CoinFlex issues new coin to raise money after investor fails to pay debt

On Tuesday, the cryptocurrency exchange CoinFlex issued a new token to raise funds in an attempt to restart withdrawals for its customers, after a client failed to repay a massive debt.

CoinFlex said it would issue a $ 47 million digital coin, offering 20% ​​interest, which it calls Recovery Value USD, or rvUSD.

This comes after the company stopped withdrawing for customers last week with reference to “extreme market conditions”[ads1]; and “uncertainty involving a counterparty”.

On Monday, CoinFlex published a blog post with more details about the other party. CEO Mark Lamb said in the post that a long-term customer’s account went into “negative equity”. That caused the company to stop withdrawing.

CoinFlex said that under normal circumstances it would automatically liquidate the investor’s position, but the trader had a clause in his account that did not allow this to happen. This condition required the individual to “promise strict personal guarantees regarding account equity and margin calls in exchange for not being liquidated,” CoinFlex said.

The company refused to name the investor, but said that the individual “is a person with high integrity with significant funds, who experiences temporary liquidity problems due to a credit (and price) crisis in crypto markets (and non-crypto markets), with significant equity holdings in several unicorn private companies and a large portfolio. “

By issuing the new rvUSD tokens, CoinFlex hopes to raise enough money to cover the shortfall in the books that the investor has left behind and resume withdrawals for users. It offers an interest rate of 20% for people who are willing to buy rvUSD to entice investors.

“We have talked to potential large buyers and believe there is significant interest in the terms presented,” said Lamb.

But part of CoinFlex’s plan is to hope that it will be repaid by the investor, which of course cannot happen. Lamb told Bloomberg on Monday that he believes the investor will repay the company “at some point in the future”.

He added that the company has “alternative mechanisms” if it can not raise money from issuing rvUSD, but did not elaborate on what they would be.

CoinFlex said it hopes to resume withdrawals on June 30. If the issuance of the rvUSD token is fully subscribed, CoinFlex will reactivate withdrawals and restore the platform to full functionality, the company said.

Many users were angry with Lamb. In the company’s official Telegram channel, users asked why CoinFlex did not name the investor, criticized the company’s risk management strategy and also asked how the company could offer a 20% return on its new currency.

Lamb did not respond to a request for comment when contacted by CNBC via Telegram.

CoinFlex is the latest victim of a massive drop in cryptocurrency prices in recent weeks that has removed billions of dollars from the digital currency market.

The new so-called “crypto winter” has revealed the weaknesses in a number of companies’ business models that are largely dependent on lending and highly leveraged trading strategies.

Celsius, a cryptocurrency lending platform that promised high returns to users who deposited their cryptocurrency, stopped withdrawing earlier this month. On Monday, the high-profile crypto hedge fund Three Arrows Capital defaulted on a loan worth more than $ 670 million from Voyager Digital.

CoinFlex’s Lamb promised more transparency in Monday’s blog post. He said the value of each account’s futures position will be made publicly available through an external audit firm that will certify those positions every hour. The company will also provide information on the security that supports these trading positions. However, the data will be anonymized, CoinFlex said.

Lamb said that this data would give users insight into “how risky the platform is, how leveraged the users are, and whether any liquidations occur at a loss for the platform.”