One of the first cryptocurrency exchanges to adopt the controversial trans-fee mining (TFM) model, which has been called a “disguised ICO” has paused trading and withdrawals over a shortage of crypto worth up to $130 million.
According to a statement published by FCoin’s founder Zhang Jian, a former Huobi CTO, the exchange is now unable to process withdrawals as its reserves are down by between 7,000 to 13,000 bitcoin, worth over $130 million at press time, over an issue that’s “a little too complicated to be explained in a single sentence.”
Zhang’s statement details the cryptocurrency exchange wasn’t hacked, nor is it pulling an exit scam on its users. He detailed that an internal system error gave users more mining rewards than they should have received, noting the error wasn’t detected for a long period of time.
The transaction-fee mining model, which saw FCoin’s trading volume surpass $5 billion per 24 hours numerous times, sees the cryptocurrency exchange incentivize trading via its own token, FT. FCoin reimbursed users for transaction fees paid in BTC or ETH with FTs until 51% of the coin’s supply was distributed, and redistributed 80% of the BTC and ETH it collected to those holding FT tokens.
The controversial model drew criticism and saw Zhang defend it, claiming it was a misunderstood invention. At the time, he said:
If you look back at history, all new things were not recognized at the beginning. Many were believed to be fraud. Jack Ma was recognized as a fraud when he first promoted the internet in China.
Various cryptocurrency exchanges started adopting the TFM model shortly after, with research showing these platforms had unusually thin order books and low traffic taking into account the trading volumes they had.
According to Zhang, the errors in FCoin’s system gave away too many tokens in mining rewards from mid-2018 to mid-2019, when a complete back-end auditing system was implemented. As throughout 2019 the price of FT kept on dropping, Zhang and his team reportedly used their own funds to buy back tokens and drive up demand, a decision he claims was an error.
This, as it gave users a chance to sell their FT tokens and withdraw as much as possible from their accounts, while FCoin bought up tokens that kept on losing value. Zhang’s announcement came shortly after FCoin suspended its platform over a risk-control issue.
Zhang is now reportedly manually processing users’ withdrawal requests sent via email. The founder of the exchange claimed he will “switch tracks” to start again, and noted he hopes he can use the profits made from new ventures to “compensate everyone for their losses.”
Featured image via Unsplash.