ChainDD Exclusive | Downfall of FCoin, Biggest Scandal at the Beginning of 2020
摘要： Everyone was shocked by the numbers in Zhang Jian’s article: loss of 7,000-13,000BTC, which means users cannot withdraw this amount of digital currency with FCoin’s asset reserves. Currently, 1BTC is around USD 9,100 and according to this exchange rate, FCoin’s shortfall is around USD 64-117 million.
In a video that went viral, a crowd of guests centered around a young man, holding wine glasses, swirling wine, and actively mingling with each other. The atmosphere was very lively. The young man in the video was Zhang Jian, the famous founder of the cryptocurrency exchange FCoin.
In that clip, a boy shouted, “FT one hundred, villa near the sea”, drawing everyone’s attention to him with laughers. Zhang Jian grabbed this chance to cheer up morale, “Let those who have no faith in us leave, so that FT prices can achieve one hundred soon.” Others went along, “it’s fantastic that they leave sooner.” Under this noisy and celebratory party atmosphere, they lifter their glasses and finished their wine.
On 24 May 2018, FCoin, a new digital currency exchange, exceeded other major crypto exchanges and ranked the third place globally in terms of values. All these can attribute to its own features “trading as mining” model and 80% revenue as dividends. The token coin of its platform realized a hundred folds’ growth from USD 0.08 as the released price to USD 1.25 within a month.
FCoin’s trading as a mining model was a popular industry disruptor, and many started to imitate their novel business model, including some exchanges, followed by this trend to be successful.
The huge trade volume, mining quantity and dividends lead to high risks of this system. The prosperity did not last long. When click fraud among users knocked over the first domino, the fall of FT lower prices and transaction volume has been triggered since June 2018.
FCoin had been struggling to save its business by various approaches to increasing the exchange’s order and allying with other players in the market. But it was too late to salvage this crypto exchange in dire straits.
On 17 February 2020, Zhang Jian published an article themed as Truth about FCoin to reveal fatal mistakes that led to the failure of the crypto exchange. He claimed that inaccurate data and wrong decision-making are two main reasons.
To date, Zhang Jian cannot be reached and he had fled overseas. He was last seen in Singapore and Malaysia in the second half of 2019 but no many are able to contact him this year.
In other words, Zhang Jian went away long before FCoin declared its shutdown.
Everyone was shocked by the numbers in Zhang Jian’s article: loss of 7,000-13,000BTC, which means users cannot withdraw this amount of digital currency with FCoin’s asset reserves. Currently, 1BTC is around USD 9,100 and according to this exchange rate, FCoin’s shortfall is around USD 64-117 million.
A month before 17 February when this insolvent exchange made an official announcement, users failed to withdraw money from FCoin but the company used the excuse of technological errors and systematic adjustment to calm down investors.
However, Zhang Jian admitted he was lying to the public in his article on 17 February. He stated that the trouble facing FCoin was no longer technological issues or team conflicts but insolvency. Many users were shocked and desperately helpless.
“I spent my life-savings, credit card and online lending money on FM. So if I cannot withdraw my money, I will have to sleep in the street.” An FM user angrily accused. (Note: FM is the only token of FMext Translation Platform. It was released on FT public chain and halted at the same time as FCoin did.)
FCoin failed, completely. Now, the previous party scene sounds so ironic, especially that confident saying “those who have no faith in us should leave soon”.
The rise and fall of a well-known crypto exchange, which was once one of the biggest crypto exchanges in terms of trade volumes with the highest daily transaction volume of over RMB 30 billion, only took 20 months. This is the most scandalous news in the global cryptocurrency field in 2020. Let’s have a closer look at what exactly happened in the past 20 months.
We have interviewed witnesses, stakeholders, employees and investors, and have gathered information and data from different sides to complete an exclusive detailed report on the start and end of FCoin Exchange.
A fleeting novel business model—Trans-Fee Mining in 2018
FCoin was launched officially on 24 May 2018 as a cryptocurrency exchange that adopted the Trans-Fee Mining model in which the transaction fees are used to reward the community and released its own platform token FT.
FCoin issued 51 percent of its FTs to the public in exchange for making transactions. Any transaction fee a user paid to FCoin would be 100% reimbursed to the user in FTs. Meanwhile, FCoin would distribute 80 percent of the transaction fees it collected to users who held FTs bitcoin continuously throughout a day.
It is worth noticing that FCoin’s model had not set a quantity limit, which means the amount of mining would not be affected by trade volume and users could gain equal value of FT rewards however much transaction fees they spent.
This incentive helped FCoin to draw attention from traders. In less than two weeks, FCoin quickly accomplished an eye-catching achievement: the trade volume of RMB 28.8 billion within 24 hours, the highest one around the world and more than the sum of trade volumes among the second to seventh-largest exchanges. On 13 June 2018, FT skyrocketed to its highest price of USD 1.25.
That was the period of time when Zhang Jian named as “a dreamy opening”. He wrote, “most entrepreneurs may not even have a chance to reach this height their entire life. In the first few months of FCoin, I gained a huge sum of income (around USD 150-200 million).
In an “ideal” world, before FT was dug up, this mining model could be sustainable. But the truth behind this model was that trade volume was accumulated with professional click farms which accounted for the majority of FTs and manipulated the price of FT. In this scenario, users entered to mine earlier were waiting for transaction fees generated by users that came later. Any excuse for speculators to withdraw their money could cause a disastrous plummet.
What worried users and exchange most were trading security and trading speed. It only took a month for Fcoin to have the largest trading volume globally. Zhang Jian, as the manipulator behind the scene, could see the great number of users and transactions, and the increasing time gap between computation time and allocation time of revenue. Technological and financial system crisis was coming to the surface.
Unfortunately, an official notice of postponing the dividend date was the last straw.
On 13 June 2018, FCoin was forced to post a notice to adjust its dividend dates that it would distribute all accumulated revenue from 12 to 19 June on 20 June and the original rule of dividend throughout a day would be resumed after 20 June.
This announcement caused an uproar among users and a plunge of FT price from the highest level of USD 1.25 to USD 0.66.
Zhang Jian gave an explanation in his article, “At that time, the system was of high risk. Everyone asked me to slow down instead of allocating daily dividends to give a break to our technology. Otherwise, serious consequences would come. I didn't follow the advice for heavy external market pressure. But when finding my colleagues were on the verge of collapse after long hours of continuous work and some even didn't have time to go home, I made a compromise.”
An urgent crisis fell upon FCoin and pushed Zhang Jian to salvage its company.
When the 20th day of June finally arrived, FCoin announced a fund project to buy back its own tokens which would put into use on 23 June. The first round of the project raised 100 million FTs. This project aimed to stabilize the market and prevent extreme price changes.
However, a month after, these 100 million FTs vaporized in the volatile market. FCoin’s mechanism flaws at the early stage posed hidden dangers to the exchange market. Zhang Jian underestimated the power of the market.
“For a very long time, I spent all my income purchasing FTs and I persuaded my other team members to do so. Wealth of mine and my team became stepping stones for others to cash out. I had to bear a damaged reputation while spending my own money to buy back FTs” wrote Zhang Jian. He thought the long-term price reduction and communization of FT brought disastrous consequences.
Zhang Jian blamed everything on the token price.
He reiterated his respect to the crypto community and would do everything for it but the reality is once the price keeps going down, he will have to bear all verbal attacks. He said, no one cared about why it happened or whether it was still safe but actions were required to save the token price.
FCoin’s project was useless. In the middle of August 2018, FT price decreased back to USD 0.072 and had no hope to climb up again.
On 15 August 2018, FCoin announced the destruction of FTs that were not released, cutting the FT volume from 10 billion to 4.9 billion and enacting FT deflationary mechanism. This means the model of trading as mining came to an end.
Since then, numerous actions of releasing FCoin ecology tokens have not been stopped and each round of funding surpassed 100 million, including ZIP, FT, FI, FCANDY, GU, FT1808, FT1808-1, FJ, FT1908, QOS, FT1809 and FMEX.
By now, all these tokens have no long been valuable or useful. The cryptocurrency market was recessive in the second half of 2018 when Zhang Jian fled overseas secretly. In 2019, FCoin attracted strategic investment from Wang Feng. Thus, Zhang Jian together with FT public chain, FT community and FT Eco Fund showed up in Hong Kong. This move seemed to be a sign of a comeback.
Once again, it was proved that FCoin took a short break in 2019 and obtained a new round of fund but nothing could stop its downfall.
On 17 February 2020, Zhang Jian wrote a long article to disclose facts about FCoin: 7000-13000 BTC (valued around USD 64-117 million) shortfall. FCoin system with errors cannot be resumed and translations were paused.
CoinHolmes, a visualized digital asset tracking system of security startup PeckShield, began tracking and analyzing addresses related to FCoin transactions. At present, FCoin Bitcoin cold wallet has been emptied.
According to ChainDD App, since FCoin went alive, it posted nearly one thousand notices about trading as mining, token reform experiment zone, fund projects, defreeze as hedging, FCandy, FInsur, FT1808, FJ and some other new concepts and products. All concepts about cryptocurrency on the market were used by Zhang Jian but all of them doomed in the end.
In the commence of 2020, Zhang Jian left investors a 20-month shell exchange and heavy debt. FCoin’s associated company in Beijing was empty by the end of 2018.
Guo Yatao, a lawyer focusing on blockchain, told us, “FCoin’s epic failure is a terrible hit to the whole industry.”
Dr. Cao Jing shares similar views, “Trading is too tempting for humanity. In the face of such great financial benefits, self-discipline is not sufficient. In the end, we can only rely on regulations. FCoin is actually a very ironic case because the blockchain is known for transparency and fairness. Many exchanges use regulatory time differences to do something evil, which is very distressing and causes harm to the industry.” Hopefully, the case of FCoin will force digital currency exchanges to operate in a more orderly and regulatory manner.
Guo Yatao said, “when regulations become a norm in exchanges, cases like FCoin can be avoided.”