A $130M Scam, FCoin’s greed

Jack Ge
Jack Ge
Feb 20, 2020 · 7 min read

Life is sometimes ruthless while the #crypto world is full of love. — Justin Sun

Tron CEO Justin Sun supported FCoin Scam on 18th Feb, 2020. As I read this, the mixed feeling of disgust and joy made me put away the burrito I just made. Disgusted by the lawless and opportunistic nature of this “liberal and communal” decentralize industry, yet joyful of the realization that people will remember this multi-million dollar lesson for a very long time.

FCoin not only sounded a wake-up call for the cryptocurrency industry, but the entire online industry should also be alert. Some IT entrepreneurs have adopted a competitive approach that is to continuously finance subsidies to users, occupying market leadership by “burning money”, but after the little flicker of flame dies out from the last dollar, you have to ask, whom were they fighting against in this money war? Investors or themselves. Cough Cough WeWork.

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The path to hell is paved in good faith - Zhangjian, FCoin CEO

That was the opnning line of Truth of FCoin, Zhangjian’s public confession that caused all the rage and panic, as well as a 12% BTC dip.

To that I say: The path to hell paved with Greed. As hard as it is to admit, this is where the 100x profit people got from crypto industry in 2017 heading towards, with more thoughts more chasing behind them waving the banner of “decentralization”.

To this day, Zhang Jian finally acknowledges that the FCoin problem is not a problem of system, not hacking, nor internal, but a problem that the capital reserve cannot be paid by users.

As early as the founding of FCoin, the huge transaction volume has made all exchanges jealous, and the controversial “transaction is mining” model has spread to all communities. In fact, some people pointed out that FCoin’s business model was “disguised ICO” or “Ponzi scheme”, but in the face of huge benefits, the project owner and investors were blinded by greed.

INVESTOR’S GREED

First, let’s review the mining rules of FCoin again. FCoin issued a total of 10 billion FT tokens, of which 49% belonged to private equity and 51% belonged to platform traders. The transaction mining unlocked 51% tokens and the remaining 49% tokens will be unlocked in the same proportion. Fcoin converts 100% of the transaction fee into FT through the records of both parties and returns it to the user the next day, and then completes a mining operation. FCoin will distribute 80% of the platform’s revenue daily to the user according to the proportion of FT currency / FT circulation. If you analyze this model carefully, you will find that FCoin is actually trying to attract more users to promote transaction volume, and to ease selling. As long as the number of new users is greater, the profit of old users will always keep them in the game. Smell a scheme that start with a P? That’s right, the good old Ponzi model that uses newcomers to subsidizing the old.

Investors are always eager for money. When this desire evolves into greed, it will drive investors to join the crazy profit-seeking crowd and eventually pay the price.

As Zhang Jian himself said, when FCoin went operational in 2018 due to the popularity of transaction mining, it quickly mooned, so that its personal income was huge in just a few months (cumulatively amounted to US $ 150–200 million). For any start-up team, this is a fantastic start, even a height that most entrepreneurs can’t ever reach in their lifetimes. Old FCoin users at that time could even earn up to 6000 BTC IN ONE DAY.

Driven by such benefits, it is not surprising that a large number of investors have poured into FCoin.

In August 2018, FCoin implemented a “community recommender” program to encourage everyone to and build their own community, basically asking you to drag your family and friends down together on a sinking ship, and then allow FT holders to have voting rights to start community co-governance; in May 2019, the FCoin community launched a partnership system, where partners can formulate a platform development strategy. The decision-making power of the platform is given to the trader. In July, FCoin launched the rules for innovation and currency on the board, which directly caused Ethereum congestion. All these operations are for one thing: attract new users.

However, the problem is that as long as there are people leaving the FCoin, or the number of new users is less than the number of existing ones, it will cause volume drop and sharp price fluctuation. And the constant sell-off in the later period became particularly obvious.

Zhang Jian was frank in Truth of FCoin: in the end everything was about the two words: “token price”.

In fact, some people have pointed out early that dividends depend on FT release speed, FT price, and other variables that are difficult to measure. Eg. If FT price is relatively stable, all dividends are received and invested back in the form of FT, then the compound interest payback period is about 35 days; if FT price continues to rise, this cycle will be greatly shortened; on the contrary, if the FT price drops, latecomers will bear the risk of the insanely extended payback period caused by the sharp price decline.

INVESTOR’S PANIC

Last Monday (10th February), FCoin suddenly announced an emergency shutdown for maintenance. However, the recovery time of the shutdown has been delayed, and official team of the exchange all became off grid. Although Zhang Jian later proposed an email token withdrawal plan, few users were able to successfully complete the withdrawal.

On 17th February, FCoin also announced a slight change to the withdrawal process, which mentioned that “receiving a verification code does not mean that the withdrawal can be successful.” Only successful upon receiving the user’s withdrawal confirmation and starting the mailbox + asset verification can it Begin mailbox + asset verification. Although FCoin claimed such rigirous process is to ensure the security, discerning investors call this “shamelessly buying time”. The more complicated the withdrawal process is, the more difficult it is for investors to get back funds .

Zhang Jian’s series of clownish act obviously angered investors. Although it is not yet possible to accurately measure the total amount of funds lost by investors due to this disaster, it is said that plenty of people have lost more than $10,000. Soon after the Truth of FCoin was released, a lawyer explained that Zhang Jian’s move was to turn a criminal case into a civil case. If he runs away, then they could file a case on fraud, but now since he cleverly acknowledged all the debts, case filing cease to be an option, without knowing the possibility of refund.

However, since 2019, FCoin has started community operations, which means that FCoin currently consist of both community and official team, instead of a registered company, so it is difficult to determine who is responsible for the loss of funds and refund. Despite Zhang Jian stated in the announcement that he would bear the debt of investors.

Not only that, refund in the cryptocurrency industry are often very rare. Taking Mt. Gox as an example, its bankruptcy trustee Nobuaki Kobayashi has repeatedly postponed the payment plan proceedings. For those who have suffered losses in the hacked Mt.Gox exchange — — That is, for creditors now, it may take a long time to get the refund.

FCoin and Mt.Gox are different nonetheless, for investors, it is usually more difficult to obtain a refund in a “civil case”.

INVESTORS’ FUTURE?

According to Zhang Jian, he has decided to “start again”, and intends to use the profit of the new project to compensate investors’ losses. Once the new project is on track, long-term mail refund processing will begin, but “this process may continue for 1–3 years. “

However, neither the early investors nor the major investors and the community can reach Zhang Jian himself, let alone what “start again” actually means. In addition, FCoin’s investors include Danhua Capital, Consensus Lab, FFund, Origin Capital, Zipper Foundation, Timestamp Capital, Node Capital, Rising Capital, Singer Capital, and Eight-Dimension Capital. Institutions, as to whether these institutional investors have also suffered huge losses, it is unknown at this time, but it is certain that most of the FT tokens held by these institutions are locked up and restricted in withdrawal, so the losses are almost acknowledged.

Zhang Jian claimed to be a believer in the decentralization and cryptocurrency, and even said, “Cryptocurrency is my dream, but getting filthy rich overnight is not, so I am willing to use my wealth to exchange for the dream of the cryptocurrency.” But we have to bear in mind that the biggest value of the economy is to stimulate the early network. The issuer must stabilize the market position with real world applications, or arm themselves with quality service in late stages, otherwise the value of the token will be zero.

At least from the current point of view, the entire cryptocurrency industry should take a good look at the regulatory security issues of platform coins, exchanges, and sponsors of token projects, because you never know which cliff your greed will take you to.

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Jack Ge

Written by

Jack Ge

I manage @CyberVeinGroup . Ardent Chinese street chess player & Imperial College London alumni. Hiking when not flying to Blockchain conferences.

Data Driven Investor

empower you with data, knowledge, and expertise

Jack Ge

Written by

Jack Ge

I manage @CyberVeinGroup . Ardent Chinese street chess player & Imperial College London alumni. Hiking when not flying to Blockchain conferences.

Data Driven Investor

empower you with data, knowledge, and expertise

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