Freeway has one aim in mind — to create a fairer financial ecosystem for everyone. Big financial institutions, middlemen, and professional traders alike make large profits in ways that aren’t as accessible to outsiders. Freeway wants to change that, and is designed so that, as the ecosystem grows, all users can benefit from its products and services.
To date, Freeway’s corporate growth engine has been fueled by sophisticated FX trading algorithms with many sub-algorithms. The algorithms trade high volumes on foreign exchange markets, making thousands of trades per day that are designed to compound small and frequent profits relative to the balance of the trading account. Incrementally, the performance of the algorithms is impressive and, in 2021, the algorithms returned 112.8% over the whole year when trading Freeway’s corporate funds — as confirmed by ACA Global, a leading governance, risk and compliance firm. The profitability of the algorithms is extraordinary, but performance at this level does not come without risk.
Until the pause in Supercharger simulation buy-backs in October last year, Freeway had grown rapidly, driven by an expanding and diverse community of people who saw the potential offered by the Freeway mission and the Supercharger simulations. Users enjoyed the rewards through their participation on the platform. We chose to operate a simulation-based platform because it allowed us to establish Freeway with its ethos of #accessforall from the outset. In total, before the events of October, we had bought back more than $110 million of Supercharger simulations from our users and had fulfilled all sell requests since platform inception.
Alongside the team’s enthusiastic determination in Freeway’s mission, it is the structure of the simulation and Freeway’s algorithms that differentiate it from other platforms and gives it the ability to build its capital base without requiring external assistance. Freeway has its own system to generate returns for itself and does not rely on finding a market of borrowers or external yield generating platforms to recoup its assets.
The crypto world has witnessed a number of high profile failures in recent months, some of which appear to have been the result of fraudulent activity. For understandable reasons, some users within our community, and others on the outside, have assumed that this is what had happened at Freeway. We don’t have every answer yet, but we can say for certain that there has been no fraud perpetrated by anyone within the company.
On 13 October 2022, we discovered that something unexpected had happened with our automated foreign exchange trading in our main brokerage account at AuBit Prime, which held Freeway’s crypto as margin. Our investigations revealed that after sudden, sharp, and divergent movements in USD and in the value of crypto at 1.30pm GMT on that day, the account had suffered large unrealised losses through the margining-out of its account with crypto-denominated margin.
The result was that, on what otherwise appeared likely to be a highly profitable trading day, we suffered a significant financial loss.
From the brokerage reconciliation reports, Freeway sustained a major loss on the day of the event — approximately $119 million, which was circa 76% of its $156 million account balance at the time.
We took swift action to try and identify various financial solutions, and paused Supercharger buy and sell requests on the Freeway platform. Since then we have also adjusted our corporate growth plans and roadmap.
It goes without saying that measures have been put in place with the aim of ensuring that similar events can’t happen in the future. For instance, we are scaling up the risk management and trading governance department within our Finance division having identified roles required moving forward and continuing to contract key expertise as we build the full time team.
We have also been working alongside our brokers, AuBit Prime, as well as our other trading partners to put in place risk mitigation to try and ensure that, if we have a recurrence of the market conditions that caused the problem, it cannot affect Freeway in the same way.
The details on new crypto-denominated trading accounts, direct from AuBit Prime, are as follows:
When trading Spot FX with the use of leverage where the account is funded with crypto, there is always a chance of a premature margin call, and eventually a stop-out, if two adverse scenarios happen at the same time:
- an extremely rapid market movement against larger positions, causing a very significant increase in unrealised losses; and
- a significant fall in the value of crypto assets that have been used to back the trading account.
This risk is partly connected with the generic market risk involved in trading and is impossible to eliminate completely without incurring significant additional costs which then impacts on returns.
However, we have put in place important measures to better manage the risks, and protect from future losses, while still allowing the algorithms to trade as they should:
- Hard Stop Losses at the brokerage level. Crucially, hard stop losses consider both the account as a whole and any sub-account independently. The main advantage of this approach is that in future, it is the regulated brokerage (AuBit Prime) who is obligated to adhere to the Stop-Loss instructions at all times, and Freeway will be compensated by the brokerage if there was ever a breach. This means that a specified value of capital in the account is always protected at the brokerage level by potentially liquidating all open positions to prevent further losses.
- The complete separation of fiat-funded trading, stable-coin-funded trading and volatile-crypto-funded trading which means that our fiat and stable-coin denominated trading accounts will suffer no impact whatsoever from future general crypto volatility.
- Daily Settlements of open trades into our Account Balance on volatile-crypto-funded trading. By settling every day, the unrealised market risk is reduced, and any negative impact on the account becomes easier to see. At the same time, the value of open profit and loss that is exposed to crypto volatility will be significantly smaller compared to the same value if daily settlements were not in place.
One of the outcomes of the on-going, independent forensic examination is expected to be further recommendations of measures to enhance the robustness of future trading activities. And, it is the creation of a risk management culture from top to bottom that will allow Freeway to continue to protect the interests of the ecosystem as a whole and all users now and into the future with new product and service releases.
The way in which Supercharger simulations were constructed means there is no liability or legal obligation for Freeway to buy back Supercharger simulations. All users still have their Supercharger simulations, therefore, Freeway is not insolvent and has not been forced into bankruptcy.
The company is still operating, and the founders and team are working around the clock to recover the situation. Freeway’s capital base is growing again rapidly as you will soon discover from Graham’s update later today.
We are absolutely committed to making Freeway’s money back in full and returning to a position whereby we can resume full Supercharger simulation buy-backs.
Right now, the team is focused on two things — first, obviously, getting to a position where buy and sell requests for Superchargers can be accepted again, and, second, to accelerate our timelines to achieving this with our pipeline of new products and services that will offer attractive returns, rewards, and user protections to our existing community as well as new users. We will use the profits from these new products in the algorithms — providing additional returns to accelerate Supercharger simulation buy-backs and reward our community members in other ways.
You’ll hear from Graham shortly about our progress since the pause, in terms of algorithmic performance, and additional financing, as well as our upcoming products and services. While the October 13th loss was very significant, we hope you take heart from the considerable progress we have made in a relatively short time since then.
The team is still here; and we are working to increase the frequency of public communication to make sure you feel properly informed.
Those communications will include a message from Graham coming later today detailing what has been done since October 13th in accelerating our projections for resuming full Supercharger simulation buy-backs from what was initially thought to be 2–2.5 years down to 9–12 months from the start of 2023.
The Freeway Team
