EXCLUSIVE：How Bitcoin Jesus Roger and the Exchange CoinFLEX Collapse
Author: Joey Wu Editor：Colin Wu
On June 24, 2022, the exchange CoinFLEX announced that it made the decision to halt user withdraws, and the price of the platform Token FLEX subsequently plummeted, from $4.30 to less than $1.50 in four hours. At the same time, FlexUSD, the platform's stablecoin, also began to de-peg, with prices dropping as low as $0.23.
CEO Mark Lamb tweeted on June 29th, explaining that Roger Ver owes CoinFLEX 47 million USDC, which led to a liquidity squeeze on exchanges, and they had served a notice of default.
Roger Ver then tweeted in response: "Recently some rumors have been spreading that I have defaulted on a debt to a counter-party. These rumors are false. Not only do I not have a debt to this counter-party, but this counter- party owes me a substantial sum of money, and I am currently seeking the return of my funds."
We recently learned the entire insider details through a source close to the situation.
CoinFLEX is a centralized derivatives exchange based in the Seychelles with a large click farm, which expanded the notional trading volume to 24 times the actual volume by means of Repo.
After this liquidity crisis (before the news became public), CoinFLEX officially explained to the other partners that they had opened a special account for Roger Ver. Normally, when the net value of an account falls below the maintenance margin during contract trading, the exchange would simply liquidate the position. However, Roger Ver, as a high net worth client, signed an agreement with CoinFLEX, using his personal creditworthiness as a guarantee that his account would not be liquidated immediately if it fell below the maintenance margin, but rather that he would be given sufficient time to make a margin call.
Roger Ver opened a net long position on CoinFLEX with a margin of BCH, which was revealed to have been initially pledged at around $400. Then, the market price fell down, leaving the net worth of the account below the maintenance margin. By the time the exchange faced a liquidity crisis and could not withdraw its money, and other users became aware of the incident, the price of BCH had fallen to $120.
If that were all, CoinFLEX would have been able to cover its shortfall. However, prior to this, CoinFLEX had issued its own stablecoin, FlexUSD, like other exchanges. At this point, CoinFLEX used FlexUSD to buy a large amount of FLEX from the secondary market and opened short position to hedge the spot price. However, the counterparty to this short position was also Roger Ver!
This meant that if Roger Ver defaulted on his margin, CoinFLEX's position would not be profitable and would then be equivalent to a net long position in a large amount of FLEX spot. So, when the withdrawal restriction announcement was made, CoinFLEX's total funds began to fall in a cyclical fashion.
Decrease in FLEX price, resulting in increased losses on Roger Ver positions.
Increase in Roger Ver losses, resulting in an increase in margin arrears.
Increased margin arrears lead to a liquidity crisis in CoinFLEX.
The liquidity crunch causes a further panic fall in FLEX price.
In the end, Roger Ver's position was completely worn out and turned into negative equity, while CoinFLEX was left with a lot of delisting FLEX. It was revealed that CoinFLEX had a real loss of $120 million, including losses from the de-peg of the stablecoin FlexUSD and the loss of withdrawals (less than $10 million) due to the collapse of the SmartBCH cross-chain bridge, which was built by CoinFLEX.
Obviously, the $120 million cannot all be attributed to Roger Ver, at least not for the FlexUSD de-peg. Not only that, but CoinFLEX shorting FLEX was a spontaneous act for which Roger Ver provided liquidity, otherwise no one would have wanted to be a counterparty to CoinFLEX. The final loss attributable to Roger Ver was around $90 million, or maybe more or less. These are among the conflicts that the two protagonists could not agree on.
Roger Ver, who was later contacted by sources close to the matter, admitted to defaulting on margin payments, but did not have enough cash flow on hand to consider using shares (of companies like Blockchain.com or Kraken) as collateral in lieu of margin.
However, just as the two sides were negotiating, Mark Lamb went public on CNBC, causing negotiations to break down.
Today, the FlexUSD price has fallen to less than $0.30, but only if CoinFLEX does not liquidate Roger Ver's position. Taking this into account, FlexUSD also has a hairscut of about 70-80%, which means that the real price of FlexUSD is only about $0.06.
The root cause of all this was not only Roger Ver's default, but also CoinFLEX's poor risk management, as Roger Ver became almost the only counterparty to the exchange, and this only counterparty had the privilege of not replenishing the margin in time. Both sides are to blame for the current situation, but users on CoinFLEX and SmartBCH are unjustifiably implicated.
To raise the $47 million shortfall, CoinFLEX announced the issuance of a Token called Recovery Value USD (rvUSD). The rvUSD holders will receive an annualized interest rate of 20%, which will be funded by Roger Ver's repayment and income of trading fee.
Despite the market conditions, exchanges can be steadily profitable, so long as they do not take users' money and make other risky investments. All the exchanges that have failed in history have used money for other purposes, or even increased leverage on top of it. Therefore, even if Roger Ver is unable to repay its debts, CoinFLEX will be able to gradually make up the shortfall with the revenue from trading fees alone.
It's not unprecedented for an exchange to issue debt tokens. In 2019, Bitfinex raised $1 billion by issuing a debt Token called LEO. While LEO didn't promise to pay a lot of interest to its holders at the time, the rvUSD was only $47 million, which is why rvUSD attracted some traditional investment funds when it was launched. The exchange currently has KYC requirements for purchasers, with an annual income of $200,000 or more or assets of $1 million or more.