Roger Ver defaults on uncollaterlized $47 million CoinFLEX loan

Roger Ver defaults on uncollaterlized $47 million CoinFLEX loan

Roger Ver defaults on uncollaterlized $47 million CoinFLEX loan

The past few weeks has been a DeFi madness, with major crypto hedge funds being liquidated and protocols succumbing to exploits.

Just when we thought things could not get any stranger, it turns out CoinFLEX, a centralized crypto exchange and yield service, had issued a $47 million uncollateralized loan to a borrower who is now defaulting. Their strategy to overcome the situation is either foolish or brilliant; find out for yourself below.

CoinFLEX pauses withdrawals

On June 23, CoinFLEX announced that they have paused withdrawals on their platform, without mention of the uncollateralized loan. Their users were frightened that the exchange had met the same fate as other centralized services, such as Celsius that also paused withdrawals due to potential liquidations.

In their announcement, CoinFLEX stated that the “counterparty is not 3 Arrows Capital or any lending firm,” which left many wondering, what happened?

$47 million uncollateralized loan

After days of suspense, CoinFLEX released another update in which they stated that “a long-time customer of CoinFLEX’s account went into negative equity, meaning the Individual’s account currently holds a negative balance.”

The large negative balance means the exchange is unable to cover potential withdrawals, hence the pause. Usually, CoinFLEX would auto-liquidate a position before its margin runs out, yet according to the exchange, because the owner of this position is a high integrity person and guaranteed their account equity in writing, their positions do not auto-liquidate. Who is this person?

FatMan, a crypto researcher prominent on Twitter, revealed the identity of the position owner in a tweet: Roger Ver.

Ver turns out to be a shareholder and investor in CoinFLEX, as well as an early investor in crypto startups from Ripple to Kraken. The Bitcoin Cash founder is likely a large holder of BCH, which is slowly losing relevance in the crypto sector and is heading towards its all-time low token price.

Strangely, Ver denies the allegations against him in the tweet above, and even goes on to accuse the exchange of owing him money. The CEO of CoinFLEX, Mark Lamb, struck back in a tweet of his own:

A token to save the day

To solve the issue, CoinFLEX decided to tokenize the borrower’s debt. They are issuing 47 million rvUSD tokens (recovery value USD) that each cost 1 USDC. If the entire supply sells out, they will have the $47 million necessary to enable withdrawals.

There are three supposed benefits to buying rvUSD:

1) Early buyers will receive extra rvUSD for their USDC up to the first $11.75 million bought

2) rvUSD holders will earn 20% APR accrued and paid daily in rvUSD tokens

3) 2.5 million FLEX Coin, CoinFLEX’s own token, will be distributed to rvUSD holders in proportion to their holdings

The payback to rvUSD holders will occur when the borrower has repaid their debt. If that does not happen, CoinFLEX will cover the USDC owed to holders from their own balance sheet. However, the token has some stringent issuance terms.

Only non-US investors are eligible, and they must have an annual income of at least $200,000, have a net worth of $1 million, and fully be KYC’ed through CoinFlex. Not only that, but the minimum investment is $100,000.

The future of CoinFLEX

It seems the tokenization of the debt is a temporary solution to buy the company some time and liquidity. After all, if CoinFLEX can afford to pay back rvUSD investors in the case that the borrower never repays, they could also afford to enable withdrawals using their own holdings.

To prevent a similar situation in the future, CoinFLEX is rehauling their futures model:

“The notional (USD) value of every account’s futures positions will be made publicly available via an external auditing firm that will attest to these futures positions every hour. We will also make available the margin (collateral) backing these positions in USD value and break down the collateral by type 1 (stablecoins), type 2 (highly liquid coins), and type 3 (low liquidity coins).”

As FatMan states on Twitter, this sounds just like reinventing the wheel, or the transparency of DeFi. It might actually be more effective to not offer uncollateralized loans in the first place.

This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.

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