The collapse in crypto prices and the onset of a new so-called “crypto winter” have left many companies in the industry facing a liquidity crisis.
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Cryptocurrency exchange CoinFlex on Tuesday released a new token to raise funds to restart withdrawals for its customers after a customer failed to repay a large debt.
CoinFlex said it will issue a $47 million worth of digital coin offering 20% interest, which it calls Recovery Value USD or rvUSD.
This comes after the company stopped withdrawals for customers last week due to “extreme market conditions” and “counterparty uncertainty”.
On Monday, CoinFlex published a blog post with more details about the counterparty. CEO Mark Lamb said in the post that a longtime client’s account went to “negative equity.” This caused the company to stop withdrawals.
CoinFlex said that under normal circumstances it will automatically liquidate the trader’s position, but there is a clause in the trader’s account that does not allow this to happen. CoinFlex said that this requirement requires the individual to “make strict personal guarantees around account equity and margin calls in exchange for non-liquidation.”
The company declined to name the investor, but said the person was a “highly honest person with substantial stakes, who was experiencing temporary liquidity problems due to credit (and price) crunch in the crypto markets (and non-crypto markets)”. in the portfolio.”
By issuing new rvUSD tokens, CoinFlex hopes to raise enough funds to bridge the gap in investor leftover ledgers and continue withdrawals for users. It offers 20% interest rate to those who want to buy rvUSD to attract investors.
“We have spoken to potential major buyers and we believe there is substantial interest in the terms offered,” Lamb said. Said.
But part of CoinFlex’s plan is hoping it will be repaid by the investor, which of course may not happen. Lamb told Bloomberg on Monday that he believes the investor will pay back the company “at some point in the future.”
He added that the company has “alternative mechanisms” if it cannot raise money by issuing rvUSD, but did not elaborate on what those would be.
CoinFlex said it hopes to resume withdrawals on June 30. The company said that if the rvUSD token issuance is fully subscribed, CoinFlex will re-enable withdrawals and make the platform fully functional.
Many users were angry with Lamb. On the company’s official Telegram channel, users questioned why CoinFlex did not name the investor, criticized the company’s risk management strategy, and also asked how the firm could offer 20% returns on its new coin.
When Lamb contacted CNBC via Telegram, he did not respond to a request for comment.
CoinFlex has been the latest victim of the massive plunge in cryptocurrency prices that has wiped billions of dollars off the digital currency market over the past few weeks.
The new so-called “crypto winter” has exposed weaknesses in the business models of a number of companies that rely heavily on lending and highly leveraged trading strategies.
Celsius, a crypto lending platform that promises high returns to users who deposit cryptocurrency, stopped withdrawals earlier this month. On Monday, high-profile crypto hedge fund Three Arrows Capital defaulted on a loan of more than $670 million from Voyager Digital.
CoinFlex’s Lamb promised more transparency in his blog post Monday. He said the value of each account’s futures position will be made public through an external audit firm that will confirm these positions hourly. The company will also provide information about the collaterals that support these trading positions. However, CoinFlex said that the data will be anonymized.
Lamb said this data will give users an idea of ”how risky the platform is, how leveraged users are, and whether any liquidations have occurred on the platform.”