When a whale went sideways on a massive position in CoinFLEX, the centralized crypto exchange should have been able to automatically liquidate the investor’s holdings and protect the platform from further damage.
But it couldn’t because of a novel feature — the whale has a “non-liquidation recourse account.”
Translation: The exchange agreed not to close out the whale in return for “stringent personal guarantees.”
So now CoinFLEX, a centralized crypto exchange with a 24-hour trading volume of $1.1B, is taking a radical step to offset the massive exposure — it’s rolling out a new token.
CoinFLEX will issue the “Recovery Value USD” (rvUSD) token in a bid to offset the losses from the investor whose account fell into negative equity, according to a white paper released on June 27.
Solend and Mango Markets Team Up to Handle Whale’s $207M Debt
The exchange suspended customer withdrawals on June 23 in response to the whale’s liquidity woes. The exchange said it plans to reinstate withdrawals from June 30, pending the success of what it hopes will be a 47M USDC token sale.
In effect, the platform is turning to investors to provide much-needed liquidity. The news comes just weeks after the multi-billion CeFi platform Celsius suspended withdrawals indefinitely as it battles to stave off nine-figure liquidations. Centralized crypto platforms are continuing to suffer a liquidity crunch amid the recent crypto downturn.
CoinFLEX CEO Mark Lamb on Tuesday tweeted that Roger Ver, early Bitcoin advocate turned Bitcoin Cash promoter, owes the exchange 47M USDC. “He has been in default of this agreement and we have served a notice of default,” Lamb wrote.
Ver responded that recent “rumors” that he has defaulted on his debt are false.
rvUSD tokenholders will purportedly accumulate a 20% annual yield with daily payouts in the form of rvUSD. The minimum purchase size is 100,000 USDC, with participation restricted to accredited investors based outside of the U.S.
According to a June 27 blog post from Mark Lamb, the firm‘s CEO, CoinFLEX made the move after a long-time customer’s account fell into negative equity.
Normally, CoinFLEX would automatically liquidate accounts that run into a negative equity balance. But the individual in question has special status.
“This condition required the Individual to pledge stringent personal guarantees around account equity and margin calls in exchange for not being liquidated,” the company said in the rvUSD whitepaper. “This Individual is a high-integrity person of significant means, experiencing temporary liquidity issues due to a credit (and price) crunch in crypto markets (and non-crypto markets), with substantial shareholdings in several unicorn private companies and a large portfolio.”
Holders of rvUSD will receive USDC on a pro-rata basis as the whale repays their debt. The company has also set aside 2.5M of its native FLEX Coin tokens from its treasury which will be paid out to rvUSD holders in proportion to debts repaid by the whale.
However, if the whale fails to repay their debts within 15 months, CoinFLEX will have the right to convert rvUSD holders with either USDC or a mixture of USDC and FLEX, although holders will be able to choose not to receive the mixed payout and wait for full USDC repayment.
Lamb said there is “significant interest” in rvUSD from potential large buyers. He added that there are no other accounts on the platform in negative equity.
In response to the issue, CoinFLEX will hire an accounting firm to review and report the notional value of all of its customers’ futures accounts on an hourly basis, Lamb said in his blog post.
The USD value of the accounts’ collateral will also be published. The identity of account holders will be kept confidential.
“The data will give a potential user of CoinFLEX insight into how risky the platform is, how leveraged the users are, and whether any liquidations occur at a loss to the platform,” Lamb said, adding that non-liquidation recourse accounts will not be permitted moving forward.
“Crypto markets may move too sharply for manual margin arrangements to be effective,” he said.