A cryptocurrency price crash and the onset of a new so-called “crypto winter” has left many companies in the industry facing a liquidity crisis.
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Cryptocurrency exchange CoinFlex on Tuesday issued a new token to raise funds in a bid to restart withdrawals for its customers, after one client failed to repay a massive debt.
CoinFlex said it would issue $47 million worth of a digital coin, offering 20% interest, which it’s calling Recovery Value USD, or rvUSD.
It comes after the company paused withdrawals for customers last week citing “extreme market conditions” and “uncertainty involving a counterparty.”
On Monday, CoinFlex published a blogpost with more details about the counterparty. CEO Mark Lamb said in the post that a long-time customer’s account went into “negative equity.” That prompted the company to halt withdrawals.
CoinFlex said in normal circumstances it would automatically liquidate the investor’s position but the trader had a clause in his account that did not allow that to happen. That condition required the individual to “pledge stringent personal guarantees around account equity and margin calls in exchange for not being liquidated,” CoinFlex said.
The company declined to name the investor, but said the 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.”
By issuing the new rvUSD tokens, CoinFlex will be hoping to raise enough money to cover the shortfall in its books left by the investor and resume withdrawals for users. It is offering a 20% interest rate for people willing to buy rvUSD to entice investors.
“We have been speaking to potential large buyers and believe there is significant interest in the terms presented,” Lamb said.
But part of CoinFlex’s plan is hoping that it gets repaid by the investor, which of course, may not happen. Lamb told Bloomberg on Monday that he believes the investor will repay the company “at some point in the future.”
He added that the company has “alternative mechanisms” if it can’t raise money from issuing rvUSD, but did not elaborate on what those would be.
CoinFlex said it hopes to resume withdrawals on June 30. If the rvUSD token issuance is fully subscribed, CoinFlex will re-enable withdrawals and restore the platform to full functionality, the company said.
Many users were angry at Lamb. In the company’s official Telegram channel, users questioned why CoinFlex was not naming the investor, criticized the company’s risk management strategy and also asked how the firm could offer a 20% yield on its new coin.
Lamb did not respond to a request for comment when contacted by CNBC via Telegram.
CoinFlex is the latest victim of a massive drop in cryptocurrency prices in the last few weeks which has wiped billions of dollars off of the digital coin market.
The new so-called “crypto winter” has exposed the weaknesses in a number of companies’ business models that rely heavily on lending and highly-leveraged trading strategies.
Celsius, a crypto lending platform that promised high yields to users who deposited their cryptocurrency, paused withdrawals earlier this month. On Monday, high-profile crypto hedge fund Three Arrows Capital defaulted on a loan worth more than $670 million from Voyager Digital.
CoinFlex’s Lamb promised more transparency in Monday’s blogpost. He said that the value of every account’s futures position will be made publicly available via an external audit firm that will attest to these positions every hour. The company will also give information on the collateral backing these trading positions. The data will be anonymized however, CoinFlex said.
Lamb said this data would give users insight into “how risky the platform is, how leveraged the users are, and whether any liquidations occur at a loss to the platform.”