FCoin Restart Investigation: Where Will the Nearly $200 Million Debt Go?

Author: Gong Quanyu, Chain Catcher

Note: This article was first published on July 23, 2020, on the Chain Catcher WeChat public account.

The restart of the FCoin contract platform FMEX, along with the ongoing related referendum, has made the handling plan for FCoin's nearly $200 million FUSD debt issue increasingly clear. The official has proposed two plans: active unlocking and passive repurchase, but the specific repurchase timeline remains uncertain.

At the same time, the FMEX official website shows that nearly half a month after its launch, users have exceeded 230 BTC in value, with 537 users making deposits, and daily trading volume stabilizing around $30 million. The various data do not look promising, and the prospects for a restart remain shrouded in uncertainty.

I. FCoin's Debt Repayment Plan

In February of this year, a notice from Zhang Jian plunged all FCoin users into despair, as user assets worth nearly 200 million USDT could not be repaid. The future direction of FCoin and how to handle these debts have become the most concerning issues for the FCoin community and related parties.

In the initial weeks following the announcement, the FCoin community engaged in heated discussions about how to report to the authorities for rights protection and whether the platform would restart. However, most opposition voices and rights protection actions did not yield substantial results. Under the leadership of the FCoin interim committee and after a referendum among platform token holders, the restart of the FCoin platform was finalized in May.

Subsequently, the FCoin interim committee released multiple pieces of information and policy announcements, and the contract platform FMEX officially launched on July 10. As a result, the handling plan for FCoin's debt FUSD has become increasingly clear. According to information obtained by Chain Catcher from within the FCoin interim committee and related public information, there are currently only two formal ways for FCoin creditors to recover their original assets.

The first method is to adopt the active unlocking plan through trading. Currently, FCoin users can place orders and trade on FMEX, and the platform will unlock users' debt assets based on their trading volume, order sequence, and time. The daily unlocking limit for the entire site is 1 BTC.

The second method is to wait for the passive unlocking plan through platform repurchase. The repurchase funds will mainly come from the platform dividends owed to FT and FMEX, which belong to Zhang Jian. The portion of FT can receive about 30% of the distributable income from the FCoin platform, while the portion of FMEX can receive about 11% of the distributable income from the FMEX platform. The repurchase will be conducted in installments, proportionally deducted from users' accounts in FUSD and converted into the corresponding USDT.

However, for FCoin creditors, the first method requires depositing assets for trading, which is equivalent to continuing to expand asset risks, while the second method is still far from realization. Currently, the restart time for the FCoin spot trading platform and the first repurchase time have not been determined, and neither can be considered a satisfactory solution.

In fact, many FCoin creditors do not believe in FCoin's future willingness and ability to repay debts and prefer to sell their FUSD assets directly to completely sever ties with FCoin. Chain Catcher has seen in some WeChat groups that many FCoin creditors are selling their account assets recently, including one FCoin user holding over 10,000 FUSD who claimed in a WeChat group to sell their account at a 20% discount.

However, since the official has not yet enabled internal transfers and trading functions for FUSD, various selling information circulating in WeChat groups is mostly about selling entire accounts, which poses serious security and privacy risks. "FCoin accounts are all real-name authenticated. If the buyer uses this account for money laundering in the future, it would be a loss," said Zhan Li (pseudonym), who holds thousands of FUSD. He considered selling his FCoin account but ultimately gave up.

Regarding the reason for not enabling the official trading function for FUSD, Kevin, a member of the FCoin interim committee, stated in a community communication meeting on the 9th of this month that it mainly concerns issues involving people's livelihoods. They do not want Zhang Jian's debts to be offset through discounted means. "We also do not want users holding FUSD to suddenly offload all their debts at a very low cost to others and then leave the platform angrily. I think the core is to keep users here, and then we can find a way to activate this community," Kevin said.

Active FCoin community user Tao Tao (pseudonym) agreed, "If the trading function were enabled, and FUSD dropped to a few cents, it could probably solve this problem in half a year, but this method would also drive away the users accumulated over the years."

Overall, the more realistic way for FCoin creditors to recover their original assets is still to wait for the platform to repurchase, although the timing is difficult to estimate. However, one can glean some insights from FCoin's historical income distribution data.

According to an announcement and related policies released by FCoin in early January this year, the total cumulative distributable income for FT users from March 18, 2019, to the end of that year amounted to approximately 293.38 BTC, equivalent to about 2.11 million USDT at that time. This means that even if FCoin restores its trading volume from 2019 and uses Zhang Jian's portion of FT dividend income for repurchase, it would theoretically take over a hundred years to repurchase all FUSD.

Considering that the repurchase funds also include part of FMEX's income dividends and that FCoin is likely to cancel the zero trading fee policy for mainstream coins like BTC and ETH after the restart, this timeframe may be significantly shortened, but it will still be a considerable number.

Many users in the FCoin community have also realized this. "There is no hope of repaying all debts anytime soon, unless Zhang Jian takes off in a new venture and directly sends money over," Tao Tao said.

Many users have also complained to the FCoin interim committee that the assets used for repurchasing FUSD are too few and suggested that the platform allocate more profits for repurchasing FUSD. Kevin told Chain Catcher that the platform's top priority is survival and development. If competitors are investing funds to capture the market, and FCoin instead foolishly allocates a large portion of its funds to repurchase FUSD, the platform will ultimately fail, and the repurchase will stop, which is tantamount to killing the goose that lays the golden eggs.

In the view of the FCoin interim committee, only by further strengthening FCoin can the platform's ability to repay debts be enhanced, thus requiring more capital investment. "If FCoin achieves the trading volume of a mainstream exchange in the future, repurchasing all FUSD debts will only take about two years," Kevin optimistically stated in the community communication meeting at the beginning of the month.

II. Attempting to Rebuild User Trust

However, for FCoin, Zhang Jian's "runaway" has almost completely destroyed the industry's and users' trust in it, and re-entering the ranks of mainstream exchanges seems almost impossible, but the FCoin interim committee is still striving for it.

To rebuild user trust in the FCoin platform, the interim committee proposed a 100% reserve proof and a multi-signature mechanism to demonstrate the platform's ability to fulfill obligations and ensure asset security.

Specifically, FCoin has published a user asset database indexed by hash values using the concept of zero-knowledge proofs. Users can calculate the hash value based on their UID, random number, and asset quantity using open-source algorithms and check in the public database whether their asset quantity is correct. "If any user cannot find their assets, it indicates that the public data is fraudulent," FCoin stated on its official website.

The multi-signature mechanism is a response to the previous issue of all assets being controlled by Zhang Jian alone. It proposes that the community elect seven members to jointly manage the platform's cold wallet, requiring at least five seats' approval for any fund operation. However, this mechanism is still in the registration and publicity stage and has not yet been implemented.

It can be seen that these two mechanisms continue the concepts of community and transparency in FCoin, and both are innovations in the global cryptocurrency exchange landscape, reflecting the interim committee's emphasis on rebuilding user confidence and their efforts. "In the past, FCoin did not achieve true transparency regarding the most important user assets, but now we have achieved true transparency and community-controlled wallets through technology and mechanisms, which embodies the true spirit of blockchain: code is law, not human governance," Kevin said.

However, there are still differing opinions on the actual effectiveness of the aforementioned mechanisms. "The confidence effect of these measures is greater than their actual effect; they are more about providing some confidence to the community and consolidating community consensus, allowing everyone to see corresponding transparency and constraints, but it is still unclear how much actual effect they can achieve." Former vice-chairman of the FCoin community committee, Kun Yuan, told Chain Catcher.

Zhan Li also expressed his views to Chain Catcher, "The technical design and concepts of these mechanisms are somewhat complex. Many users have been too deeply harmed by FCoin and will not be interested in or understand these mechanisms. Moreover, the identities of the FCoin interim committee members have not been disclosed, so those private key managers can collude to take user assets and run away once FCoin can no longer operate."

In fact, doubts about the identities and positions of the FCoin interim committee have long existed within the FCoin community, with many believing they are merely a front for Zhang Jian and will conduct secondary harvesting. In previous FCoin rights protection communities, several widely circulated texts stated, "Supporting the restart means taking everyone's remaining funds to waste," and "The interim committee is largely to obtain the intangible assets in Zhang Jian's hands"…

However, Kun Yuan believes that the main reason for not disclosing the identities of interim committee members is concerns about safety issues. "No one can guarantee the success of the restart. If it fails after half a year and a large portion of the funds is lost, they will become scapegoats, and a large number of rights protectors will come looking for them," Kun Yuan stated.

III. The Unsuccessful Restart and the Disappearance of Zhang Jian

The restart of FCoin has now taken a significant step forward, but it is far from smooth: the restart time has been delayed significantly from the initial estimate; among various businesses, only the contract business has been launched; within the contract business, only the BTC perpetual contract has been launched; and the income distribution and repurchase plans have yet to be initiated…

These issues are partly due to strategic development considerations, such as the higher income potential of contract business and the time needed for technical verification, but a significant portion is also due to the non-cooperation and passivity of Zhang Jian's team during the handover process.

Kevin stated in the community communication meeting at the beginning of the month that Zhang Jian and his team did not engage in any voice communication during the massive workload of the handover process, only communicating in writing. Many technical documents were incomplete, but the most serious issue was that when some materials and assets had not been handed over, Zhang Jian did not respond at all and recently deactivated his Telegram account.

Kevin further told Chain Catcher that the unfinished handover work includes some altcoin assets, FMEX Telegram group management permissions, and FCoin's "uncontaminated" original assets and transaction information. According to Zhang Jian's announcement in February, FCoin had over-distributed dividends to some FT users due to a financial system failure in 2018, resulting in approximately 30%-35% of mainstream coin asset data being contaminated. If the original asset data can be obtained, contaminated assets can be excluded, alleviating the platform's debt repayment pressure, but Zhang Jian's actions mean this is no longer achievable.

From earlier concealing the true asset status of FCoin to now passively treating technical docking matters and ignoring opportunities for self-redemption, these actions have undoubtedly further exacerbated Zhang Jian's irresponsible public image, and in the eyes of many, he seems to have lost any possibility of a "comeback."

However, Kun Yuan, who had closely communicated with Zhang Jian for half a year, holds a different view. He attempted to analyze Zhang Jian's psychological state for Chain Catcher, "He is a very idealistic person who has invested a lot of effort into FCoin in the past. However, when he announced the 'truth' about FCoin, it was already dead for him, and his heart was also dead, leading to a state of giving up. It will take at least a year or two to recover."

Tao Tao referred to Zhang Jian as a "coward," stating, "He should face the community honestly, take responsibility for the debts, and relinquish the operating rights of the exchange to focus on technology and repay the debts, rather than disappearing."

Zhang Jian's complete escape also signifies that FCoin has entered the "post-Zhang Jian" era. The restart of FCoin can no longer be reversed, and its current most important task is to enhance the platform's credibility and competitiveness, increase trading volume and related income, and find a balance between healthy platform development and the prompt repurchase of FUSD debts, taking responsibility for the long-term interests of all creditors.

However, based on the performance of FMEX nearly half a month after its restart, the market response and various data are not optimistic. Chain Catcher contacted nearly ten users in the earlier rights protection group, among whom many were unaware of FMEX's restart. This reflects both the low investment in publicity by FCoin and the fact that many users have lost hope and are unwilling to pay too much attention.

Since FMEX publishes its asset data daily on its official website, this also provides a good reference for the public to understand FMEX's business development. As of 24:00 on July 22, FMEX users had accumulated deposits reaching 234 BTC, with a total of 537 deposit users. However, most of this data was contributed in the initial days following FMEX's restart, and the subsequent growth has not been optimistic. According to Chain Catcher’s statistics, the FMEX platform accumulated deposits of about 10 BTC from July 20 to 22, with 15 new users added. Additionally, the daily trading volume of FMEX's BTC perpetual contract remains stable at around $30 million.

"From my observations, the trust recovery of existing users is still not ideal. I estimate that some potential users who are waiting or large holders with risk awareness are still waiting for the implementation of the multi-signature mechanism," Tao Tao stated.

Another FCoin user, Ming Li (pseudonym), who has lost over 1 BTC, told Chain Catcher: "The trading unlocking is still the same old story. I have no mood to deal with this now because my heart has already been deeply hurt by them."

Although the early restart of FMEX cannot be described as smooth, this does not mean that FCoin's restart is likely to fail. The biggest advantage of FCoin's restart lies in the forced binding of FUSD debts and tens of thousands of users together; these users are the potential base for the FCoin platform. Currently, FCoin's publicity efforts and functional development are quite limited, but if progress goes smoothly in the future, there is still hope to attract more users to trade.

However, the time left for the FCoin interim committee will not be long. According to the Q1-Q2 financial report published on FCoin's official website, FCoin has already spent 340,000 USDT on various expenses since its restart until the end of June, equivalent to about 2.4 million yuan. With subsequent market activities and research and development activities, this figure may increase, and the pressure from the community will also grow.

Kevin told Chain Catcher that the bottom line for the interim committee team is to achieve self-sufficiency within 18 months after the restart. If they cannot achieve this within 18 months, it will mean the restart has failed, and a referendum will be held to decide how to handle the remaining assets.