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Rethink of Centralized Exchanges following FCoin’s Overnight Shutdown

FCoin, the controversial Chinese crypto exchange, has triggered a quite stir in the crypto space once again as it declared insolvent and failed to pay the 7,000 to 13,000 BTC back to its users.

Fund difficulty caused the exchange’s inability to cash users’ deposits which, citing its founder Zhang Jian’s words, “range from 7,000 BTC to 13,000 BTC” (that’s $68.60 million to $127 million). What makes the platform end up like this is “a combination of data error and wrong decision,” Zhang added.

The sudden shutdown of FCoin which rose to fame by “trans-fee mining model” in 2018 but only lasted for over one year left a large number of retail investors to face big losses, ranging from hundreds of thousands to millions and even more. It is also causing a “domino effect” in the crypto space in the country.

Following its shutdown, ExinOne, a China-based financial service platform for crypto asset, announced that its investment product Yubi Bao had suspended withdrawals as it explained that part of Yubi Bao’s crypto assets was kept in FCoin’s finance-management account. A number of teams behind some quantitative funds as well as lending/borrowing arbitrage traders have also been affected.

“There’re already three quant funds trapped,” an industry insider disclosed, “the impact of the FCoin crash is setting off a knock-on effect on the crypto space.”

In the meanwhile, trust issue of centralized exchanges has been greatly questioned, some warn users of small exchanges to withdraw their crypto holdings on these platforms as soon as possible to prevent similar things happen. This may lead to mass panic and trigger a run on the crypto industry in the country, which would kill a batch of small exchanges and crypto service providers.

The FCoin incident once again educates the market about the dangers of centralized exchanges. Some criticized centralized exchange is the bug in the blockchain world and users who trade on these platforms are just like running naked. While the fact is that centralized exchanges such as Binance, Coinbase, Bittrex, they have a percentage of over 90% of total cryptocurrency transaction volume.

Indeed, in a centralised trading system, where exchanges hold the private keys to users’ assets, it is common to see exchanges embezzle their users’ fund. Industry insiders told us that in the current market, few exchanges will not misappropriate users’ assets.

Under such a context, choosing an exchange is just like a gamble. Isn’t there any better solution for a centralised exchange? Perhaps the reserve requirement system is a feasible solution in the short term.

“Only when a platform is insolvent will people realize the significance of 100% reserve, if there is 100% reserve open and transparent, even 0.01 BTC fund problems can be found in time in the very beginning and such disasters could absolutely be avoided,” said Zi Cen, CMO of RenrenBit, a crypto lending firm.

However, due to the current vague regulations on cryptocurrency exchanges, it depends more on the exchanges themselves in terms of the reserve system instead of external forces. While people are more and more concerned about the asset security, a perfect reserve system is likely to a contested spot in the following centralized exchange competition.

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