First of all, despite the name, FCoin is the exchange’s name. It has a coin, or rather a token, which entitles holders to 80% of the exchange’s revenue. Rather tautologously, it’s called the FCoin token, or FT.
It’s a good job there aren’t any other famous FTs already in the world of finance to cause confusion. By the way, the “F”, if you’re interested, stands both for “finance” and “future”, so no confusion there either.
FCoin is in hot water this week over accusations of manipulation. Because it’s a decentralised exchange, holders of the FCoin token are able to vote on which coins are listed on the exchange. But rather than the traditional “one token one vote” or the egalitarian “one holder one vote”, FCoin decided to make use of something called cumulative deposit number ranking, which means that the coins deposited most frequently with the exchange were listed.
There is a superficial logic to this — the coins with the most deposits should be the coins for which there is most demand for use, so should therefore be on the exchange — but it falls down with even the lightest puff of scrutiny or the merest hint of contact with the real world.
The system is so nakedly open to exactly the sort of abuse that is rife in the world of cryptocurrencies that it seems, in the parlance of the tech sector, less of a bug than a feature.
Getting coins listed on exchanges is a key part of the strategy for inflating their value. The nature of the cryptocurrency market means that getting onto an exchange raises a coin’s profile and makes it easier to trade. This makes it a vital tactic in the pump-and-dump playbook (not a metaphor — there is an actual playbook; it’s called the god pdf).
WeChat and Telegram transcripts of pump-and-dump syndicates are full of promises, requests and plans to use influence and position to get such-and-such coin listed on so-and-so exchange once the pumpers have built up their positions.
So, when FCoin offered the chance to get any coin listed (with no scrutiny of the value or use case) simply by placing deposits, bots were immediately set up to spam transaction after transaction of shitcoin after shitcoin into FCoin’s exchange via forged accounts — known as a Sybil attack.
Since virtually every altcoin, a cryptocurrency that isn't Bitcoin, is built on top of the Ethereum network, the tubes were immediately clogged. Transaction times for Ether, the cryptocurrency that powers the Ethereum network, slowed to a crawl and fees hit a level almost double their all-time highs.
With a network rendered slow and expensive, Ether users sold out and the price dropped a neat 10% (actually a rather restrained move in these parts). Some have speculated that the voting process was deliberately designed to attack Ether, although what FCoin would get out of that is unclear. One result is simply notoriety. FCoin is now a name on everyone’s lips, making it even more attractive as a pumping venue.
The trading volume numbers posted on FCoin’s exchange since its creation in May have been incredible. Literally incredible. The exchange claims to be executing up to $17.3bn of trades per day. For context, the next largest exchange’s total volume is just under $1bn. The crypto community is asking itself whether these numbers are entirely made up, composed of bot-executed wash trades or if a two month old Chinese exchange could have become the largest in the world without being mentioned in data outlets.
To be fair to FCoin, everything about the system encourages high volume trading and, the exchange is a new project from the creator of Huobi, the fourth largest crypto-exchange in the world, so it’s not exactly unheralded.
Nobody at FCoin could be reached for comment. Their “contact us” button redirects to the community’s Telegram group, in which Byte Me's question about high volumes and manipulation received no response (just as was the case for the previous questions on the same topic).
To ETF, or not to ETF
This week, it came to light that an exchange owned by US markets operator Cboe, has filed with the US Securities and Exchange Commission to list and trade a bitcoin exchange traded fund (ETF). According to a version of the application summarised by the SEC, the suggested ETF would have a minimum of 100 shares outstanding and be worth roughly $200m, making it “cost-prohibitive” for small retail investors. It would be issued by the VanEck SolidX Bitcoin Trust.
Cboe already lists Bitcoin futures, a controversial product to say the least. According to the SEC, Cboe seems to think that “the very nature of the Bitcoin ecosystem makes manipulation of bitcoin difficult”. It specifically refers to the OTC market here, noting that it would be particularly difficult to manipulate the fund compared to an exchange that trades bitcoin in a "listed" manner. Byte Me understands where Cboe is coming from but simply doesn't think the ecosystem is ready for ETFs yet.
Bitcoin is a decentralised currency. In this context, that means that when Bitcoin moves from one wallet to another, it doesn’t need a central trusted intermediary to verify transactions.
However, to trade Bitcoin, you generally have to register with one of many exchanges, most of which are not decentralised in any sense of the word. They expect users to deposit funds with them to begin trading. They are mostly unsupervised, unregulated and have a tendency to be the target of high-profile hacks in which millions of dollars go missing overnight.
Hardly the decentralised utopia portrayed by crypto evangelists.
Without proper surveillance, regulators cannot be sure that large swathes of the market aren't being influenced by practices like wash trading, in which investors buy and sell to themselves to create the impression of market activity. And in the sentiment-driven crypto market, even if you are trading OTC or on an exchange that is squeaky clean, you can be damn sure that criminality on other exchanges will affect the price of your asset.
Adding to this, as Byte Me highlighted in a previous column, academics at the University of Texas fear that the price of Bitcoin was serially manipulated towards the end of last year, potentially helping propel the currency to a sky high valuation of almost $20,000. It is now sitting at roughly $6,200.
Whether the allegations are true or not, the opaque nature of the cryptocurrency spot market means that it is simply not ready for ETFs, whether traded by retail investors or institutions.
Since the SEC gave its reasoning for blocking ETFs back in February, few of its worries about market manipulation have been alleviated. Cboe may wish to venture into the cryptocurrency world a little more cautiously, lest it sustains serious reputational damage. After all, Bitcoin is is no stranger to controversy.