Popular altcoin exchange Vircurex just announced that it has stopped withdrawals for BTC, LTC, FTC (Feathercoin) and TRC (Terracoin). Any incoming deposit will not be credited. Furthermore, on 24 March, all BTC, LTC, FTC, and TRC accounts will be frozen until Vircurex can redistribute available funds to users. Last year, the exchange was hacked twice, resulting in a large loss of coins. Vircurex promised to cover the losses from their own income, and the plan seemed to have been working until recently.

“We had enough coin balances in our cold wallet to upkeep our platform and the positive cashflow enabled us to gradually refill the wallets.

Unfortunately we had large fund withdrawals in the last weeks which have lead to a complete depletion of our cold wallet balance and we are now facing the option of either closing the site with significant unrecoverable losses for all or to work out a solution that allows the exchange to continue to operate and gradually pay back the losses.”

The exchange has decided to go with the latter option, and has outlined the following plan:

The Plan

1. We will introduce an additional balance type called “Frozen Funds”. Funds in this balance type cannot be used to trade or withdraw. Those are the balances that the exchange will gradually pay back and hence transfer back to the available balance over time.

2. We will move all current balances for BTC, LTC, TRC, and FTC to the “Frozen Balance”, i.e. your balance will be set to 0.

3. We’ll take the current available cold storage balance and distribute it based on the below-described distribution logic.

4. Monthly we will take the net profit of the exchange and credit back that amount distributed to the users based on the described distribution logic.

The freezing of the balances is a one-time action, it does not affect future deposits in anyways.

Distribution logic

50% of the amount will be distributed top-down and the other 50% will be distributed bottom-up.

Top-down means: credit the amount from the largest account balance down to the smaller accounts Bottom-up: credit the amount from the smallest account balance to the larger accounts.

Example

User 1: 5 BTC

User 2: 4 BTC

User 3: 3 BTC

User 4: 3 BTC

User 5: 3 BTC

User 6: 3 BTC

User 7: 1 BTC

Amount to distribute: 12 BTC:

Step 1: Top-down distribute 6 BTC:

User 1: Credit 5 BTC

User 2: Credit 1 BTC, remaining frozen balance = 3 BTC

Step 2: Bottom-up distribute 6 BTC:

User 7: Credit 1 BTC

User 6: Credit 3 BTC

User 5: Credit 2 BTC, remaining frozen balance = 1 BTC

This approach has the advantages that

all users will eventually receive their funds, though the timeframe depends on the monthly volume available

new deposits and users are not penalized, thus supporting the ongoing operations of the platform

fund withdrawals from the available funds are guaranteed, no surprises or unnecessary delays

But Will it Work?

Vircurex seems fairly confident that this plan will work. However, bitcoiners are skeptical after the recent Mt. Gox disaster. Few people will want to use the exchange and make deposits after this announcement. Furthermore, some users are claiming that Vircurex has been operating as a fractional reserve, meaning that only a fraction of deposits is backed by cash-on-hand and are available for withdrawal.

Vircurex has been operating as fractional reserve for sometime, and due to a run is now ending withdrawals. https://t.co/C8rizSD7wq

— Ryan X. Charles (@ryanxcharles) March 23, 2014

Overall, bitcoins are displaying little to no optimism regarding this announcement, even though the exchange is being significantly more transparent than Mt. Gox. It remains to be seen whether or not Vircurex’s plan will actually work, though.

Headline image by Zach Copley.