The Largest Brazilian Bitcoin Exchange is Falling Apart

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How tiny Negocie Coins defied logic to become (dubiously) the biggest BitCoin spot exchange in the planet. How it might be pulling a spectacular exit-scam..

Claudio Oliveira’s favourite brands are Louis Vuitton, Louboutin and Hermès. A luxury? His private jet. A ritual before sleep? Kissing Chanel (a Chihuahua) and small talk with his wife.

The 48-year old Brazilian is a humble, soft-speaking leader, in his own words. The type that would never be known in the broader tech scene if it wasn’t for a headline-grabbing statistic.

On April 19th, 2019, Negocie Coins, his 1.5 years pet exchange, overtook Binance as the largest-volume Bitcoin spot market in the world. According to CoinMarketCap, at least.

This should not be taken seriously. But, on May 13th, NegocieCoins claimed to have over 5% of Bitcoin’s global spot volume.

With over 150k BTC claimed in daily trades (more than U$ 1 billion, or 100x the volumes of all other Brazilian exchanges combined), the company made Claudio a target of gossip magazines and pay-to-play paparazzi TV shows.

But mainstream media would barely assimilate such meteoric ascent, until Claudio’d go on air again. This time, on Facebook Live, in an impromptu stream, the CEO was red and sweaty.

After luring celebrities, an ex-president of the Justice Tribunal and a R$150K country show to his birthday party, it was no more time for celebration.

Search interest for Negocie Coins and TemBTC, the main exchanges Claudio Oliveira controls, has regained ATH levels.

Since May, Brazil’s Federal Police is conducting an investigation inside the ostentatious building where his holding, named Bitcoin Banco, employs +200 people in Curitiba, Brazil.

The probe’s findings are still not public. Leaked documents and witness’ reports have terrified past and existing customers. Nobody has yet proved or disproved how much money the business actually holds.

This is an obscure story about the rise and demise of yet another Bitcoin pharaoh.

An eventful history granted BTC with a dubious reputation in the eyes of the local mainstream public:

>> The first Brazilian bitcoin influencer (who also made videos about tax evasion), was prohibited from leaving the country in 2014, and, à lá Satoshi, vanished from the map (Justice has looked for him ever since).

>> The first dominant exchange, Mercado Bitcoin, exit scammed its thousands of customers in 2014 (it still operates, under renewed management).

>> A big local miner has had his wife kidnapped and a ransom asked in Monero (over U$30 million). On conferences (and meetings with bank representatives) he appears to wear a t-shirt saying “fuck the banks.

LocalBitcoin volume historically lags neighbouring countries, and Brazil is miles behind Argentina, for example, in terms of development contribution to the ecosystem.

However, in 2017, it all began to change. The market blossomed. Exchanges saw a huge influx of retail interest. News floated that Brazil had more crypto-investors than people in the stock market.

Scams proliferated accordingly. Even Ronaldinho Gaúcho, the soccer star, is promoting a crypto-thing that promises fixed returns.

Bitcoin Banco was founded in mid-2017. In September, that year, it bought an exchange called Negocie Coins, pretty irrelevant still.

In 2008, NegocieCoins went from 5th to 1st Brazilian exchange (in volume) quickly.

In January 2019, Bitcoin Banco acquired TemBTC, another minuscule exchange. Since then, Negocie Coins and TemBTC have been sharing the top 2 spots in the country’s national volume ranking.

The group has established a third exchange, and 2 physical agencies, in Curitiba and Sao Paolo.

“We are actually contrarian to this digital trend, and going material, because we want people to perceive us as an actual bank” — Claudio Oliveira

Bitcoin Banco offers a product that’s similar to a savings account — the more time you commit your BTC to their custody, more yield you’re entitled to. Leaked documents suggest offerings that range from 1 to 5% per month. Of course, clients can also take advantage of the group’s exchanges to trade.

Most (if not all) “aggregate value” offerings the “bank” promises are actually products of its subsidiaries: the ability to purchase real estate, redeem credit points on e-commerce, reinvest into different vehicles, etc.

On TV and print interviews, group representatives are unclear about how their main product generates return. To a regional TV channel, in 2018, the CTO and Marketing Chief stumbled on each others’ words when asked “what is done with the BTC to generate the return?”. Then they concluded:

— “We uti-li-ze it.”
— “I don’t understand…” — the interviewer pondered — “a traditional bank lends its clients’ money, and pays back part of the interest… do you lend the BTC you get?”
— “Lo-look, it’s delicate to put things that way. What happens is that people from outside don’t really understand…”

OK: guaranteed return schemes shouldn’t be news anymore. Streets are full of fraudsters who make up terrible stories to explain such miracles.

Indeed, Bitcoin Banco wouldn’t be a thing worth noticing if it wasn’t for two details.

The first one is the volume they claim to be having.

The second curiosity in Bitcoin Banco’s business model is as absurd as its volume. Once NegocieCoins and TemBTC rose to the spotlights, it was impossible not to note the spread between them.

It floated between 1.5% and 8%, never closing.

This chart uses MercadoBitcoin’s prices minus 0.5% as a proxy for TemBTC’s prices (historical data not available). The ratio has been holding well as a proxy.

Right now, you can go to their websites and check it — it’ll probably be there.

The company always treated this as if it was a normal byproduct of an immature market. It even made tutorials on how to optimally transfer between both exchanges in order to profit from the spread.

On a sample of 1000 trades taken at June 5th 2019, from NegocieCoins’ API, 99.998% of settlements were initiated by SELL orders (I didn’t bother getting the data for TemBTC, but you can guess). On the same period, on MercadoBitcoin, the most visited exchange in Brazil, 46,90% of settled orders were originally SELLs.

At this point, you should (1) be wary of the data being spit by NegocieCoins’ API, and (2) be able to guess what type of traders constitute their user base.

In March, they announced the obvious next step in meeting user demand. The group had been testing a proprietary system for transferring Real$ AND Bitcoin (and pretty much any other token) between NegocieCoins and TemBTC — without fees or delays. One that would centralise activity, as they marketed it.

A sidechain to the Brazilian fiat currency AND to every cryptocurrency the group supported.

It was called FortKnox. And looked basically like a block explorer.

FortKnox was an arbitrageur’s dream. It reduced the 1.5–1.6% total fee cost for a whole buy-sell cycle down to a fixed 0.5% unique withdrawal fee.

Here’s a story detailing how a trader shrunk his arbitrage cycle from 4 hours to just over 1 hour with FortKnox. He praises it, grateful for the U$5k/week he’s been able to make out of thin air. Google will fetch you many more similar reports.

There’s just one thing users should probably have noticed.

Transaction hashes on FortKnox, when pasted into an actual block explorer… were inexistent.

Businesses using the “FortKnox system”. They all belong to the same group.

There’s no public source code, full node or client one can use to audit the data. It’s impossible to verify what’s stated. Users need to trust the company behind FortKnox (registered in the same city block as Bitcoin Banco).

Recapping:

>> Bitcoin Banco lured clients with the promise of guaranteed returns;

>> The group acquired a network of exchanges and businesses;

>> Persistent spreads between its main exchanges attracted arbitrageurs;

>> Bitcoin Banco stimulated the migration of its clients’ money (BTC and R$) to a proprietary, closed ledger system (FortKnox).

>> Profits from arbitrageur activity between the group’s exchanges inflated balances on this ledger, in a self-reinforcing loop.

In the past weeks, Bitcoin volume in Brazil has made headlines on multiple crypto-outlets around the world. Journalists have pinned everything from record inflation levels to the political crisis as the root of such growth. The cause is actually much simpler.

A breakdown sliced by the source of the money being traded (if it’s originally Real$ OR FortKnox closed-system Real$) suggests more than 99.5% of Brazil‘s grand volumes are dubious:

Volume distribution on top 9 Brazilian exchanges — real R$ on top, FortKnox R$ on the bottom.

Like any other business that faces incentives to practice undisclosed fractional reserve, Bitcoin Banco’s perpetual-motion machine would only halt once customers began demanding their money back en masse.

On May 21st, Banco Plural, a legacy financial company who effectively banked Bitcoin Banco for the bulk of its fiat activities, suspended commercial relationships with Claudio Oliveira’s group.

In response, high-level executives recorded a video, exhibiting the letter received and communicating a new policy.

Bitcoin Banco’s compliance director and vice-president blamed an actual bank for the group’s mounting problems.

From then onwards, a daily limit per client would be installed: R$10.000 or 1BTC. There would also be a global limit (undisclosed) — whenever reached, all pending withdrawals would be halted until the next day.

Fun fact: deposits and trading remained functional.

Queued withdrawals have been growing steadily since then. The exchange’s page on Reclame Aqui, a popular Brazilian site for formalising customer complaints, derailed into a snowball of anger.

In multiple appearances, employees of the company promised that withdrawals would be resumed until the 5th of June. Claudio Oliveira himself reinforced the deadline.

In a video published on the 5th, he apologises for not being able to live up to his commitment, babbles on some further dates, and threatens a developer who’s made bold claims against him on social media.

Soon after, Bitcoin Banco’s executives proceeded to reveal shocking news.

FortKnox, their closed-source sidechain, had been under double spend attacks. Over R$50 million were allegedly stolen from customer accounts. Now, onto the peculiar circumstances:

>> The fraud was not discovered by authorities, but rather the group’s IT team;

>> News seem to have been first broken by a gossip column in Curitiba, then announced on a press conference booked BY THE GROUP, in a police station;

>> The group shared a video of the double spends in action. One just opens two tabs at the same time, and clicks “withdraw” simultaneously. No code involved.

A demo of a double spend in Negocie Coins — shared by themselves.

Bicoin Banco has already handled data belonging to over 2500 clients to the Federal Police. Six customers are under explicit charge of fraud, and being actively investigated.

Brazilian Justice has frozen the equivalent of R$750.000 in accounts belonging to Claudio Oliveira. It has also confiscated ELEVEN luxury cars in his possession.

Soon there were people on social media advertising “FortKnox BTC” (whatever this meant) with up to 50% discounts against BTC’s spot price. Facing an increasing wave of withdrawal requests, Bitcoin Banco sped up efforts to calm down its customer base.

In the days following news of the uncovered fraud, they released a video explaining the ongoing collaboration with the Police. Hollywod-esque, the camera glides through the office, carefully framing a series of elements that inspire trust: monitors on the walls, an electronic lock, clean glass panels, assertive body language.

Online, clients finally started to discuss the possibility they’ve been fooled. Employees leaked audios pondering over the same chances. By now, it wouldn’t be surprising if even the police was suspicious of Bitcoin Banco’s proactive collaboration attitude.

Worth mentioning, the group had released and marketed, in 2018, a Chainalysis-like forensic tool catered to enforcement authorities. Can’t say the man’s got no vision.

Data from Alexa and public exchange APIs.

Claudio Oliveira is creative; his user base, unsophisticated. It’s a killer match.

Throughout its epic, Bitcoin Banco has issued and promoted a bunch of shitcoins. The most prominent ones were:

>> LeaxCoin: an ERC20 token to “buy, sell and rent real estate”, LEAX never reached main net or delivered the functionality its marketing promised. In mid-February, it fell 99% on one day, and was delisted from the group’s exchanges. They promised a buyback with a 5% premium (never happened) and vowed to launch a sucessor, LeaxEX, along with a new exchange (also never happened).

>> BR2EX: a “soft stablecoin”, it’s “anchored on the volume negotiated within partnering exchanges”, and has the “extra guarantee” of gold reserves held by an ensuring fund. Details were never disclosed. The gold was once said to be put in a “trusted” institution in Switzerland, which would issue periodic reports.

An e-mail from an employee of Bitcoin Banco offering fixed returns and bonuses on deposits.

Bitcoin Banco also offers 2 “saving-accounts-like” products, with conservative and aggressive (but fixed) returns.

Last, but not least, there’s Le Rêve: a product named after the term “the dream”, in French. Investors choose an object of their desire (that can be found on partnering e-commerces), and deposit BTCs equivalent to its price. In 12 months, the investor gets the BTC back, if it has grown in value, or the original amount, in R$, if BTC devalued meanwhile! Of course, the chosen “gift” is available on day 1 — and its delivery is free!

La Rêve is a display of wizardry in the art of re-packaging interlinked businesses to pump them all up together.

That also seems to be the driver behind Claudio’s recently announced plan to get Bitcoin Banco out of the hole it’s sunk in.

His latest proposal to accelerate withdrawals is to give people one of his shitcoins (BR2EX), instead of the real money they’re entitled to.

Claudio Oliveira has no Google Search results that are older than Negocie Coins, his pet exchange. Claudio has no Facebook, Instagram, Twitter or LinkedIn.

There’s no online footage of Claudio in public appearances before an event called Universe BTC, held in early 2019. It happened in the fanciest of Sao Paolo hotels, for 550 people, with champagne and very good food around.

He showed up again on BitConf, the country’s annual Bitcoin community gathering. Attendees reported in awe his arrival with 3 fridge-sized bodyguards. In an interview to a popular YouTuber, he said:

“We have 3 companies in our group (sic). TemBTC, Negocie Coins, Bat Exchange, our marketplace Get4Bit, our marketing company Fork Content, and a supermarket chain”.

Actually, Claudio is a shareholder in no less than 54 private companies. 11 of them seem to have a direct relationship to cryptocurrencies. Others include a bar, a retirement cooperative, a tennis academy and a church.

The entrepreneurs is believed to have grown in Switzerland. On an interview, the CEO of NegocieCoins before it was acquired (in late 2017) said Claudio

“[…] graduated in Electronic Engineering, Finance and Graphic Design in Switzerland, where he worked at major international banks, dating back 20 years ago”.

To Amaury Jr. (a shelved TV host whose program is going back to air after Claudio announced it’ll sponsor it), he confessed “missing the alps, but enjoying the simplicity of Brazilian countryside’s lifestyle”.

No one among Claudio’s highest level executives has a public history in known international companies. Some figures are as rare as the mastermind himself.

Clockwise, from top left: the group’s mysterious vice-president; highest ranking executives in a modern room; Claudio and his Chihuahua in his jet; Claudio in an event being interviewed by C-level celebrity hunters; Bitcoin Banco’s Marketing Director bold presence on Twitter.

Ironically enough, Curitiba is the city where now infamous Operation Car Wash begun.

Local tribunals have unparalleled expertise in dealing with money washing cases where truth is buried deep beneath the surface. It remains a mystery, though, if Curitiba’s forensic tactics will succeed this time.

In the past 2 years, Claudio Oliveira came apparently out of nowhere to establish a pompous network that give him access to Brazil’s socialite, corporate and political elites.

Claudio Oliveira is introduced to the Mayor of Sao Paulo, live on a TV show. The Mayor wants a meeting with him to discuss funding for the government — but don’t worry, it’s just a joke after all…

NegocieCoins and TemBTC are still operational. Withdrawals’ queues are growing; formal complaints, skyrocketing; legal suits, piling up. The group’s solvency, as a whole, is unclear. An audit from a big firm was signed up for in July 2018, and widely announced in the pressnews never followed.

Money continues to pour in. There’s apparently hundreds of fixed-return small-scale pyramid schemes spread in Brazil’s countryside and coastline (mainly in Sao Paulo state, according to field reports), relying on Bitcoin Banco’s ethereal money ledgers to operate — and report profits to clients.

ClaudioCoin: already a valuable meme on Brazilian cyberspace.

As long as these ramifications of the system keep sucking new money, the march will go on — no matter what happens to the mothership.

2017 and 18 marked Brazil’s history with a corruption purge and the imprisonment of a bunch of criminal politicians, setting the stage for a much awaited political reform and economic revival.

In 2019, Brazil’s “crypto history” might be in dire need of a similar shakeout, before achieving its true potential.

Until then, the largest South American economy remains to the widest bitcoin ecosystem what it has always been: an outsized, but vague promise.

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