On the surface, Liquid seems to be a crypto success story like some notorious crypto exchanges. However, a recent interview with former employees of the exchange brought the reality to light. Insiders described Japan’s Liquid exchange as a downgrading workplace with co-founder in-fighting, downplayed security issues and berated staff.
Glorious Days of Liquid
Founded in 2014, Liquid Group was among the first firms to get a licence to operate exchanges in Japan. Initially, the firm ran two exchanges: Quoinex, which enabled trading between fiat money and bitcoin (BTC), and Qryptos, which handled crypto-to-crypto transactions.
Later, the two were merged and rebranded under the name Liquid. In addition to Japan, it also expanded its presence in Singapore, the Philippines and Vietnam.
In Oct. 2021, the FSA registered Quoine as a Type 1 Financial Instruments Business. A Type 1 licence permits intermediaries, such as brokerages and exchanges, to provide securities and derivatives.
Kayamori, the co-founder of Liquid, wanted to develop a pooling system called the “World Book” where an offer to sell a token on the U.S. exchange Coinbase (COIN) could be matched with a buy offer on Liquid if both exchanges offered the asset. Investors believed in this grand ambition of Kayamori.
World Book roadmap. Image: Liquid
In November 2017, the firm raised around $105 million worth of the cryptocurrency ether (ETH) by issuing its native QASH token via an initial coin offering (ICO). QASH was designed as an Ethereum-based ERC-20 token used to pay trading fees on the issuer’s platform.
There were 4,988 participants from 98 countries participating in the QASH Token Sale. At the end of the sale on November 8, 2017, the allocation of 350 million QASH (equal to 350,000 ETH or USD105 million) was oversubscribed, making it one of the most successful blockchain fintech ICOs.
A Downgrading Workplace
In a recent interview, former workers of Liquid describe a chaotic workplace, even by the standards of the worldwide crypto sector, which is notorious for its hard-charging personalities and lax corporate cultures.
Japanese authorities issued business improvement orders to the Liquid exchange and five other crypto companies on June 22, 2018, ordering them to strengthen their risk management procedures. Kayamori ignored the order to address compliance concerns.
The co-founders Kayamori and Lozada engaged in conflict. As each founder attempted to oust the other, Liquid divided informally into two squads. According to a source close to Liquid, “Their flaws almost balanced each other out in the beginning”. “It got to the point where they couldn’t even be in the same room.”
According to Liquid former staff, while Lozada understood technical issues better than Kayamori, he lacked exceptional execution skills. Lozada often screamed at subordinates and humiliated those who made mistakes. Kayamori did the same, yelling at staff during team calls, sarcastically asking why everyone was ignorant and didn’t do their jobs properly.
Two former workers revealed that Liquid was also notably unmeritocratic. There were standards and regulations, but meeting them didn’t matter. Kayamori displayed “bizarre favouritism,” and management gave discretionary incentives to people close to them.
Liquid Kept Up Appearances
In November and early December 2018, QASH maintained its value even as bitcoin and ether, the market’s leading cryptocurrencies, declined. The firm purchased its tokens to keep the price at 21 cents. However, it seems that Liquid did not make these acquisitions public.
Chief Operating Officer Seth Melamed on Liquid’s security. Image: Seth Melamed
Liquid continues to market itself as the world’s most secure exchange in 2019, though four former workers said that security had degraded by this point. Preparing Liquid for sale was Kayamori’s primary priority. Announcing an undisclosed Series C financing round in April 2019, he referred to Liquid as a unicorn, one of just two firms in Japan with a valuation of $1 billion.
Some workers were annoyed by the company’s now-weak security and conducted a “pentest,” or penetration test, which included obtaining exchange money on a thumb drive and delivering the drive to top management to show how simple it was to break security.
Despite the employees’ efforts to do right by users, Liquid management was known to ignore them. “There are forces of order and good trying to make things happen, but the existing culture has an immune system seeking out and destroying them,” said a former staff member.
Security Loopholes And Hacks
According to a former employee, a larger-than-usual proportion of customer care staff had access to user accounts to the extent that they could edit user information, examine wallet addresses, and view money.
On November 13, 2020, Liquid fell victim to a hack. The platform attributed security flaws to GoDaddy (GDDY), a domain registrar and web hosting business. Kayamori said that the vendor “incorrectly transferred control of the account and domain to a malicious actor.” GoDaddy did not reply to a request for comment from CoinCulture.
Kayamori said that customer funds were adequately accounted for and were kept secure. However, two former workers claim that the actual scope of the November 2020 data breach was never revealed. They said that customer assets and personal data were taken.
Liquid halted withdrawals and deposits on August 19, 2021. It said that it had been hacked once again. The hack was eventually estimated to be worth $90 million. According to three ex-employees, the breach diminished the value of Liquid.
A week after the attack, FTX offered the Japanese exchange a loan of $120 million. According to Liquid, the money will be used to accelerate new capital generation projects and provide critical liquidity. There is still no official explanation for the breach.
FTX Acquires Liquid Group
Five months after the hack, FTX announced the acquisition of Liquid Group. According to contracts reviewed by CoinCulture, it planned to acquire all shares, stock options, and warrants from shareholders. The contracts include blacked-out dates.
Japanese cryptocurrency exchange bitFlyer, a Liquid rival, is reportedly valued at $370 million. According to Gehrke, as a consequence of the attack, Liquid was likely sold at a discount to bitFlyer’s value, probably for roughly $200 million. “From an FTX perspective, it’s a bargain, right?” he said.
Another source revealed that the business has around 40,000 shares. According to McKnight’s complaint and a shareholder document accessed by CoinCulture, the price per share was $3510.41; thus, the firm would have sold for almost $140 million based on the share count.
FTX refused to comment on Liquid’s compliance and security problems and did not respond to questions about its due diligence on the acquisition.
By purchasing Liquid, FTX was able to sell derivatives on the Japanese market and obtained licences on the cheap. In recent years, Japan has been increasingly hesitant to approve new licences for cryptocurrency exchanges. Even Nasdaq-listed Coinbase, one of the world’s leading exchanges, did not get a Japanese licence until June 2021, three years after announcing its intention to do business in Japan.
Kayamori emailed shareholders on May 1 from FTX’s Bahamas office to announce that the acquisition had been finalised and that Liquid would now operate under the name FTX Japan. FTX intends to move its Japanese clients to the Liquid platform and allow investors to swap QASH tokens for FTT tokens.
Kayamori said in an email that his ambition for Liquid was to give financial services to everyone.
“We knew it was not going to be easy but, to be honest, I never thought it would be this difficult either,” he wrote. “But as the 19th century German philosopher Friedrich Nietzsche once said, what doesn’t kill you only makes you stronger. And we were able to withstand all challenges to become part of the FTX family.”