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The Unravelling of Bitcoin Marketplace Paxful

Paxful was one of Africa’s leading bitcoin marketplaces, boasting more than 200 employees. Beyond operations, staff took paid trips to music festivals, dismissals were rampant, and management was constantly fighting.

Last week, peer-to-peer (P2P) bitcoin (BTC) exchange Paxful announced that they would suspend its operations.

According to a message from CEO and co-founder Ray Youssef on Paxful’s website, Paxful is not sure whether operations will resume upon closure of its marketplace.

“While I cannot share the full story now, I can say that we unfortunately have had some key staff departures,” wrote 46-year-old co-founder Youssef, also citing regulatory challenges that the US presents, in addition to the P2P market.

“We’ve been bending over backwards for the past five years to try to comply with the highest standards,” he said, referring to abiding by rules set by US regulators. “The regulators still don’t get it and it’s painful to see.”

Paxful was founded in 2015, and has grown to hire over 200 people in four offices across the globe. At least $5 billion was traded on Paxful by more than 12 million users since its inception, according to court filings.

Paxful’s former employees, in lawsuits and interviews, allege that the troubled company had been suffering from severe gaps in management professionalism. Amongst the misconduct include promotions based on favouritism, sudden layoffs and dismissals, paid travel expenses for lavish  experiences, and reports of repeated routine cannabis usage while on the clock by Youssef himself.

Artur Schaback, Paxful’s 35-year-old co-founder had also agreed with Youssef that behind closed doors, their business relationship turned sour, resulting in the company’s eventual closure. Currently, Schaback and Youssef are in a series of intertwined court disputes of legal actions and counterclaims.

Schaback holds 50% of the company’s Class B common shares, and served as Paxful’s chief operating officer. Schaback is suing Youssef in Delaware Chancery Court, accusing Youssef of denying him access to company resources and information while he was on paternity leave; and that Youssef and other “cohorts” have “looted Paxful coffers.” The lawsuit also alleges that Youssef was part of an “an illegal plan to avoid international sanctions on transactions into and out of Russia.”

Schaback went on paternity leave since October 2021, and claims that the leave was the beginning of his 15-month-long feud with Youssef.

On the other hand, Youssef says that Schaback was fired from Paxful for “incompetence and bad behaviour.” According to Youssef, Schaback’s suit was a factor for Youssef’s decision to close up Paxful. 

“It was clear to everyone at the company that Schaback did not have any understanding of what a COO was supposed to do,” lawyers for Youssef argued in a March 17 filing in the Delaware case.

Despite this, Schaback still believes in Paxful. He wants the courts to appoint a custodian to take control of Paxful’s assets as it goes under a potential restructure. While both Schaback and Youssef confirmed that there’s already a custodian for Paxful, there’s not much details revealed yet.

The start of Paxful

“We met because we believed the idea of bitcoin helps the little guy,” Schaback said in an interview.

Before Paxful, Schaback and Youssef previously co-founded another bitcoin-based payments service called EasyBitz. It failed. Later, Schaback and Youssef worked on launching Paxful.

Paxful can be thought of as EasyBItz “2.0,” and found an opportunity to strike the market. In an interview, Youssef chronicled Paxful’s humble beginnings, and how the story started when an unbanked sex worker reached out to the duo to get advice on buying bitcoin so she can post advertisements on Backpage, a bitcoin-friendly site mostly containing adverts for prostitution and human trafficking. Backpage was eventually shut down by the FBI in April 2018.

Since Visa and Mastercard stopped providing their services to Backpage from 2015, Paxful found the sweet spot to offer their services.

According to Schaback, his ultimate goal for Paxful was to be part of “empowering the forgotten 4 billion unbanked and underbanked.” 

In the Delaware court filing, Youssef said he “was responsible for the development of Paxful’s business operations, marketing, design, support and technical systems administration,” and “wrote some of the code for Paxful’s system.” As for the other co-founder’s role, “Schaback wrote most of the code for Paxful.”

Paxful operated in a very simple but clear way: users would exchange cash or gift cards for bitcoin. Paxful operated as a middleman for these transactions, providing mediation and escrow services for a fee.

The gift cards in question were the most used on the site, and were typically purchased at a steep discount as they aren’t as liquid as bitcoin nor cash.

“You want 10 euros worth of bitcoin, OK give me a 20 euro gift card,” Brian McCabe, previous head of product marketing at Paxful from February 2018 to 2021, recalled in an interview.

Despite Paxful’s sex worker customer base dwindling down after US-based Backpage’s shutdown, the peer-to-peer service soon found popularity in emerging digital asset markets like Nigeria and China. In these countries, bitcoin had the reputation of being a reliable alternative to currencies, favouring digital assets in comparison to their home currencies and their payment systems.

Paxful then grew to four offices worldwide: from New York City; Tallinn, Estonia; Hong Kong; and Manila. Compliance, legal, sales, and marketing were based in New York, whereas development, product, and user interface were based in Tallinn.

Expansion and conflict

According to sources, once Paxful started to get big, the founders of Paxful started fighting – and more. Additionally, it wasn’t uncommon for lavish spending to occur on company pay and time.

Roughly a year after Paxful’s founding, in September 2016, pedestrians in the upscale Miami Beach area in Florida spotted two men on a penthouse balcony of a large condominium building aiming an AR-15-style assault rifle onto the streets, taking turns holding the weapon in what apparently was posing for photos.

Three men were then arrested, with offences ranging from improper exhibition of a firearm, to possession of narcotics – particularly cocaine and hashish, according to Miami-Dade County court records. While the charges were eventually dismissed, two out of the three men involved with the case included Ray Youssef and Artur Schaback themselves.

Five months after the incident in February 2017, Youssef was arrested in Tallinn “on suspicion of drug trafficking after allegedly purchasing illegal drugs including MDMA (also known as ecstasy) and steroids multiple times through the dark web.” The allegations come from court documents filed by Schaback.

In the filing, Schaback cited Glassdoor posts where employees have supposedly said Youssef held meetings while under the influence of drugs, making a case for improper business  conduct.

While Youssef admitted to serving a guilty sentence in connection with a drug-related offence in Estonia, Youssef responded that the Glassdoor complaints may have been made by Schaback himself, or from “others acting in concert” with Schaback.

Schaback also alleged that Youssef was part of management meetings under the influence of “unspecified substances”. McCabe also confirmed, saying that “during virtual meetings, [Youssef] would smoke CBD and weed in the office all the time and it would smell like it.”

In Paxful’s heyday, lavish spending was a natural occurrence in the office, according to former employees. McCabe notes that in 2018, Paxful flew the entire company to Belgium for Europe’s biggest electronic dance music festival. “We were there for a week,” McCabe said. “On a retreat at a five-star hotel.”

McCabe also recounts that abrupt firings of employees were also commonplace within Paxful’s work culture. According to the former head of product marketing, Youssef had a penchant for praising employees, and later firing them “for reasons that seem to be made up.” In contrast, McCabe says that Schaback was “quieter and holds back things before he says them.” 

Ivan Suhharev – Paxful’s former CTO, and the third man involved with the Miami case – claimed to be a victim of an unjust, abrupt firing. In April 2020, Suhharev was suddenly terminated from his role for “egregious conduct”. Soon, Youssef and Schaback demanded Suhharev nearly $300,000 in excess profit shares paid to him over the years. In response, Suhharev demanded access to Paxful’s books and records in May 2021. The case was then dismissed in November that year.

While Paxful was aiming to push towards markets in Nigeria, Kenya, Russia, and Sri Lanka in the 2020s, they were also attempting to set up shop in hyperinflation-ridden Venezuela in 2018. Despite this, in 2020, Paxful pulled out of their plans, citing “concerns regarding the regulatory landscape around Venezuela and Paxful’s own risk tolerance.”

Throughout Paxful’s existence, court documents filed by both Youssef and Schaback indicate that the co-founders were the only two members on Paxful’s board. It was revealed that Youssef and Schaback owned 50% of Paxful’s Class B common stock, each.

What’s going on now?

Schaback also has alleged that Youssef made large transfers of bitcoin to Russia-based entities related to Paxful, and had created a new entity for Paxful’s employees and operations in Russia, named Dekslektika. Despite this, these entities were run by two people that aren’t related to Paxful.

“Youssef and his cohorts conceived of and formed Dekslektika as part of an illegal plan to avoid international sanctions on transactions into and out of Russia,” Schaback said. Schaback claims that Dekslektika planned to allow illegal transactions of bitcoin in and out of Russia to avoid sanctions violations at the time.

Despite this, Youssef dismissed the claims, saying that Paxful has long stopped serving new users from the area.

Not to mention, there’s a shareholder dispute going on as well.

According to Youssef, he and Schaback equally hold all the company’s stock, aside from 10% of Class A common shares, which are held by three individuals. But Schaback says that Youssef attempted to “bully” him, threatening to sue if he didn’t resign from his positions at Paxful, and selling his shares as a result. 

“Paxful has a two-member Board, and Youssef and Schaback have served as Paxful’s two directors since the company’s founding,” Youssef acknowledged in the Delaware court case. “There is a two-thirds director vote requirement for the Board to act. Thus, as Youssef and Schaback are Paxful’s only directors, both directors must vote in favour of an action presented for Board approval for it to be valid.”

As Paxful has set itself up as a duarchy, its corporate structure became a huge reason for it to fail. 

The filing concludes: “Youssef and Schaback are therefore on the road to being hopelessly deadlocked as Class B stockholders and co-directors regarding the proper course of action for Paxful.”

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