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Shut down unilaterally, Paxful accused of misappropriation of funds and money laundering

Paxful CEO Ray Youssef announced the suspension of operations on the platform earlier this month, saying the suspension could be permanent. Regarding the reasons for the closure, Youssef only stated that it was due to the increasingly stringent regulatory environment and the successive departure of core members, but could not disclose more details about the exact reasons behind the decision.

Paxful Wallet will remain active in order for customers to get back "all credited" funds. At the same time, Youssef also stated that his priority is to maintain the safety of customer funds and provide non-US users with the option to easily migrate to other peer-to-peer platforms. To make sure they can get their funds back quickly and safely, Exodus Wallet and Muun Wallet are recommended as security options.

The closure of this 8-year-old veteran platform has made the outside world sigh. But at the same time, another co-founder of Paxful, Artur Schaback, revealed that the platform was unilaterally shut down by Youssef, and he was kicked out of the company. "Youssef's actions are aimed at consolidating power in jurisdictions outside the United States and removing me and other shareholders from his plans." In addition, Schaback said he had limited access to company information and hadn't done so in 18 months. Get involved in day-to-day operations.

Subsequently, the litigation disputes between the two joint creations also surfaced. Schaback and Youssef, who co-founded Paxful in 2015, sued for control and filed charges against each other of misappropriating company funds, money laundering and evading U.S. sanctions against Russia, according to court documents in Delaware.

In the lawsuit, Schaback alleges that he and Paxful CEO Youssef had disagreements over the future and operations of the marketplace, including a conflict over "the legality of increasing spending to undisclosed entities." Paxful transferred large amounts of bitcoin to a Turkish entity called "EMiR," which he claims is not a legitimate software company, "which does not have a website advertising software or web development services, nor does it have a physical address...appears to belong to a clothing company. "Dekslektika, a St. Petersburg, Russia-based company owned by a former Paxful director, allegedly acted as a subcontractor to receive EMiR payments, and was run by two individuals unrelated to Paxful. The entities are accused of beginning "large-scale irregular transactions" after Schaback was frozen out of the company's operations.

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Repay user funds in full out of pocket, CEO will launch another new platform

In order to avoid the risk of jail for failing to comply with the court's request to return Paxful's frozen funds, Youssef said that he is working on a plan with the court to compensate users with his own funds in an effort to comply with the law and avoid getting into deeper legal problems. User funds come first.

"I knew that if I didn't pay out of pocket, those users would be stuck and never recover their full funds, which is why I took the risk of having to separate the user list into 'good' and 'bad' wallets because I Don't give money to terrorists or money launderers, please be patient."

For Paxful’s outage, Youssef said it had been planning for 15 months, and Schaback’s lawsuit was a direct contributing factor to the decision to shut down. "Since the co-founder of the platform (Schaback) decided to sue the company and himself, the lawsuit was terrible and scared off the best users of the platform, all the top staff resigned, and the company has no operational staff."

Still, Schaback said Paxful remains a viable business and wants the court to appoint a custodian to control Paxful's assets. In response, Schaback and Youssef confirmed to CoinDesk that a custodian had been appointed at a recent hearing.

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Paxful's origins and internal disputes

Born in Egypt, Youssef immigrated to the United States as a child and settled in New York City. Youssef is a self-taught programmer who taught himself to code at the age of 19 after getting his first computer and briefly worked as a professional MMA fighter.

During his entrepreneurial journey, Youssef stumbled across Bitcoin. Although initially wary, Youssef warmed to it after learning more about it and attending his first Bitcoin meetup. Meanwhile, the Occupy Wall Street protests of 2011 hit Youssef deeply, opening his eyes to financial inequality.

Artur Schaback (left) and Ray Youssef (right)

Youssef met Schaback, an Estonian, at a bitcoin event in New York in 2014, and the two co-launched a bitcoin payment service, EasyBitz, which failed. In 2015, Youssef and Schaback teamed up to create Paxful to empower these forgotten unbanked and underbanked regions. Among them, Youssef is responsible for the development of Paxful's business operations, marketing, design, support and technical system management, and wrote part of the code for Paxful's system; Schaback served as Paxful's chief operating officer and wrote most of the Paxful code.

Since its development, Paxful has become one of the largest peer-to-peer Bitcoin marketplaces in the world, with over 9 million users and a weekly transaction volume that peaked at approximately $50 million in May 2022. Last year, Paxful was listed by Time Magazine as one of the most influential companies of 2022.

However, during Paxful's meteoric rise, Schaback and Youssef clashed. According to Coindesk, Youssef revealed that Schaback was legally fired more than a year ago for several things, namely incompetence and bad behavior, and that he refused to participate in the internal investigation. "It was clear to everyone in the company that Schaback had no idea what a COO was supposed to do."

In an interview with Coindesk, Youssef said, “Money changed Schaback, he lived a luxurious lifestyle and started showing off, which was not in line with the mission of the company. A group of sycophants began to surround him, being surrounded by his nightly alcohol service parties and Attracted by consumption.” Former Paxful employees also confirmed Youssef’s statement, claiming that Schaback often spent extravagantly during his tenure. For example, in 2018, Paxful took the entire company’s employees to a five-star hotel in Belgium for a week’s vacation and participated Europe's largest electronic dance music festival.

At the same time, Youssef also disclosed in the court filing that in late 2020, Schaback hired auditors to work with top engineers. But these so-called auditors are just friends of Schaback, have no qualifications, and are unlikely to bring any value to the company. They themselves have admitted that they only came to Paxful to make some money.

Schaback's spate of misconduct prompted Paxful to hire outside counsel to conduct an internal investigation into its conduct. In accordance with company policy, Schaback's access to offices and systems was suspended during that time, but Schaback himself declined to cooperate with the investigation.

Schaback denied this, saying it was a scam, that he was barred from operating the company during his 2021 leave and cut off from company resources and information, while Youssef and other associates "drained, misappropriated and blatantly stealing Paxful's resources and profits".

Meanwhile, Schaback said his suspension was illegal because it wasn’t authorized by Paxful’s board, which requires a two-thirds vote of directors to act. Youssef and Schaback are the only two board members who each own 50% of Paxful’s Class B common stock, court documents show. At the same time, Youssef’s internal investigation found no evidence of wrongdoing, and even after he was fired, he continued to serve as an officer and director of the company, but Youssef seems to be trying to remove him from the Paxful company story.

Schaback’s still-filed court documents point to Paxful’s biased promotion system, erratic firings, and Youssef himself, who has been arrested multiple times on suspicion of drug trafficking and buying contraband on the dark web, and who regularly uses it at work and in meetings. Marijuana, etc., and even hired darknet employees. He also alleges that Youssef paid a woman he was in a relationship with as much as $30,000 a month for media consultations, but that Schaback did not respond when he requested documents related to the service.

In addition, Schaback also revealed that Youssef had requested to acquire the shares of other Paxful shareholders in September 2022, but was rejected, and Youssef also threatened to sue him if he did not agree to resign, thus trying to "coerce" him to sell his shares.

The internal dispute between Youssef and Schaback continues, but Paxful's "changing the financial world" narrative appears to be drawing to a close.