Drugs, Erratic Dismissals and Feuding Founders: Behind Bitcoin Marketplace Paxful’s Unraveling

In September 2016, a police-blotter news item appeared on the website of a local CBS TV affiliate in Miami Beach, Florida: Pedestrians in the upscale area, just a couple of blocks from the former Versace mansion, had spotted two men on the penthouse balcony of a multilevel condominium building, aiming an AR-15-style assault rifle toward the streets below, and taking turns holding the weapon while apparently posing for photos.

Three men were arrested and accused of offenses ranging from improper exhibition of a firearm to possession of cocaine and hashish, Miami-Dade County court records show.

The charges were eventually dismissed, and it was the sort of incident that might easily be written off as the puerile hijinks of spring breakers, or as one of so many absurd Florida man minor crimes.

What now seems more relevant than ever is that the defendants in the case included Ray Youssef and Artur Schaback, the co-founders of Paxful, a website that allowed users to buy and sell bitcoin on a peer-to-peer basis, similar to eBay or Craigslist. The company, founded in 2015, had grown to employ over 200 people in four offices around the world, with some $5 billion traded on Paxful by more than 12 million users over the course of its existence, according to court filings.

Paxful closed last week, and the 46-year-old Youssef, who served as founder and CEO, attributed the decision to “key staff departures” and “regulatory challenges.” But both Youssef and Schaback, 35, acknowledge that, behind the scenes, their frayed business relationship played a key role in the company’s demise, and the pair are now trading blows in court via a tangle of legal actions and counterclaims.

Former employees allege, in lawsuits and in interviews with CoinDesk, that the company long suffered from severe lapses in management professionalism, including promotions based on favoritism, erratic dismissals, lavish spending on travel and reports of routine cannabis usage on the job by Youssef himself.

Schaback, a co-founder of Paxful with 50% of the company’s Class B common shares who served as chief operating officer, is suing Youssef in Delaware Chancery Court. Schaback says Youssef cut off his access to company resources and information while he was on paternity leave; and that Youssef and other “cohorts” have “looted Paxful coffers.” Key sections of the complaint containing alleged dollar amounts were redacted from the public version.

The lawsuit even goes so far as to accuse Youssef of “an illegal plan to avoid international sanctions on transactions into and out of Russia.”

“Mr. Youssef took unilateral action to permanently shut down Paxful,” Schaback told CoinDesk in an interview. “His plan has been going for the better part of 15 months, but thanks to our civil proceedings in the United States, his plan was discovered and thwarted.”

Youssef, an American citizen currently based in Dubai, told CoinDesk in an interview that Schaback was fired for “incompetence and bad behavior” and that Schaback’s suit was a contributing factor in the decision to close.

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

Schaback says Paxful is still a viable enterprise, and wants the courts to appoint a custodian to assume control of Paxful’s assets. Both Schaback and Youssef confirmed to CoinDesk on Friday that a custodian had been appointed in a hearing late Thursday, though details were scant.

Schaback says his ultimate goal is to realize the company’s original mission of “empowering the forgotten 4 billion unbanked and underbanked.”

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

Humble beginnings

Youssef was born in Egypt and immigrated to the U.S. as a toddler, settling in New York City. He’s a self-taught coder and, for a brief stint, was a professional mixed martial arts (MMA) fighter. He says he met Schaback, who is Estonian, at a 2014 Bitcoin event.

In a 2018 interview with Digital Trends, Youssef chronicled the humble beginnings of Paxful and how an unbanked sex worker reached out to Schaback and him to get help buying bitcoin so she could post ads on Backpage – a bitcoin-friendly prostitution and trafficking site that was eventually shut down by the FBI in April 2018.

Schaback and Youssef had previously co-founded another bitcoin payment service called EasyBitz – it was a dud. Paxful was like EasyBitz “2.0,” and after Visa and Mastercard pulled their integrations from Backpage in 2015, bitcoin was the sole payment method left. Paxful had hit the jackpot with its position in the market.

Youssef said in a filing with the Delaware court that 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,” while “Schaback wrote most of the code for Paxful.”

Paxful’s business model was simple but clever. Users would exchange cash or gift cards – mostly gift cards – for bitcoin. Paxful’s role was to act as a middleman, providing escrow and mediation services for a fee.

The gift cards would typically be purchased at a steep discount since they are not as liquid as cash or bitcoin.

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

Eventually, U.S.-based Backpage was shut down and Paxful’s sex worker customer base disappeared. The company’s good fortune persisted however, when soon after the Backpage shutdown, new demand for a peer-to-peer platform beckoned in Nigeria, China and other emerging markets – where bitcoin was seen as a viable alternative in locales with less reliable currencies and payment systems.

The company went through an explosive growth phase. Paxful’s website states that the four offices were located in New York City; Tallinn, Estonia; Hong Kong and Manila.

The company’s compliance, legal, sales, and marketing teams were based in New York where Youssef primarily worked, according to a former employee. The development, product and user interface teams were based in Tallinn, Estonia. Schaback says he worked out of multiple locations.

It was during that period of meteoric growth that Schaback and Youssef started to butt heads.

Five months after the Miami Beach incident, in February 2017, according to court documents filed by Schaback, Youssef was arrested once again, this time in Tallinn, Estonia “on suspicion of drug trafficking after allegedly purchasing illegal drugs including MDMA (also known as ecstasy) and steroids multiple times through the dark web.”

Schaback cited posts on the website Glassdoor where employees supposedly said Youssef held meetings while under the influence of drugs.

In a filing in the Delaware case, Youssef responded that he suspected the Glassdoor complaints might have been made by Schaback himself or “others acting in concert with him,” though he did admit to serving a sentence in connection with a guilty plea on a drug-related offense in Estonia.

Lavish spending, at least back in Paxful’s salad days, was a staple of working there, former employees recall.

McCabe says in 2018, Paxful flew the entire company to Belgium for the biggest electronic dance music (EDM) festival in Europe.

“We were there for a week,” McCabe said. “On a retreat at a five-star hotel.”

In 2016 Paxful employed a 25-year-old Brazilian man as a computer and network technician who separately came under investigation by the U.S. Drug Enforcement Administration for his role as moderator of a darknet marketplace “WSM” where drugs, hacking tools and stolen financial data were exchanged, with payments made in virtual currencies such as bitcoin and monero (XMR), according to an affidavit filed in connection with the case in 2019.

Abrupt decisions to fire an employee seemed to have been the norm at Paxful, McCabe recalls.

Youssef “loves to praise you and one day he gets into a mood and decides to fire you for reasons that seem to be made up,” McCabe said. Schaback was “quieter and holds back things before he says them.”

Ivan Suhharev, Paxful’s former CTO (and the third man arrested with Youssef and Schaback in Miami Beach in 2016), claimed to be a victim of an abrupt firing. He was suddenly terminated from his role in April 2020 for “egregious conduct.” The co-founders then demanded that Suhharev fork over nearly $300,000 in excess profit share paid to him in prior years.

As a shareholder with over 765,000 Paxful common shares, the former employee filed a complaint with the Supreme Court of New York in May 2021 demanding access to the company’s books and records. The case was dismissed in November 2021.

Paxful Inc. had a net profit of $5.47 million in 2018 and $3.63 million in 2019, according to a Nov. 3, 2020, letter from the company that was included as an exhibit in Suhharev’s case.

The company in the late 2010s and into the early 2020s pushed aggressively into markets including Nigeria, Kenya, Russia, Sri Lanka and elsewhere. In July 2018, Youssef described to CoinDesk Paxful’s plans to open an office in hyperinflation-ridden Venezuela, though in September 2020 the company announced it was pulling out, citing “concerns regarding the regulatory landscape around Venezuela and Paxful’s own risk tolerance.”

Through it all, Youssef became a sort of go-to expert for CoinDesk and other crypto media on bitcoin adoption in emerging markets, commenting on all manner of trends and specific news events.

In 2021, Schaback welcomed his first child, and went on paternity leave in October of that year, a move he claims marked the beginning of his 15-month-long feud with Youssef.

Court documents filed by both Schaback and Youssef clearly show that the pair were co-founders of Paxful and were the only two members on Paxful’s board. Both men owned 50% of Paxful’s Class B common stock each.

The office smelled like weed

Schaback alleged in his suit that Youssef’s behavior became “increasingly erratic” during the period when he was out. He alleged that Youssef hatched a plan to undermine him in his absence and assert control over Paxful.

Schaback’s court documents state that Youssef attended management meetings under the influence of “unspecified substances” and McCabe said the allegations were consistent with his own observations.

“I wouldn’t say smoking in meetings,” McCabe said. “But during virtual meetings, he would smoke CBD and weed in the office all the time and it would smell like it.”

Youssef didn’t immediately respond to a reporter’s question about the alleged drug use. New York legalized recreational marijuana use in 2021.

“The conspiracy theories are madness,” Youssef told CoinDesk. “He even sued our general counsel who is an awesome guy and he resigned. We lost seven executives because of him.”

Schaback eventually returned to the office on Jan. 31, 2022, and says It wasn’t long before he realized how much things had changed. In his suit, Schaback says access to company resources, like his email address and Slack account, had been cut off and his corporate credit card had been blocked. His chief operating officer title had been removed.

In a conversation at a later point, Youssef suggested that Schaback accept a lesser role as an executive vice president, the filings state. “Schaback rejected that.”

‘Like some kind of horrible divorce’

In late 2020, according to Youssef’s filing in the Delaware court case, Schaback brought in auditors to work with Paxful’s top engineers.

“Paxful’s employees quickly realized that these purported ‘auditors’ were merely Schaback’s friends who did not possess any qualifications and could not possibly bring any value to the company,” the filing reads. “After a company party, for example, the head ‘auditor’ became too intoxicated to control himself and admitted as much to several Paxful employees, stating, ‘guys, don’t worry, we are here just to make some money from Paxful, and after that, we are gone.’”

According to Youssef: “Schaback’s serial misdeeds led to Paxful retaining outside counsel to conduct an internal investigation into his conduct, during which time Schaback’s access to company offices and systems was suspended, in accordance with company policies. Schaback refused to cooperate with the investigation, no doubt aware that his cooperation would lead to the inevitable conclusion that he should be disciplined due to his disloyal conduct.”

“It was like some kind of horrible divorce,” Youssef said. “He was fired over a year ago for several things, namely incompetence and bad behavior. He refused to partake in the internal investigation. He was legally fired.”

Schaback claims the investigation was a sham, saying it was an attempt to limit his activities, oversight and knowledge of Paxful internal activities and accused Youssef of “draining, misappropriating, and outright stealing Paxful resources and profits.”

Half of the board

Schaback claims his suspension was unlawful, given that it hadn’t been authorized by Paxful’s board of directors.

“It wasn’t official because only the board can fire me as the COO and I’m half of the board and there was no evidence they found to fire me,” he told CoinDesk.

The internal investigation ordered by Youssef closed on June 9, 2022 with no evidence of wrongdoing by Schaback, according to his suit, and he continued in his position as officer and director of the company, even though he was terminated as an employee.

Schaback claims Youssef tried to erase him from Paxful’s corporate story, with no mention of him as the COO on the website, and that only Youssef’s picture appeared as the founder.

On Aug. 23, 2022, Youssef tweeted, “I have no cofounders.”

It was during this time that Schaback claims Youssef sent payments for “media consulting” of up to $30,000 a month to a woman with whom he was romantically involved. Schaback wasn’t aware any such service was needed and has requested documents related to the service, which haven’t been provided.

Youssef mostly denied the allegations in a court filing, though further explanation was redacted from the public version.

According to Schaback’s suit, Youssef made large transfers of bitcoin to Russia-based entities affiliated with Paxful and created a new entity for Paxful’s employees and operations in Russia, which they named Dekslektika. The entities were run by two people not 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, claiming that they planned to allow illegal transitions of bitcoin in and out of Russia to avoid violations of sanctions at the time.

In his response in the Delaware case, Youssef said that the Russia-related accusations were “outside the scope of the expedited phase of this action” and “therefore do not require a response.”

In September, according to Schaback, Youssef asked to buy out Paxful’s other shareholders, but the offer was rejected.

According to Youseff, he and Schaback equally hold all of the company’s stock except for 10% of the Class A common shares, held by three individuals.

Schaback says that Youssef attempted to “bully” him into selling his shares by threatening to sue him if he didn’t agree to resign from his positions.

After a few more attempts to seize control of the company, including trying to transfer Paxful’s assets to a shell company, Youseff on Jan. 7 tweeted that he “finally achieved victory,” and “one day all shall be revealed.”

Three days later, on Jan. 10, Schaback filed his complaints against Youssef and Paxful in the Delaware court.

In interviews and social-media posts last week, Youssef was already starting to recommend alternatives to Paxful, including an upcoming platform called Civilization Kit (Civ Kit), while Schaback says he wants to revive Paxful as soon as the lawsuit is settled.

“I know Ray’s counterargument will be that all employees have left and it’s impossible to re-launch the product because all the knowledge is gone,” Schaback said to CoinDesk.

One lesson for startup founders might be found in the pitfalls of the duarchy that was Paxful’s corporate structure.

“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 favor of an action presented for Board approval for it to be valid.”

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.”