Ray Youssef: The Ray Narrative
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When I started out as an entrepreneur, I never thought armed men would one day barricade themselves in my office or that my staff would resign because they feared for their lives. But that’s exactly what happened this past January when my co-founder and former COO, Artur Schaback, stormed into our Estonian office with a friend and four armed thugs to demand money.
The first thing Schaback did when he arrived at the office was to demand that our chief of information security (CISO) give company access to Schaback’s friend, a shady character recently released from prison after being convicted of violent and financial crimes, including racketeering. Our CISO would not grant access because the person was not an employee. Schaback then produced a document which identified the man as Schaback’s “business advisor”. Artur demanded all the petty cash in the office (approximately 10,000 euros), and forced one of our accountants to sign a document stating that she gave it to him willingly. He then attempted to steal the personal laptops of some of Paxful’s senior employees, including the CISO and CTO. When they refused, he held them hostage in a room with four armed goons for hours, continually berating them for not relinquishing their personal property. He also tried to gain access to customer funds.
In the aftermath, the office was evacuated, two senior executives quit immediately, and many other staff subsequently resigned because they feared for their safety. A federal court judge in the United States, when made aware of the incident, banned Schaback from entering any Paxful office unless he was supervised. How did all this happen? Why did the mild-mannered Estonian guy I first met in 2015 go “full thug”, as one of our staff described his actions on that day. Why was his access denied in the first place? It’s a story that has to be told. Though it pains me to share these private details, it’s important that the whole truth is out there so those who have done the right thing for Paxful’s customers are protected.
My best guess is that Schaback’s only interest in life is to make money. When we first met he fooled me into thinking we held the same beliefs. That Bitcoin and peer-to-peer was a way to help the little guy and end financial apartheid. I now know this was complete bullshit, because various investigations and audits revealed that he stole about $25 million from the company. There is concrete evidence that he embezzled almost $7 million before his position as COO was terminated, and he stole hundreds of thousands of dollars more from the company after that. However, his big scam was taking 600 BTC out of the company accounts which, at today’s price, would be worth about $18 million. All up, he siphoned off about $25 million from Paxful. Artur has a Ferrari, two other luxury sports cars, and a yacht. It is quite clear how he acquired those assets.
Although I didn’t know it at the time, he began to steal money after I was arrested in Estonia. Schaback has already mentioned my arrest in the media, so I don’t mind telling the story, but I’ll include the details he conveniently forgot to mention. The truth is that Schaback had a flat in Estonia where I was crashing at the time. It was his flat, rented in his name, but he wasn’t home when the police arrived and asked to search the flat. They found some testosterone powder — which was mine — and a whole bunch of other drugs, which were not mine. I still don’t know why the police decided to knock on the door and search the flat that day, but, as I later discovered during a company audit a few years later, that was around the time Artur began taking money out of the company. The Estonian authorities kept me detained for three months and tested me for drugs, but found nothing. When I was released, I returned to an office full of incompetent new hires and a massively ballooned monthly spend. To this day, I still wonder why I was the one arrested for drugs found in his home and why the raid even happened. I recently found out that Schaback’s father is a former policeman, so maybe that had something to do with it. I don’t know. This was one of many fires I had to put out thanks to Schaback. One of the worst was in 2016 when he and his friend decided to wave around an AR-15 in broad daylight, prompting the Miami Beach SWAT team to pay us a visit. I had to keep us from being killed, get us bailed out of jail, and then restore our reputation.
It took a while for me to piece together everything that had been going on because part of my job as Paxful CEO was to travel around the world and spread the word about our mission. While I brought in the business, Schaback’s job as COO was to run our offices and make sure our products served our customers. It was only when COVID-19 hit and I was forced to come off the road that I realized the extent of his greed, deceit, and incompetence.
The court filings surrounding Schaback’s lawsuit are now public record so people know part of the story, but they need to know the full story. They should be aware of the series of events that led to Schaback’s dismissal as COO and his stubborn refusal to act in the best interests of the company; an attitude that led to the suspension of the Paxful marketplace and the company being placed into the hands of a custodian.
After I got off the road, Schaback continually tried to convince me to move into De-Fi, to play around with tokens, NFTs and “shitcoins”—this was long before the collapse of FTX. All his proposed strategies focused on maximizing profits rather than helping our customers because he saw Paxful as another crypto exchange profiting from speculation rather than a peer-to-peer platform designed for real use cases. In short, he wanted to take Paxful in a direction that opposed our mission. That didn’t mean our relationship was terminal—many partners disagree over strategy or philosophy. The issue was that the deeper I dug, the more I realized we weren’t simply having a disagreement over strategy or philosophy. Schaback cared only about making money for himself and he didn’t care how he made it. I also discovered that he wasn’t a very nice human being.
In addition to my constant struggle to keep Paxful aligned with our mission, I realized that product development was stalling and that inefficiencies and incompetence were widespread. While I was on the road bringing in business, we went from one million to twelve million customers, but Schaback and the product team — his personal hires — were not doing their jobs. Nothing illustrates this better than the fact that our conversions dropped by 90%. Stop a minute and think about that. This guy oversaw a 90% drop, a miracle of stupidity that would be hard to emulate even if you tried. Schaback was able to hide the conversion data from me because revenue continued to rise on the back of the more than ten times the additional traffic my boots-on-the-ground led initiatives brought in. We should have been making ten times more than what we were previously making. KYC cannot be blamed as we saw the same drop in the West as the Global South. A 10% drop would have been ground for dismissal but a 90% drop is beyond anyone’s comprehension. And it got worse.
Aside from the conversion disaster, he destroyed our gift card business in Africa, almost cost us our money transmitter licenses, and made such a mess of compliance — even after I had allocated him an unlimited budget — that people resigned en masse. I and other executives saw; everything he touched turned to shit. The one common element in every Paxful disaster was Artur Schaback. Despite all of that, despite many of our top guys telling me that he was incompetent and out of his depth, I was loyal to him. He was my co-founder and, at least until I knew better, I thought he genuinely had the company’s best interests at heart. I did everything I could to accommodate and help him — even firing him as COO would have made him more money because he still owned 50% of the company and we would have been more profitable with him out of the way. But he rejected everything I tried to do to help him. I had to remove him as Chief Product Officer to save the company and the only thing he would accept was COO, thinking he would cause less damage. As Chief Operating Officer he was even less qualified and he spread toxicity at an even greater rate. My performance review for him was one out of five stars and, compared to what everyone else thought, I was being generous. However, instead of taking the feedback, he rejected each and every point and accused me of plotting against him even though I was the only one defending him.
We conducted two simultaneous investigations, including an audit initiated by Schaback that looked into the finances of all the directors, including me. The results of the investigations were alarming. They revealed the misallocation or mislabeling of money, overspending, faulty product strategies, overpayments to consulting engineers, and the misuse of funds due to nepotism, lack of oversight, and, in some cases, embezzlement. The company administration was shambolic. Legal issues were mishandled and some compliance questions raised by the DOJ were not being adequately addressed. Products were sabotaged due to incompetence and greed. People were hired into positions with no job description, nor any clear reporting lines. Many were Schaback’s friends, relatives, or associates and other “consultants” who worked on De-Fi or NFT projects at a cost of around $1 million each month. It is no small irony that one of the findings of the audit report — initiated by Schaback himself — showed I was being short-changed. He had taken so much cash out of the company that Paxful owed me money.
Perhaps the most damning evidence of his greed and treachery is what one of the financial audits uncovered. Schaback had misappropriated more than $6.5 million from Paxful by submitting dummy invoices for work allegedly performed by his Estonian company, Kaizern, now facing multiple civil claims for underpaying taxes. In reality, the work billed by Kaizern had been performed by Paxful employees. Kaizern, through Schaback, lifted verbatim descriptions of work performed by Paxful’s internal teams and digitally cut-and-pasted those descriptions into Kaizern’s dummy invoices. I also suspect that Schaback accessed customer funds directly from the Company’s BitGo cryptocurrency hot wallets and used them for personal benefit.
One of the first things I did when I realized the extent of our problems was to talk to Schaback. His wife was having a baby, so I told him to take some paternity leave and allow Ame to try to resurrect the company. I had to do that because so many staff told me they were going to quit if he remained COO. Some people had already left because of him. No one in the company respected him. He was just a party boy who had destroyed the product department when the best people could not put up with him and left the company. The word often used about the products Schaback developed was “garbage”. I heard that so many times. More importantly, some of the work he was doing placed the security of the company and of our customer funds at grave risk. One of the executive testimonials called one of Schaback’s plans “borderline suicidal” for the company. I convinced him to take some leave and tried to put everything back together. We needed a new engineering team, a new CTO, a new CPO, and I knew it was going to be a huge turnaround operation. Many of the failures had been hidden, and because our conversions had fallen so much our valuation plummeted; it dropped so far that the company almost didn’t survive. At one meeting, the VP of Finance said we would go bankrupt within six months and then immediately resigned.
There were some good people in the company, but they were being stunted by lack of opportunity and — as I soon discovered — they’d had to work in an environment so toxic I contacted the company’s legal counsel, McDermott, Will & Emery (MWE), one of the most respected law firms in the United States. They advised me to conduct a full investigation to examine the complaints made by staff. I didn’t know where the investigation would lead, but when the reports started to come in, I realized that covering for Schaback’s incompetence was one thing, but dealing with his abusive and disgusting behavior was impossible.
I couldn’t protect Schaback after the reports were delivered by the investigator. The guy hired to examine the complaints was an ex-federal prosecutor and he went around talking to people in our office, asking questions, and taking testimonials. What our staff told him was shocking. So many good people in the office had left or were thinking of leaving because of the toxic culture. Schaback’s nepotism had utterly destroyed our engineering department. Many were quitting in disgust over the outright fraud committed by him and his cohorts. Under Schaback’s protection, people were siphoning off company money by claiming an insane amount of overtime pay – basically doubling their salaries. In every signed testimonial, employees told the investigator they would resign if Schaback came back. Aside from being treated badly, staff saw company money wasted on lavish parties, expensive gifts, drugs, and sex workers, and some of the real work we had to do was being neglected or done haphazardly by people who did not have the competence to do their jobs. And the biggest problem with our workplace culture was Schaback. The investigator called his behavior “gross misconduct”. At a baby shower for him and his wife, for example, one of Paxful’s senior executives (who has a child with Down syndrome) offered his congratulations to Schaback and asked if he was excited at the prospect of being a father. Schaback replied, “I know it’s not going to be a retard. It’s not retarded”. There were reports that he groped two very young girls who had fallen asleep after becoming drunk at a nightclub, offered Paxful staff sex workers he had hired to attend a party, and offered another executive cocaine to “fix” his headache. At a London dinner with Paxful employees and other industry people, he openly ordered sex workers from the table after dinner. When he left, he said, “Don’t worry. I’ll use protection”. All these details have been written in signed testimonials made by Paxful employees, but none would be a surprise to anyone who worked in the Estonian office. It was common knowledge that Schaback liked cocaine and sex workers. He was a party boy who thought he was untouchable. Unsurprisingly, Schaback refused to cooperate with the investigation, and MWE advised the board that his employment should be terminated before we lost all the good people in the company. He was my co-founder and it was hard to take such drastic action, but after reading about the abusive behavior detailed in the testimonials and the findings from the financial audit, there was no other option.
I offered Schaback $87 million and 5% of the company if he’d step down as COO and give me complete control. I told him it was the only chance to save the company, but he turned me down. It was a surreal meeting as I looked him right in the eyes and told him that if he did not take the deal he would go down in history as “the stupidest motherfucker who ever lived”. He looked me in the eyes and said “I know”. By that stage, all he seemed interested in doing was accessing the hot wallets, often putting pressure on the other executives.
The deterioration of my relationship with Schaback caused me a lot of pain, but he wasn’t doing what he should have been doing as COO — and worst of all he seemed to have abandoned all of his principles. I tried everything, offering him new titles after each failure. He went from CTO, to CPO to COO but he refused to take any non-chief position, even at the same salary. All my efforts to minimize the damage he was causing failed. Schaback knew he was not measuring up as an equal co-founder and despite his promises to step down and rebalance things, he broke his word every time. Looking back, I see clearly that he was stalling for an exit, thinking he would be “the richest man in Estonia.” He was also happy to continue spending money he did not earn and to help enrich his cousin and his cronies with ill-gotten gains.
Even after we removed him there was a lot of work to do and my team did an amazing job because we were racing from one emergency and fire to the next just to keep Paxful together. In some ways it was a miracle that we got the company back on the right footing. However, Schaback was still a director and he still owned half of the company, and he continued to cause problems. This culminated in a lawsuit he brought against Paxful and me that ultimately forced us to suspend our marketplace in order to protect our customers’ funds. As a director of the company, the court granted him authority to review and approve payments over $50,000, and this sounded the death knell of the company. He played this stupid game of chicken, withholding payments to suppliers with no regard for the company or our customers. At one board meeting, he said all our engineers and compliance people were “bogus”, and that I was robbing the company. The reality was our engineering staff level was 20% smaller than under him and we stabilized the platform, yet this reality was disregarded in all of his claims. He refused payments to service providers and harassed and berated staff to such an extent that service providers refused to work with us and the entire executive team resigned.
It’s easy to understand the way he thinks if you understand what he’d been doing to the company for years. He basically accused me of doing what he’d been doing to feather his own nest and maintain his lavish lifestyle. In one meeting I pleaded with him for three hours. I told him that it was not safe to run a fintech company without engineers, compliance, security, or operational staff. It was a no-brainer, but he didn’t want to pay them. He said, “It will be fine. Just promote people…” It was a surreal board meeting; even my attorney said he couldn’t understand what was going on. I was screaming common sense at Schaback and he completely dismissed everything.
Less than 24 hours later, our wallet started collapsing and I had no choice. Customers were screaming about their money and everything was ready to blow up, so I called an emergency board meeting and showed Schaback irrefutable evidence that Paxful would collapse unless he approved payments to crucial service providers for engineering and compliance support. He finally agreed to take the engineering team’s advice. The engineers said all services other than the wallet should be suspended. We kept the wallet open so people could access their funds. The game of chicken only came to an end when Schaback realized that Paxful did not have the 53 engineers he kept mentioning in his court filings. Despite my best efforts, the only thing I could salvage from the carnage that followed was our customers’ funds. The damage to Paxful’s reputation was irreversible. Schaback had dragged everyone’s name through the mud. Then he came out in the media and accused me of unilaterally closing down the company despite it being his insane game of chicken that left us with no engineers – even after three hours of my pleading with him. His court filings were full of ad hominem attacks against me. His legal tactics were scorched earth chaos and he even dragged my fiancée and our General Counsel (GC) into it. Our GC resigned in disgust and my engagement was called off because I had to protect her. I don’t blame her for being afraid. Schaback’s ex-convict “advisor” Dennis was calling me continually, demanding money and my location, asking me to meet him in person. This guy is on record as having told someone, when explaining his racketeering conviction, that he went to prison for “the same thing the mob go to prison for”. With such a reputation, in addition to his role in the $10K Estonian office shakedown, there was no way I was going to risk my fiancée’s safety or allow her reputation to be dragged through the mud—so we separated.
Schaback’s tactics included forcing me to obtain new legal counsel for myself and the company — thereby hoping that new company counsel would be sympathetic to his cause — spreading lies and misinformation online and to the media, and accusing me of having plotted against him. He wanted to remove the law firm that conducted the investigation in order to cover his tracks. The truth is that my intentions have always been to ensure that Paxful fulfilled its mission by serving our customers and remaining loyal to Bitcoin. Removing Schaback was a result of his performance as COO and its detrimental effect on the company. He was still a shareholder. I didn’t take him to court, even when I saw how much money he was stealing from the company. And let’s be clear — the company was Schaback and me, so he was, in effect, stealing from me. The irony of all this is that he sued me when I was just trying to manage a process. I was just trying to keep a sinking ship afloat and Schaback was continually firing missiles at the ship.
If I had not removed Schaback as COO, it is doubtful Paxful would have continued for as long as it did because the toxic environment he created in our office forced good people out and threatened the viability of the company. In the same way, I thwarted his attempts to get into “shitcoins” and NFTs because it was in the best interests of the company and our customers. I have always been a Bitcoin champion, and recent history has proven that my unwillingness to follow Schaback’s preference for speculative strategies probably gave Paxful another two years of life and definitely saved our customers some money.
The bottom line is that Schaback was happy to rob people blind while taking Paxful down the same shithole FTX went down. He worried only about one thing: money. All his schemes were designed to help him fund his lifestyle. He accessed user funds and used company cards because our director salaries were aligned with the other executives and were not enough to cover his expenses. He admitted as much by telling people that, “I need the company card. I don’t live on my salary”. Before I took it away from him, Schaback had access and control of Paxful wallets (including users and earnings, which were the same wallets) so he was able to withdraw funds directly. He controlled a finance team who were not segregated in their duties, so no one knew how financial statements were generated or how withdrawals were accounted for, which is how he funded his lavish lifestyle. It was he who bought a Porsche and a Ferrari, not me. He also bought two yachts. I drive a Mini Cooper and have never owned a yacht in my life.
In the end, I saw Schaback for who he is — a scheming, greedy individual who surrounded himself with shady characters inclined to help him get what he wanted. The former Paxful employee he calls a “whistleblower” in the media was not fired because she “blew the whistle” on my spending. This is just one of the many verifiably false accusations in his court filings. The truth is she was fired because she used the authority given her by Schaback to take $60,000 from the company while she was on maternity leave, contrary to Estonian labor laws. That’s why she was fired. Another former employee who has spoken out against me in the media, Brian McCabe, was fired by Paxful HR because of a sexual harassment complaint against him. This disturbed individual has tweeted that he “will never stop chasing me,” and he has even tried to extort money from me. He tormented the three women he sexually harassed in order to prevent them from testifying in court against him—and he also stole 18 bitcoin in customer funds.These are the people who support Schaback, in addition to the thugs and goons he often drags around in his Mercedes-Maybach.
The sad part about all of this is that Schaback caused the downfall of something I truly believed in. He wiped away everything that made Paxful special, that made us different, that made us good. He doesn’t care about people and that was the big difference between what he wanted and what I wanted. Far worse has been done than I can say right now. Schaback did things that could have forced the entire company to be shut down, and the only reason Paxful’s financial situation isn’t worse is because I did not withdraw the “directors fees” he did. The sheer stupidity of initiating a lawsuit despite the trail of destruction he left behind is mind-numbing. The past four months of litigation has been like playing chess with a monkey who has a bazooka. The bazooka is the outright criminality he committed and that could bring the weight of the government down on us and hurt our customers. No one on our legal team has ever seen anything like it. One described the case as a “divorce from hell”, with the other side refusing to accept anything reasonable. Every relationship with our providers, engineering and compliance especially, has been utterly destroyed. Even my engagement was not spared.
No one understands what the fight has been about since Schaback and I mutually resolved in a November 2022 board meeting to dissolve the company, having agreed it would not remain profitable if we were to exit markets deemed risky under American compliance laws.
The plan was to do the necessary work to unlock the $4.5 million in funds still suspended by compliance. Artur again went back on his word and sued to overturn what he’d agreed to, claiming in court documents that a dissolution would prevent a “9-figure exit”. His lawsuit bankrupted the company and destroyed any chance of us being able to free-up those suspended user funds. It also took down the wallet when he refused to pay our engineers. I had the hardest two weeks of my life, sleeping less than two hours a day, as I struggled to get our wallet back up amidst death threats and massive user pain. I offered to give him all my shares for one satoshi if he would commit to the compliance work needed to unfreeze user funds, but he refused. If he saw no value in the company, what was the point of the lawsuit? We were all left shocked. It defied logic. Why continue to fight and try to reopen the marketplace if he doesn’t see value in the company? Why endanger user funds on a platform that has only a skeleton crew of engineers and no compliance? I resigned as CEO and now have no control over Paxful. All I could do at the time was to put my shares into a trust to make users whole. Even that is being blocked and we are again left fighting for nothing. The old saying “better to have a smart enemy than a stupid friend” hits home here.
Paxful is now unable or unwilling to pay its suppliers, service providers, and some staff who have been terminated. I know this because many of the people affected have reached out to me to try to get their money. I can’t help them and that hurts me. I’ve always tried to stand up for the little guy and these people are hardworking decent people who did work with the expectation of being paid. They are not investors or banks who loaned money to Paxful. In fact, I’ve never owed money, bought goods on credit, or taken on debt in my life. I’ve never had a mortgage. It hurts to see the company I built go down this path while I can’t do anything because of all the legal shit Artur has brought down on me. It all could have been avoided if Artur had stuck to the plan we agreed in November last year. Had he not been greedy about getting his “9-figure exit deal,” the suppliers would have been paid, staff would have received their severance packages in full, and all our users would have been made whole.
Meanwhile, I’m in limbo, spending most of my days dealing with lawyers. And even though I was forced to resign as CEO, it seems that Artur wants to remain attached to me no matter what I do in the future – that’s what I hear from his lawyers. They even asked questions about whether the Civ Kit white paper I co-wrote belongs to Paxful. When you realize that the Civ Kit is a non-profit, open-source project, you get some idea of the level this guy will stoop – and how stupid he is. All I want is to be free of this guy, but he seems to think we have a 50-50 partnership for life. I guess when you’re an asshole without talent your options are limited.
Whatever the courts decide, my conscience is clear and my mission continues.
I know that God will always replace what you have lost with far more. I put everything into Paxful and walk out with nothing, yet I consider myself the richest man alive as I have the trust of the people who are helping me with my mission.
The next chapter will be world changing, God willing.
This article is featured in Bitcoin Magazine’s “The Withdrawal Issue”. Click here to subscribe now.
A PDF pamphlet of this article is available for download.
This is a guest post by Ray Youssef. Views expressed are his own and do not necessarily reflect those of BTC Media or Bitcoin Magazine.
