Most people found out about the release of Mingxing “Star” Xu from police custody in a strange way: The mysteriously detained “WeChat Steps” of the OKEx CEO, an application in WeChat that tracks users’ walking steps, showed that he was finally started walking again.
That he was released is good news for both OKEx, the exchange he founded, and the thousands of users whose funds have recently been frozen due to the apparent central point of failure – Xu himself.
These weeks there bing reflects on the OKEx saga and asks where the company might be going next.
An innocent man
After Xu was released from custody, on November 20, he announced in a WeChat announcement that his adventure with the police had nothing to do with money laundering, which many believed was the most plausible explanation. Instead, he said the problem was a company he bought, LEAP Holdings Group, to be listed on the Hong Kong Stock Exchange. Other than Xu’s Wechat status update and his statement that he was innocent all along, no further details were released.
OKEx started as OKCoin and had to be renamed after the Chinese government further banned crypto exchanges 4th September 2017. The headquarters were relocated to Malta, although it is widely believed that most of the customers have stayed in China.
Hoping to further legitimize its presence, OKEx followed Huobi’s steps and bought a majority stake in LEAP Holdings, a company listed on the Hong Kong Stock Exchange. The company has nothing to do with crypto, of course, but mainly deals with construction and waste management. This is known as reverse takeover or backdoor listing. Xu has managed to “whitewash” the OKEx exchange and rename the entire company to OKG Technology Holdings and become a legitimate “technology company” listed in the public market.
In order to appear friendlier to Chinese regulators, Xu made himself available at key government meetings focused on blockchain and pledged to invest millions in China’s new “blockchain-not-crypto” island, Hainan.
Leap Holdings, the construction company that turned into a technology company, was renamed OKC Holdings Corp. renamed, with Xu as CEO; He resigned as CEO of OKEx, claiming that the word decentralization was inconsistent with the party and the country’s image. He famously said: “I would hand over my company at any time if the government so wishes. ”
History is hard to erase
Despite Xu’s best efforts to adhere to them, the Chinese government did not hesitate to take him with them if questions arose. It’s hard to imagine that there was only one problem behind his arrest. It’s likely a combination of OKEx’s OTC trading business, which was the center of recent government action, and its 2018 readmission.
Why? For a reverse takeover, Xu would need access to millions of dollars to buy LEAP shares. The money had to come from somewhere, and that remains a mystery at this point. Regardless, the government released him and for the time being appears to be happy with the way he’s handled his affairs.
The road is still long and tough
This is hardly the end of OKex’s saga. It needs to think about ways to protect itself from such incidents in the future. Many have argued that this case could lead OKEx to follow Binance’s lead and “decentralize” itself and continue its crypto exchange operations offshore.
Easier said than done, however. For a company to be successful in China, it has to be close to its customers. Binance lost many customers to Huobi and OKEx after its exodus from China in 2017, and it is believed that they will struggle to win them back.
Xu could go further to be regulator friendly and focus on OKEx’s blockchain business. However, the blockchain business without crypto is a money-losing business and needs to be subsidized by the stock market business.
The OKEx saga may have calmed down after the private keys were found. However, the effects are still being felt. OKEx needs to change the way it manages its keys and operations in China to regain the trust of its users while walking a tightrope under government control.
Top 3 other things that happened in China last week
1. BCH’s quiet fork
The Bitcoin Cash network went through a hard fork last week, splitting into two new blockchains: Bitcoin Cash ABC (BCHA) and Bitcoin Cash Node (BCHN). The dispute centered on whether 8% of each block’s reward should be diverted to a development fund that turned out to be BCHA’s own development team.
Though Bitcoin Cash was championed by Chinese crypto OGs like Jihan Wu, the founder of Bitmain, the recent hard fork received surprisingly little attention in China. Why?
First, Chinese miners have little economic incentive to engage in the fork, as they are ambivalent about mining Bitcoin and its split coins as long as they are all running the SHA256 algorithms. You just choose what brings the highest profit.
Second, the Chinese voice is weakening within the BCH ecosystem as Wu himself is stranded in Bitmain’s internal struggle. When the fork was first proposed, both Wu and Haipo Yang, founders of ViaBTC, a giant mining pool and supporter of BCH, remained neutral. This was in stark contrast to her active engagement during BCH’s 2018 fork.
After all, the Chinese community, to a greater extent the global crypto community, simply cannot bother with any other fork. Why should anyone watch out for a fork of Bitcoin’s fork when the real thing is going through the roof?
2. An ERC-20 bond sponsored by China Construction Bank is postponed
Barely a week has passed since Fusang, a Malaysian digital stock exchange, announced that it had postponed issuance of “the first publicly traded debt on a blockchain.” What makes these bonds unique, besides being marked as tokens on the Ethereum network, is that they can be bought for both Bitcoin and US dollars.
The news was significant as it uses not only blockchain but also crypto. The fact that credible investors would use Bitcoin to buy a bond is an advancement.
However, the deal is has been postponed on November 13th without further notice. The block linked the delay on CCB’s statement that Bitcoin or cryptocurrencies would not be needed, which could be a plausible reason given that CCB is still China’s largest and most conservative financial institution. Allowing Bitcoin to be included in his books can create unnecessary problems. It is better to postpone it early than to cancel it later.
3. From Huobi to Binance
OKEx isn’t the only Chinese crypto exchange invited for tea with Chinese regulators. Huobi, another major exchange focusing on the Chinese market, saw their COO, Robin Zhu, get out of here also.
The result? A record number of Bitcoin flowing from Huobi to Binance, an exchange known for its decentralized structure and insecure physical location.
There were always inflows and outflows between Huobi and Binance. In 2019, when Binance experienced a brief downtime, a lot of Bitcoin flowed from Binance to Huobi. Both exchanges are operated by Chinese people and are known for their great customer service, which is essential to win the hearts of Chinese retail investors.
However, the recent flow from Huobi to Binance could be more difficult for Huobi to reverse. The reason for this is that with both OKEx and Huobi facing regulatory issues, BinEx appears to be a safe haven as it operates outside of the regulatory zone. Its founder, CZ Zhao, is not in China or in countries that will cooperate with the Chinese government should they invite him for a cup of tea.
We could see the beginning of a massive de-China move among the Chinese stock exchanges.
“欢乐 豆”, which means “Happy Token”, is the nickname of OKB, OKEx’s platform token. The “happy token” originally referred to the tokens used in a popular game produced by Tencent. Although they are called tokens, they have nothing to do with crypto – they are developed in a centralized database. This is why OKB got its nickname: OKEx’s blockchain, on which OKB is based, is nothing more than a centralized database.