Locking Down China’s Troubled Crypto Exchanges

Chinese crypto investors had a turbulent November. It started when Mingxing “star” Xu, founder and CEO of the popular exchange OKExwas taken away by Chinese police, resulting in weeks of suspension and panic. Then came a rumor that Leon Li, Huobi’s founder, may also have been taken. Huobi has vehemently denied the allegations and even sued one of the Chinese reporters for defamation subsequently.

Huobi founder Leon Li

The fact that Li and his C-level executives, who would normally address big issues through WeChat or by filing a corporate statement, are silent. One wonders if their reluctance is choice or violence.

In contrast to the OK group, Huobi is considered a dear friend of the Chinese government. Li himself is a graduate of the renowned Tsinghua University and has been waving China’s flag “Blockchain-not-Crypto” since day one. Why has the Chinese government suddenly sharpened its knife and targeted those exchanges that have safely danced in the gray area?

These weeks there bing examines these questions and draws out the very real limits within which the exchange must live.

Don’t cross the red lines

Let’s start with China’s ICO ban on September 4, 2017, when the seven government departments, including the People’s Bank of China (PBOC), ordered the crypto trading to stop. The law specifically forbids trading between fiat and crypto – but it wasn’t that strict on crypto to crypto.

As a result, many exchanges found a new profit model after the practice had decreased somewhat: OTC trading desks combined with crypto-to-crypto trading. This is exactly how Binance rose at the end of 2017: instead of focusing on a fiat-to-crypto ramp, crypto-to-crypto trading was introduced.

Why is the government so sensitive when it comes to fiat and crypto trading? Simple – capital control. Many developing countries that have experienced an economic upswing are faced with the delicate task of ensuring that economic gains remain in the country. If you do not take care that the capital flows freely abroad, this causes a depreciation of your currency.

A negative example of this phenomenon is Argentina, a country that has suffered from massive capital drainage to the United States and years of currency devaluation and economic chaos.

In order to avoid this, the Chinese government is examining both politically and economically the inflow and outflow of capital. It has enacted laws prohibiting both citizens and businesses from sending and investing money overseas. A well-known example is that Wanda scandal, a conglomerate that has bought numerous foreign assets from its piles of money in the Chinese real estate market.

How does crypto come into play? Unsurprisingly, crypto is the easiest way for people to launder money overseas – especially with stable coins like USDT. One can easily buy USDT at OTC trading counters or secure profits in the form of USDT, which avoids both price volatility and regulatory scrutiny. Recent data from chain analysis shows that Tether has overtaken Bitcoin to become the most preserved digital asset of East Asian addresses.

The Chinese government has never been against crypto per se– It’s against those who would use crypto to mess up their monetary policy.

If we follow this capital control logic, we can better understand why mining is a legitimate industry in China. Mining is essentially miners who export hashrat for dollars. It is literally bring Foreign currency to China and thus contributing to the government’s major capital control scheme. Why take action against such an industry?

What’s next

Although very little is known about the recent OKEx and Huobi incident, many industry OGs believe the exchanges were unknowingly involved in money laundering cases. This should come as no surprise, however, as OTC trading typically requires very little care.

To protect itself from future investigations, Chinese exchanges must be more vigilant towards OTC companies. You have to turn down suspicious transactions despite lucrative fees to have peace of mind. Another way out is decentralization, which could explain Huobi’s aggressive move to adopt Korea’s most popular exchange, Bithumb. After all, serving the Chinese government from a neighboring East Asian country is easier than anywhere else.

The hard part of running an exchange in China is that its survivability is entirely up to the whim of the government. Or should we say President Xi Jinping’s whim? He was the one who put blockchain on the country’s tech agenda and will be the one who could cut out crypto once and for all.

But what might he be doing under such radical policies? Perhaps when crypto has grown so big that it directly jeopardizes the country’s financial stability. If that happens, great for the crypto ecosystem but bad for those who didn’t manage to get out on time. The punishment will not simply be held for a month.

Both exchanges must remain conservative and cautious for the time being. Even chanting the blockchain non-crypto mantra could be considered too fancy.

The other three big things that happened last week

1. $ 4.2 billion of Plus Token seized and possibly sold

The prosecution of Plus Token, which could be considered the largest crypto Ponzi program in China’s history, was out of date – until it was revealed last week that $ 4.2 billion worth of crypto had been seized from the treasury. The transaction was handled by a Beijing-based company Chaindigg, which is considered to be China’s chain analysis.

Many on the chain Analysis indicated that the tokens had already been sold in late 2019. However, the case raises the question of whether the Chinese government ever tried to work on its treasury management during the sell-off. Specifically, there were Chaindigg specific instructions regarding the timing and selling price and? In one way or another, the government has been a secret player in setting the price of crypto.

Of course, this is not just China’s problem. The same question can be asked of other governments. On November 5, the US government confiscated $ 1 billion worth of Bitcoin that originally came from the Silk Road. If BTC continues to hit bigger and bigger highs, as we’ve seen over the past two months, central governments could be the biggest winners of the crypto boom.

A fun fact from Chaindigg is that Huobi’s co-founder Leon Li is one of its investors. While the government is cracking down on Li’s OTC trading desk for possible involvement in money laundering, her trading desk is also helping the government enrich its treasury. A coin always has two sides.

2. Canaan’s price rose 200% as the industry hit ATHs

Of all the crypto mining companies, Canaan has struggled the most. Although the company was the first mining company to go public in China, it faced challenges and was even sued by investors for violating the securities law.

Still, its price has risen by over 200% in the past two months.

The main reason probably has less to do with Canaan than with the industry as a whole. When we entered a bull market, bookings for mining equipment skyrocketed. And as one of two publicly traded mining companies, Canaan’s share price rose accordingly. It was noticeable, however, that after rising 200% on November 30, the company announced a grim third quarter and the share price fell by more than 10%.

You can temporarily pump Kanaan during a bull market, but if the company isn’t a bull itself, the pump won’t last long.

3. OKEx resumed withdrawals and launched a “Happy Friday” campaign

Now that OKEx no longer seems to be in the dark when its founder went missing, the exchange is launching a series of new campaigns to attract customers. As the Show dataSome flee to other exchanges.

In the last campaign announced on Friday, OKEx users who held 10,000 OKB for 7 days will receive a special bonus of 0.00283794 BTC (11.30862331 USDT). Called “Happy Friday,The free money is distributed weekly.

Ordinarily, such a joyful, free distribution would have earned OKEx some applause. However, following a serious breach of trust when it became known that its owner, Star Xu, is the exchange’s sole key holder, the exchange could face some suspicion and resistance to its free money game. It’s time OKEx thought about a major overhaul of its service instead of simply trying to lure back its skeptical customers with pocket money.

You know?

“杀猪 盘” means “cheating in the slaughter of pigs”. The term refers to a form of online cheating in which grifters gain victims’ trust through a romantic relationship. Remember to send endless love letters. Once the “relationship” is established, the scammer would “recommend” the victim an investment program that submits money for “love”. Once the money is in their account, the scammers obviously end the “relationship” and look for the next target. Guess what is a perfect investment program? A crypto program. Indeed, digital assets have become a common ploy to lure the innocent victim. It’s novel, cutting edge, and maybe a little sexy.