Chinese crypto investors had a tumultuous November. It started when Mingxing “Star” Xu, founder and CEO of the popular exchange OKEx, was taken away by Chinese police, resulting in weeks of withdrawal suspension and panic. Then came a rumor that Leon Li, Huobi’s founder, might have been taken away as well. Huobi has vehemently denied the accusations and even sued one of the Chinese reporters for libel in the aftermath.

Leon Li
Huobi founder Leon Li

Still, the fact that Li, as well as his C Level executives, who would normally address big issues via WeChat or by issuing a company statement, have remained silent. It makes one wonder whether their reticence is a choice or by force.


Unlike the OK Group, Huobi is considered a dear friend of the Chinese government. Li himself is a graduate of the prestigious Tsinghua University and has been waving China’s “blockchain-not-crypto” flag since day one. So, why, all of a sudden, did the Chinese government sharpen its knife and target these exchanges that have been dancing safely in the grey zone?

This week’s da bing explores these questions and teases out the very real boundaries that exchanges have to live within.

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 that crypto trading be halted. The law explicitly forbids trading between fiat and crypto—but it was not so strict on crypto to crypto.

Consequently, after the crackdown receded somewhat, many exchanges found a new profit model: OTC trading desks coupled with crypto-to-crypto trading. That’s precisely how Binance rose up the ladder in late 2017: instead of focusing on a fiat-to-crypto on ramp, it embraced crypto-to-crypto trading.

Why is the government so sensitive when it comes to fiat and crypto trading? Easy—capital control. Many developing countries that have enjoyed economic booms have to grapple with the thorny task of ensuring that economic gains stay in country. If they aren’t careful that capital would freely flow to foreign countries, triggering a plunge in the value of their currency.

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


To avoid this, the Chinese government scrutinizes, both politically and economically, the inflow and outflow of capital. It has enacted laws that forbid both citizens and businesses from sending and investing money abroad. A high profile example is the scandal around Wanda, a conglomerate that bought numerous foreign assets from its pile of cash gained from China’s real estate market.

So how does crypto come into play? Well, unsurprisingly, crypto provides the easiest way for people to launder money abroad—especially with stablecoins such as USDT. One can simply buy USDT from OTC trading desks or lock in gains in the form of USDT, which avoids both price volatility and regulatory scrutiny. Indeed, recent data from Chainanalysis shows that Tether overtook Bitcoin to become the most-received digital asset by East Asian addresses.

The Chinese government was never anti-crypto per se—it is against those who would use crypto to mess up its monetary policy.

Following this same capital-control logic helps us understand more why mining has been a legitimate industry in China. Mining is essentially miners exporting hashrate in exchange for dollars. It’s literally bringing foreign currency to China and therefore contributing to the government’s grand capital control schema. Why crack down on such an industry?

What’s next

Even though very little has been revealed of the latest OKEx and Huobi incident, many industry OGs believe that the exchanges might have been unknowingly entangled in money laundering cases. But this should come as no surprise as OTC trading normally involves very little diligence.

To protect themselves from future investigations, Chinese exchanges need to be more vigilant on OTC businesses. They will have to turn down suspicious transactions despite lucrative fees, in exchange for peace of mind. Another way out is to decentralize, which might explain Huobi’s aggressive move to acquire Korean’s most popular exchange, Bithumb. After all, it’s easier to serve Chinese government from an adjacent East Asian country than anywhere else.

The tricky part of operating an exchange in China is that its ability to survive is wholly subject to the government whim. Or shall we say President Xi Jinping’s whim? He was the one who put blockchain on the country’s technology agenda and will be the one who could cut crypto out once and for all.

But what under circumstances would he enact such a radical policy? Maybe when crypto has grown so big that it directly threatens 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 custody for a month.


For now, both exchanges have to stay conservative and low key. Even chanting the blockchain-not-crypto mantra could be considered too outlandish.

The three other big things that happened last week

1. $4.2 billion from Plus Token seized and potentially sold

The prosecution of Plus Token, which could go down as the biggest crypto Ponzi scheme in China’s history, wasn’t newsworthy— until news broke out last week that $4.2 billion worth of crypto was confiscated by the state treasury. The transaction was processed by Beijing-based Chaindigg, which is considered the Chainanlysis of China.

Many on-chain analyses suggested that the tokens had already been sold by the end of 2019. But the case makes one wonder if the Chinese government ever attempted to work on its treasury management during the sell-off. Specifically, did it give specific instructions to Chaindigg in terms of the timing and sell price and? One way or another, the government has been a secret player in determining crypto price.

That’s not just China’s issue, of course. The same question can be asked of other governments. On November 5, the US government seized $1 billion worth of bitcoin that originally came from Silk Road. If BTC continues to reach greater and greater all time highs, as we’ve seen during the past two months, central governments might be the biggest winners of the crypto boom.

A funny fact of 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 potential involvement in money laundering, its trading desk is also helping the government enrich its treasury. There’s always two sides to the same coin.

2. Canaan’s price jumped 200% as industry reaches ATHs

Among all the crypto mining firms, Canaan struggled the most. Despite being the first mining company in China to go public, the company faced challenges and was even sued by investors for violating securities law.

Yet its price has jumped over 200% in the last two months.

The primary reason probably has less to do with Canaan than it does with the industry at large. As we entered into a bull market, bookings on mining rigs skyrocketed. And, as one of two publicly traded mining companies, Canaan’s stock price went up accordingly. However, what was noticeable was that after skyrocketing 200%, the company announced a dismal third quarter on November 30 and the share price dropped more than 10%.


One may pump Canaan temporarily 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

Screen Shot 2020 12 05 at 3.33.53 PM

Now that OKEx appears to be out of its dark period when its founder went missing, the exchange is launching a series of new campaigns to retain customers. As the data shows, some are fleeing to other exchanges.

In its most recent campaign, announced Friday , OKEx users who held 10,000 OKB for 7 days will get a special bonus of 0.00283794 BTC (11.30862331 USDT). Named “Happy Friday,” the free money distribution will occur on a weekly basis.

Normally such a joyous, free-money distribution would have won OKEx some applause. However, after suffering from a major trust incident when it was revealed that its owner Star Xu is the only key holder of the exchange, the exchange might face some suspicion and resistance to its free-money gambit. It’s time for OKEx to consider a more sweeping overhaul of its service, rather than simply trying to lure back its skeptical customers with pocket money.

Do you know?

“杀猪盘” means “pig-butchering scam.” The term refers to a form of online scam where grifters win the trust of victims through a romantic relationship. Think of sending endless love letters. Once the “relationship” is established, the scammer would “recommend” an investment program to the victim, who will hand in money because of “love.” Obviously, once the money is in their account, the scammers end the “relationship” and hunt for the next target. Guess what’s a perfect investment program? A crypto program. Indeed digital assets have become a common trick to allure the innocent victim. It’s novel, cutting-edge and perhaps, a little sexy.

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