Recent reports from local news publications including Beijing News revealed that the Chinese government had disallowed cryptocurrency exchange executives from leaving the country until its investigations come to an end. The translation of the original report read:
“A number of informed sources say the executives of special currency trading platforms are not allowed to leave Beijing to cooperate with the investigation. In accordance with regulatory requirements, trading platform shareholders, the actual controller, executives and financial executives need to fully cooperate with the relevant work in the clean-up period in Beijing.”
It is unclear whether the government’s decision to disallow cryptocurrency exchange executives to leave the country while the investigation is ongoing relates to the idle funds controversy. But, according to experts including BnkToTheFuture CEO Simon Dixon, the People’s Bank of China (PBoC) requested every bitcoin exchange in China to submit a daily report until their operations are officially terminated.
Huobi and OKCoin, two of China’s largest bitcoin and cryptocurrency exchanges, have recently been criticized by the bitcoin community and industry for placing idle client funds in low-risk banking products and investment vehicles.
Xinhua, the official press agency of the People’s Republic of China, first revealed the controversial policy of OKCoin and Huobi and announced that the PBoC has begun an investigation into the policy of the two exchanges on August 21. According to Xinhua, a highly respected local news agency, the “low-risk banking products” Huobi and OKCoin have invested into with idle client funds are considered as high-yielding and risky investments in China.
According to OKCoin CEO Star Xu, the company has been compliant with Chinese financial regulations and has not been pursuing such policy for the company’s financial gain.
“We at OKCoin have a strict policy of placing idle client funds into lower-risk banking products. This policy is in keeping with general practices in the banking and securities industry, for both the purpose of safeguarding clients funds, as well as assuring proper record keeping and segregation of funds. We refute allegations to the contrary as patently false,” said Xu.
However, Xu’s statement is rather ambiguous considering that the PBoC is launching a full investigation into the company’s controversial policy. If it were on par with general practices in the banking and securities industry, state newspaper Xinhua and the government would not have pursued an investigation into the two companies.
More importantly, it is also crucial to acknowledge the fact that neither OKCoin and Huobi are operating in the banking and securities industries. Hence, the two companies are not required to comply with the regulations and general practices of those industries. Fundamentally and conceptually, bitcoin is a decentralized cryptocurrency developed to operate as an alternative financial system to existing banking platforms and financial networks. To describe its controversial policy as a “general practice” served for the benefit of users is not a reasonable statement sufficient to legitimize its policy.
Zheping Huang of Quartz demonstrated similar thoughts about the Huobi and OKCoin scandal, as he wrote:
“For a long time up until recently, Chinese bitcoin exchanges didn’t charge users transaction fees—a major revenue source for other exchanges in the crypto market. How did they make a profit? At least part of the mystery might have been solved.”
Huang’s statement was directly countered by Xu in his interview with Quartz but if the decision to place $150 million of idle client funds in risky banking products is not for the good of the company and it is surely not for the benefit of users, legitimacy of the policy of the two startups become even more difficult to justify.
Still, OKCoin denied any wrongdoing and protected its policy in its latest announcement. The OKCoin team noted:
“Recently there have been rumors and false allegations regarding OKCoin, and its affiliates, in their use of idle client funds. We would like to assure all parties, and especially our customers, that we have a strict policy of placing idle client funds into bank-backed low-risk products for safe-keeping. We consider the safety and integrity of our client funds as our most important responsibility.”