OKEx CEO admits to exchange failure in withdrawal debacle

After halting withdrawals for almost six weeks, OKEx’s resumption of services has been met with huge relief by account holders fearing the exchange was about to be added to BNC’s graveyard of crypto exchanges.

While it was hoped that CEO Jay Hao’s Telegram AMA on November 26th would reveal more about what was going on at OKEx prior to and during the withdrawal suspension, it was disapointly light on details, although some new insight was gained.

Asked what happened and why OKEx did not implement withdrawals using the backup private keys it says it has, Hao stated: “The reason for the suspension of withdrawals was because one of our private key holders was temporarily unable to authorize transactions. We have a very robust backup mechanism in place for private key holders that makes sure the activation of the backup private key can still be triggered in the event of long-term incapacitation, such as death or memory loss. However, we failed to include other important scenarios, such as private key holders becoming unreachable due to unforeseen circumstances, in our contingency plan.”

It has been widely reported that the private keyholder concerned was OKEx founder Mingxing ‘Star’ Xu and in essence what Hao is admitting here is that no one on OKEX’s or OK Group’s executive team was empowered to take action in the event Chinese authorities detained Xu. It’s a concerning situation, but not uncommon in organizations with autocratic leaders. Only time will tell if this management shortfall at OKEx will be addressed, but Hao says it will. "Clearly, we cannot have a situation where this occurs again and we are now making it our full priority to upgrade and improve our internal processes."

Hao also said during the AMA that in the interests of transparency OXEx will reveal its wallet addresses in the weeks to come. With regards to the questions raised about money laundering concerns at OKEx, Hao said the investigation into the private key holder "had no relation" to OKEx. "We have established, implemented, and continued to refine an Anti-Money Laundering, Anti-Terrorist Financing, and Trade & Economic Sanctions Program since our inception," he said, "to ensure a robust and compliant digital asset trading platform. We want to promote legal, transparent business activities and maintain a strong reputation among our customers, regulators, and the digital asset industry."

OKEx withdrawals begin

OKEx observed net crypto withdrawals worth more than USD100 million within hours after it reopened withdrawals from users at 08:00 (UTC) on November 26th.

Data provider CryptoQuant reported that the first batch of outflows included 2,822 Bitcoin (BTC). This was the largest Bitcoin outflow from the exchange in a block outflow since May 2019. The outflows dropped OKEx’s total BTC reserves from 101,686BTC to 98,821.

456 BTC was moved toBinance and 400 moved to other exchanges. 83% of the Bitcoin total outflows went to non-exchange wallets such as ones managed by custodians. This is a potentially bullish long-term signal that indicates most users withdrawing from OKEX are seeking to “HODL” their Bitcoins privately as opposed to using an exchange to dump them on the market.

The price of Bitcoin dropped close to $3000 and by just over 15% around the time OKEx opened for withdrawals. It appears unlikely, however, that the two events are connected.

Analysts have also suggested, though, that a key factor in Bitcoin’s recent price run to $19,000 has been a supply shortage of coins across the market which the OKEx withdrawal suspension contributed to. Between October 16th when withdrawals were suspended and November 26th when they were reopened, the price of Bitcoin rose from USD10,769 to USD17,586, a rise of 63%.

The surprise almost six week suspension of OKEx’s crypto withdrawals left many users disgruntled and the exchange is now trying to incentivize them not to remove holdings en masse. OKEx has announced that it will be launching a compensation and rewards program for users who used services on the exchange when withdrawals were suspended.

In a post released on November 24th, OKEx announced that users who made deposits, held tokens, or traded while withdrawals were disabled will receive 20% of the exchange’s total income from futures and perpetual swap transaction fees in the last seven weeks. The payment will come in the form of a one-time payment and will be gathered in an incentive fund. Users will be compensated based on the volume of activity and size of holdings. For OKB holders, the value of their OKB tokens (in US dollar terms) will be doubled in the asset weighting calculation.

For users who had more than 10,000 USDT in their accounts before 4:00 pm UTC on Nov. 23, OKEx will issue a commission rebate card valued between a minimum of 100 USDT and a maximum of 1,000 USDT. They have also announced that further futures and perpetual swap transaction fee income incentives will continue to be announced soon.

Why did OKEx stop withdrawals?

OKEx’s suspension of withdrawals had been one of the crypto world’s most unusual exchange failures. Since its announcement on October 16th that OKEx was stopping withdrawals because “one of our private key holders is currently cooperating with a public security bureau in investigations where required,” OKEx released no new information of any significant consequence until its announcement of a return of services on November the 19th.

Typically in a scenario like this, if it was a hack and the exchange survived, there would be a flurry of communications to clients reassuring them as to compensation and insurance schemes. Alternatively, if it was an exit scam or rug pull there would be little or no communication, cold wallets would be drained and key personnel would disappear quickly.

The OKEx response, for the first couple of weeks at least, was somewhere in the middle. The exchange continued to say it was working on the problem and that the suspension was only temporary. It also continued with ‘business as usual’ announcements about support for hardforks and discounted trading fees once the issue was resolved. While it is difficult to know for sure, these announcements ‘felt’ they were coming from people who were just doing their day-to-day jobs and that what was really going on with OKEx was out of their pay-grade. At the end of October, however, communication from OKEx and many of its senior staff mostly fell silent.

Contact from OKEx

On the 11th of November, Brave New Coin was contacted by representatives of OKEx concerning this story. The exchange raised issues with the section below relating to wallet tracking and transaction monitoring. OKEx stated that the addresses mentioned below did not pertain to OKEx. BNC responded with a request for an interview to bring transparency to the situation – with the goal of providing some independent third-party review of the safety of OKEx user’s funds.

OKEx agreed to an email interview and BNC sent its questions the same day, with a follow up on the 18th of November advising OKEx that the article would be updated the following day. OKEx advised it would reply to BNC’s questions on the 18th.
Unfortunately, OKEx never sent any responses and did not answer any questions at all about why withdrawals were halted.

The Brave New Coin OKEx investigation

Brave New Coin began investigating the OKEx lockdown about a week after the suspension of withdrawals was announced. The investigation focused on three key areas.

1. The people and the businesses – who is the OKEX founder Xu Mingxing – and who are the senior executives that surround him?

2. The money – where was the crypto that was held in the OKEx wallets on October 16th – and had it been moved?

3. The Chinese Government – If Chinese authorities did arrest OKEx executives, what motivated this action and how would it likely resolve?

The people and the businesses

The dominant narrative is that OKEx exchange is a Malta registered company. This is true. Although it was announced in April 2018 that OKEx was moving to Malta, it did not actually register in Malta until September 7th 2018. Three OKEx related companies were registered at that time – OKEx Malta Limited, OKEX MT Limited, and OKCoin Europe Ltd. All three companies have the same address in Malta of 30, Kenilworth, Flat 4, Sir Augustus Bartolo Street.

This address is also home to many other registered companies in Malta. This is a common scenario in jurisdictions like Malta, Jersey, and The Cayman Islands – where the local governments have created less restrictive tax and business laws in an effort to attract companies who have been hampered by legislation in their own countries.

In the crypto world this is referred to as ‘regulatory arbitrage’ where exchanges will move their company registration to nations that are viewed as more supportive of crypto. Binance is another example and also has two companies registered in Malta. Addresses like this are typically the offices of lawyers or accountants who have established themselves as consultants to help offshore companies get set up and comply with local laws. While staff at these consultancies may hold positions like company secretary or directorships at the locally registered company, they are typically only ‘ceremonial’ roles, taken up purely to comply with local regulations.

Although there is no indication that OKEx actually conducts any of its business in Malta, documents at the Malta Business Registry do provide details of many of the company’s key staff. It is important to point out that although the exchange operates under the name OKex and there is much media coverage and company generated public relations referring to an organization named ‘OK Group’, Brave New Coin was not able to locate a registered company with the name “OK Group”.

Instead, the majority of company registrations for OKEx related businesses worldwide have been under variations of the name “OK Coin”. BNC research found dozens of related companies registered. Some names include: OKCoin Europe Technology Company Limited, OKCoin USA Inc, OKCoin Pte Ltd (Singapore), OKCoin Technology Company Limited (Hong Kong), and OKEx International Holding Company Limited (British Virgin Islands). In the US there are 39 registered branches of OK Coin USA.

Who are the OKEx executive team?

Although there are a labyrinth of companies within the OK Group that are owned by each other and operating worldwide, the names of a few key personel appear consistently across different company registrations in multiple jurisdictions. They are;

	Xu Mingxing – Xu Minxing (known as ‘Star Xu’) is the head of the OK Group tree. Whether it’s OK Coin, OKEx, or OK COIN International, all roads lead back to Xu as the founder of it all. Xu travels on a Chinese passport but he also has a Hong Kong Identity Card number. Xu has two addresses listed on identity documents examined by Brave New Coin, one in Beijing and the other in Hongze County, China. Xu has been named by Chinese media as the private key holder assisting the authorities. BNC sources in China are confident Xu is not in prison per say, but is instead under some form of house arrest or “residential surveillance” in China. Social Media Twitter LinkedIn
	Tae Won Tim Byun – The only “Involved Party” in OKEx MT Limited is Tae Won Tim Byun. He is listed as a US national and lives in Los Altos, California – a city adjacent to Palo Alto in San Francisco’s Silicon Valley region. Byun brings ‘institutional credibility’ to the organization as his Linkedin profile lists an impressive Fintech career with roles at Visa and the FDIC prior to getting involved with crypto. His experience has often been in the ‘compliance’ field. His current role at the OK Group is Global Government Relations Officer. Byun served as a Director of OKEx Mt Limited from its registration in 2018, until he resigned as a director in April 2020. Byun’s name also features prominently in relation to the registration of OK Coin companies in the United States. Social Media Twitter LinkedIn
	Hong Fang – Hong Fang is listed as a director of OKCoin Europe Limited. She is also the CEO of OK Coin USA and a director of OKCoin Pte Ltd in Singapore. Like Byun, Fang brings a US centric credibility to OKEx as she is a former VP of Investment Banking at Goldman Sachs and a Morgan Stanley staffer. She holds a United States passport and is listed as living in Palo Alto in Silicon Valley. Social Media Twitter LinkedIn
	Jie Hao – Jie Hao’s anglicized name is “Jay” Hao. He is the current CEO of the OKEx Exchange. Hao was born in November 1973 and travels on a United States passport. He is listed as living in the US in the upmarket San Diego neighborhood of 4S Ranch. Hao is listed as a ‘Beneficial Owner’ of OKEX MT Limited, in which he has a 50% share. Social Media Twitter LinkedIn
NO PHOTO AVAILABLE	Xinlin Yang – Xinlin Yang is also listed as being born in November 1973. He travels on a Hong Kong passport and is listed as living in Hong Kong on Braemar Hill Road in the Pacific Palisades apartment block. Yang is also listed as a ‘Beneficial Owner of OKEX MT Limited, in which he has a 50% share.

The OKEX leadership team was conspicuously silent across all their social media channels regarding the suspension of withdrawals. OK Coin CEO Hong Fang, for example, tweeted or retweeted over 70 times after the October the 16th annoucement and before the recommencement announcement – without ever once
mentioning the suspension.

Could OKEx access its cold storage wallets?

It makes sense that OKEx could not move crypto from its cold storage wallets because Star Xu is either the sole signatory on the wallets – or he is at least a required signatory – and that if he is restrained in some way, then no withdrawals were possible. This scenario does align with OKEx’s stated security policy that access to its cold wallets “must require confirmation of two authorized parties.” If this is indeed the extent of failsafe protections that OKEx has in place, then it does not align with other aspects of the exchange’s security policy that “Everyone has the potential to suffer from an unexpected event. Others need to be authorized to access offsite backups in order to ensure safety.”

So is it possible that OKEx did not have any ‘others’ authorized to access offsite backups? Is Xu the kind of founder who would ignore his own exchange’s stated policy and make himself an indispensable signatory? It is impossible to know for sure, however, those who have worked with Xu remember him as a difficult personality with a very hands on approach to the management of his business.

For example, Chris Lee (Chinese name Li Shufei), was the former CEO of OKEx – working alongside Xu during 2017 and 2018. However, in May 2018, Lee abruptly resigned from the company and soon after announced that he would be joining rival exchange Huobi as Board Secretary and Vice President of International Business Development. It’s understood that Lee’s working relationship with Xu was volatile. Journalist Wang Yanhua reported in 2018 on Lee’s fraught relationship with the founder.

Lee had posted on WeChat that he experienced challenges in working with Xu but also noted his devotion to the company. Lee wrote, “He (Xu) is a tech guy. He’s not very good at communicating, which is what many geniuses face. He is not used to being accountable to others, which is his management issue. He’s not easy to get along with. But then again, which boss is? He has his shortcomings, but also his strengths. He’s hardworking. He spends more than ten hours in the office everyday, even sleeping there, and sees to a lot of things personally. As this industry is so closely intertwined with money, perhaps he is not used to trusting others yet.”

Chris Lee (left) and Star Xu, taken when Lee joined OKEx. Source

Reading between the lines, Lee’s description of Xu as someone who is difficult to communicate with, that does not trust others, and who likes to see to things himself, does fit the profile of someone who would demand sole or indispensable responsibility for private key management.

Tracking the OKEx wallets

So if this is the case, was it possible to track OKEx’s wallets and check for movement of funds? The answer is yes. Although BNC must caveat the following information with a note that OKEx is not transparent about its wallet addresses (which makes sense from a security perspective) and it is unlikely that the exchange will confirm any of these addresses as being theirs, assembling the ‘best guesses’ from a range of observers did shine light on the likely state of play with OKEx wallets – and showed funds were moving. Starting from October 16th BNC has assembled the following wallet transaction analysis using public data from Glassnode, Cryptoquant, Etherscan, Chain.info, Bitinfocharts, Whale Alerts and Chainalysis;

• October 16th: Okex announces that all withdrawals are suspended until further notice.

• Also on October 16th Glassnode reports that OKEx has 201,981.303020241 BTC. Source Twitter: https://twitter.com/glassnode/status/1317048711055331329. (Glassnode only provides data with a 1-month time lag on free accounts and does not provide specific address data).

• OKEx CEO Jay Hao uses Glassnode data and announces on Twitter that OKEx currently has 202,732.64098193 and says there have been no on-chain outflows since October 16th.

• According to Cryptoquant, OKEx has reserves of 100,749BTC, 235 million USDT(ERC20). 1.31million True USD (TUSD), 923,183 DAI, 13.45 million USDK. Cryptoquant provides data up to October 25th. Cryptoquant does not provide address data either

• Etherscan provides data on the Ethereum blockchain. Etherscan marks several addresses as belonging to OKEx.

• https://etherscan.io/address/0xa7efae728d2936e78bda97dc267687568dd593f3= ~USD 63million in ETH

• https://etherscan.io/address/0x6cc5f688a315f3dc28a7781717a9a798a59fda7b= ~$300M in ERC20 tokens

• https://etherscan.io/address/0x5041ed759dd4afc3a72b8192c143f72f4724081a. (Not marked by Etherscan but suspected to belong to Okex) = 235 million USDT(ERC20), 1.31million True USD (TUSD), 13.45 million (USDK). These numbers match what was reported by Cryptoquant. The wallet also contains 7.43 million USDC and 1.1 million PAX.

• According to Chain.info, OKEX has 294071.38 BTC. Broken down as 257864.18 BTC (87.69%) in cold storage, 3457.44 BTC (1.17%) in hot wallets, and 32749.76 BTC (11.14%) in deposit wallets.

• Chain.info marks 339279 wallets as belonging to OKEx, distributed as 54 cold wallets, 14029 hot wallets, and 325196 deposit wallets.

• The largest wallets on OKEx as listed by Chain.info are shown in order below.

  • https://chain.info/3Kzh9qAqVWQhEsfQz7zEQL1EuSx5tyNLNS (cold wallet, 74296 BTC)
  • https://chain.info/38UmuUqPCrFmQo4khkomQwZ4VbY2nZMJ67 (cold wallet, 44736 BTC)
  • https://chain.info/3DwVjwVeJa9Z5Pu15WHNfKcDxY5tFUGfdx (deposit wallet, 14500 BTC)
  • https://chain.infoDVJfEsDTPkGDvqPCLC41X85L1B1DQWDyh (deposit wallet, 11405 BTC)
  • https://chain.info/bc1quq29mutxkgxmjfdr7ayj3zd9ad0ld5mrhh89l2 (hot wallet, 1008 BTC)
  • https://chain.info/35tFJwVKEexyDr3fZicy3YpfQvApndVJXG (deposit wallet, 1200 BTC)
  • https://chain.info/1NYAd6fA2dc5xowuweFUSDRqRTEzDwk28 (deposit wallet, 844 BTC
  • https://chain.info/32pizyEwWzF7r85Dj8dQFbSALuRrN85BhS (deposit wallet, 798 BTC)
  • https://chain.info/3LhfhgcYNiCceJrjDuMbYWqxPkKkgDQ4ay (deposit wallet, 719 BTC)
  • https://chain.info/1VERF5rDyVoS4mPCbK68vSGpVo95cAXRm (cold wallet, 654 BTC)
  • https://chain.info/1KneytMTrRzYMWKsq7A41KCya4o4ZReoC5 (deposit wallet, 392 BTC)
  • https://chain.info/18XY4c65DavYJxsVem4uqbuUkxqty6GYTC (deposit wallet, 239 BTC)
  • https://chain.info/1QEVQEFnR8BzksckP3ahCDtWpWi54cXXVg (deposit wallet, 200 BTC)

It is clear from the above information that the wallet watchers were not 100% sure exactly which wallets belonged to OKEx – and the info is sometimes contradictory. However, there was also frequent agreement. For example, both Bitinfocharts and Chain.info agree that the following are OKEx wallets;

• –https://bitinfocharts.com/bitcoin/address/bc1quq29mutxkgxmjfdr7ayj3zd9ad0ld5mrhh89l2
• –https://bitinfocharts.com/bitcoin/address/1NYAd6fA2dc5xowuweFUSDRqRTEzDwk28
• –https://bitinfocharts.com/bitcoin/address/1KneytMTrRzYMWKsq7A41KCya4o4ZReoC5
• –https://bitinfocharts.com/bitcoin/address/1QEVQEFnR8BzksckP3ahCDtWpWi54cXXVg
• –https://bitinfocharts.com/bitcoin/address/18XY4c65DavYJxsVem4uqbuUkxqty6GYTC
• –https://bitinfocharts.com/bitcoin/address/1VERF5rDyVoS4mPCbK68vSGpVo95cAXRm

The following addresses show a digression between the watchers – being listed as Coinbase wallets on Bitinfocharts, but as OKEx wallets on Chain.info

• –https://bitinfocharts.com/bitcoin/address/3Kzh9qAqVWQhEsfQz7zEQL1EuSx5tyNLNS
• –https://bitinfocharts.com/bitcoin/address/3DwVjwVeJa9Z5Pu15WHNfKcDxY5tFUGfdx
• –https://bitinfocharts.com/bitcoin/address/3DVJfEsDTPkGDvqPCLC41X85L1B1DQWDyh
• –https://bitinfocharts.com/bitcoin/address/35tFJwVKEexyDr3fZicy3YpfQvApndVJXG
• –https://bitinfocharts.com/bitcoin/address/32pizyEwWzF7r85Dj8dQFbSALuRrN85BhS
• –https://bitinfocharts.com/bitcoin/address/3LhfhgcYNiCceJrjDuMbYWqxPkKkgDQ4ay

Were OKEx wallets being used?

Yes. The six wallets above (1 cold, 1 hot, 4 deposit) that both Bitinfocharts and Chain.info recorded as being OKEx wallets were all used following the suspension of withdrawals.

This likely means that OKEx still had access to at least some of its cold wallets and was still be able to move funds onchain. The most valuable wallet above – 3Kzh9qAqVWQhEsfQz7zEQL1EuSx5tyNLNS – is of particular interest. It was listed as 8th on the Bitcoin rich list and contained 64,449 BTC which converted to ~USD875 million and nearly 0.3% of all Bitcoins in circulation.

Bitinfocharts.com says this wallet belongs to Coinbase, while Chain.info says it belongs to OKEx. This address has been tagged as making a number of large transactions to bc1quq29mutxkgxmjfdr7ayj3zd9ad0ld5mrhh89l2 – a wallet that is marked as owned by OKEx by Bitinfocharts.

Source:https://bitinfocharts.com/bitcoin/block/655029/bc1quq29mutxkgxmjfdr7ayj3zd9ad0ld5mrhh89l2. Transactions made in in Block 655029, Time: 2020-11-02 07:52:26

It would seem odd that Coinbase would send so much BTC to an OKEx hot wallet but not immediately suspicious. However, if Chain.info’s analysis that this is an OKEx wallet is accurate, then it appears clear that OKEx did have control of its largest Bitcoin cold wallets and was actively using them to send BTC to its hot wallets. Again, internal transfers would be normal but if the original announcements were to be believed, and OKEx had lost contact with one of its private key holders, then the exchange should not have been able to move funds from its largest wallet.

In turn, the OKEx hot wallet (bc1quq29mutxkgxmjfdr7ayj3zd9ad0ld5mrhh89l2) that had received those transactions was also been actively making deposits to addresses marked as belonging to other exchanges. Like this one on to Bitfinex on October 25th https://chain.info/fb1361b99308befb66ecf407b96a16ba3c8255dfb15bfc8e2a76715e5ebcb348

And this one to Binance on October 23rd

https://chain.info/2d3f09bacf881d431c6bf8106123ff55f7b177ea037d0ceb397f9ffeffad60c0

This suggests that while withdrawals for users are banned, the OKEx exchange itself was transfering funds to other external addresses.

Whale Alerts tagged these addresses as OKEx – and as making a number of large transfers to other exchanges.

1. https://twitter.com/whale_alert/status/1317110095290007557 – Suggests a 5,000 BTC move to Binance

(associated address- 15sMzCGDJKFxHx7q4qatjqhtYMMVxxMt1h0)

2. ps://twitter.com/whale_alert/status/1317111042883964930htt – Suggests a 3,500BTC transfer to Binance
3. https://twitter.com/whale_alert/status/1317496764010799110 – Suggests a 1,251BTC transfer to an unknown wallet

Jay Hao has denied that OKEx has any connection to the first two addresses mentioned, while data provider Cryptoquant says the sending address in the third transaction belongs to Gemini. Phillip Gladwell, chief economist at Chainalysis, also says the first transaction is not a “transfer from OKEx to Binance” https://twitter.com/philip_gradwell/status/1317120228510359552

One of the addresses marked by whale alerts, 1KcZqjt5vbmXQuZrx8Us9HHJg4HgYWNkZR, appears to have received a large amount of money from OKEx hot wallets on October 14th and 15th https://chain.info/e857b385793070c2ec1609bda1c0dc006ac5e064abb9c3b0d76afcb26ffabf7f

https://chain.info/e83d0f7bab35d01cbf8e7741a6cf4ede499fe35099c017a4df9908197bd8f25f

Questions then arose as to why OKEx was sending such large sums of money to an address that it was not associated with. Glassnode picked up on these transactions too and suggested that there were large outflows from OKEx on October 14th and 15th of 5000BTC each, matching up with the two transaction ids above. https://twitter.com/glassnode/status/1317082760700448768

Cryptoquant also suggested that these transfers were internal. This could mean that 1KcZqjt5vbmXQuZrx8Us9HHJg4HgYWNkZR was an OKEx address and was being used to send money to exchanges post October 16th.

OKEx wallet summary

If the evidence assembled above by the crypto watchers is reliable, then it appears OKEx did have some ability to move funds around, and did so, after October the 16th when it halted user withdrawals.

As mentioned above, in its email to Brave New Coin on November the 11th OKEx stated that the wallet addresses featured here did "not pertain to OKEx.” It also stated that OKEx had "no access to or ability to move funds on-chain.”

Why was Star Xu detained?

So why was Star Xu detained by Chinese authorities? Blockchain journalists there have speculated that it was in relation to funds he had borrowed from a Shanxi-based underground bank for the purposes of the backdoor listing of OKC Holdings on the Hong Kong Stock Exchange in 2019. Jay Hao, the CEO of OKEx, tweeted on October 16, that “the investigation concerns a certain private key holder’s personal issue only.” This was not Xu’s first brush with Chinese authorities. In 2018 he was reportedly in talks with police over accusations of fraud, which relate to an alleged involvement with a “little-known cryptocurrency.” Local media reports said that Xu co-operated with the authorities – and was not charged.

Adding further drama to the situation, on the evening of November 2nd, Huobi’s exchange token HT dropped suddenly as rumors spread that Huobi COO Zhu Jiawei was under investigation, as was its CEO Li Lin.

Shortly after, the official Huobi Twitter account tweeted that “Huobi Global Is Operating Normally. We have become aware of rumors within our community about the arrest of a Huobi senior executive by local officials. We can share with confidence that these rumors are false.”

Despite the exchange denying that its officials were under investigation, speculation continued with several Chinese blockchain journalists stating that the rumors were true.

Another possible reason for Xu’s detention relates to the Chinese government’s ongoing crack down on money laundering. Although OKEx has stated that its withdrawal suspension “is not related in any way to AML”, Chinese media continued to report that it was. At US based blockchain investigation agency CipherBlade, founder Rich Sanders says that a cursory investigation by his company identified hundreds of OKEx deposit addresses that should have been flagged by any off-the-shelf anti-money-laundering tools. Sanders says CipherBlade investigations show numerous transactions through these addresses from darkweb wallets belonging to Hydra, AlphaBay and others – which suggests that the anti-money laundering theory is certainly plausible.

The Chinese Communist Party is confirming its power

The most likely explanation for the detainment of Xu Mingxing, and the rumors surrounding the investigation of Huboi executives, is that this was a move by the Chinese Communist Party (CCP) to ensure China’s new wave of billionaire entrepreneurs tow the party line. Joining, or at the very least working in conjunction with the party can be helpful to Chinese business people. Chinese entrepreneurs must navigate a complex, opaque business environment where the state-led economy dominates most industries. Private businesses that seek to operate outside of this government-led economy will always attract the attention of the state. In China, business executives need the backing of the Communist Party to succeed and survive.

As an example of this, in November Chinese authorities halted Ant Group Co’s $35-billion share sale in Shanghai and Hong Kong, putting the brakes on what was to be the world’s largest initial public offering (IPO).

The Shanghai stock exchange suspended the listing after founder Jack Ma was called in for “supervisory interviews”, it said in a statement. There was “significant change” in the regulatory environment and “such major issues could lead to your company no longer complying with requirements on listing or information disclosure,” the statement said.

Jack Ma, or Mǎ Yún, is a Chinese business magnate, investor, and philanthropist. He is the co-founder and former executive chairman of Alibaba Group, a multinational technology conglomerate. In China, Ma is a personification of the rise of the self-made tech entrepreneur. He is the Chinese equivalent of Mark Zuckerberg, due to the success of his e-commerce giant Alibaba and its online finance spin-off, Ant Group.

The sudden halt of Ant Group’s IPO less than 48 hours before it was to begin trading underscores the tight control the CCP wields over the private sector. It is also a clear demonstration of the peril of criticizing the state.

“The party has once again reminded all private entrepreneurs that no matter how rich and successful you are it can pull the rug out from under your feet at any time,” wrote Bill Bishop, the author of the China-focused newsletter Sinocism.

Chinese authorities say that Jack Ma’s firm will face the same restrictions on capital as banks. Regulators cited “changes to the financial technology regulatory environment and other major issues” for the halt to the IPO. This is likely a bureaucratic cover, however, with local commentators suggesting the real reason the IPO was stopped was due to comments made by Ma on October 24th at a summit in Shanghai.

In a fiery speech, Ma criticized the financial system in front of key Chinese financial leaders Zhou Xiaochuan, a former governor of the People’s Bank of China, and Yi Gang, its current governor. “We shouldn’t use the way to manage a train station to regulate an airport,” Ma said. “We cannot regulate the future with yesterday’s means.” Ma’s comments went viral on Chinese social media and were seen as a direct attack on officials. Less than two weeks later, Ma, along with two other executives, was summoned to meet financial regulators, and the next day the IPO was halted.

The situation is also an example of official unease in China over the rise of online finance, dominated by companies such as Ant and Tencent whose digital payments platforms allow customers to make all their purchases with mobile money as well as invest and borrow. The CCP is wary of any developments that threaten its control of the economic system. This is why it has taken an interest in the Bitcoin mining industry, closely monitors crypto exchanges, and is moving forward with a central bank digital currency – a digital yuan.

The incident with Jack Ma is just the latest example of the CCP flexing its muscle to bring wealthy Chinese businessmen into line. In September, a Chinese billionaire who criticized President Xi Jinping’s handling of the coronavirus pandemic was jailed for 18 years on corruption charges reported CNN. Ren Zhiqiang, a retired real-estate tycoon with close ties to senior Chinese officials, had disappeared in March after allegedly writing an essay that was critical of Xi’s response to the coronavirus epidemic.

Other recent high-profile cases include official investigations into Wu Xiaohui, the founder of Anbang Insurance Group Co., and financier Xiao Jianhua of Tomorrow Holding Co. Billionaire Chairman Yang Zhihui of Landing International Development Ltd mysteriously disappeared before resurfacing three months later following extended discussions with the party. Others like Guo Wengui, head of Beijing Zenith Holdings, and a billionaire businessman have fled the country after speaking out against the party.

Chinese commentators say that the routine detainment of critics such as Zhiqiang, and the blocking of Jack Ma’s IPO are a signal from China’s top officials to remind the country’s wealthy of who is really in charge.

Summary

OKEx’s suspension of withdrawals was concerning. That said, it does appear that concerns about the entire event being a long slow hack or a rug pull were overblown. Star Xu may well have put his client’s assets at risk, but the reality is that anybody who is prepared to pass the custody of their crypto into the hands of a Chinese exchange needs to understand that the Chinese Communist Party can step in at any time – particularly if key personnel like Xu continue to live and work within China’s borders.

That said, it appears Xu Mingxing was able to convince party officials of his loyalties. As noted in the examples above, this ‘re-education’ of Chinese entrepreneurs can take months, so OKEx user were fortunate to regain access so quickly.

The lack of comment by OKEx’s executive team made sense too, as they were either afraid of arrest themselves, or if they didn’t live in mainland China they didn’t don’t wish to make matters worse for Xu and the company by speaking out.

Brave New Coin always thought it unlikely that the Chinese state will would seize user’s funds. Although China’s attitude to crypto has been mostly negative, it has never moved to mass confiscation before. Indeed, if China does wish to transition its population to a digital yuan in the reasonably short term, it will benefit from the goodwill of those who are already familiar with the processes of moving and using digital currency.

OKEx’s statement to Brave New Coin that it had “no access to or ability to move funds on-chain” aligned with the narrative that Xu Mingxing was a sole or required signatory on the wallets – and for whatever reason, he was restrained from enabling withdrawals. It does not seem likely that OKEx had followed its own security protocols and authorized others to “access offsite backups in order to ensure safety.” OKEx’s casual disregard for wallet management best practises should be shocking, but regrettably it is actually par for the course in an industry that routinely sees exchange users pay the price for appalling security mismanagement. With the recent surge in crypto prices likely to drive many people to invest in cryptocurrency for the first time, actually choosing which exchange they’ll trade on may well be the most important decision they make.