Two of China’s ‘three exchanges’, Huobi and OKCoin, have reportedly dipped into 1 billion yuan ($150 million) of idle users’ funds to invest into risky, high-yielding financial products.
According to a recent report by China’s state news agency Xinhua, Huobi and OKCoin have helped themselves to a collective 1 billion yuan of idle client funds to invest in ‘wealth management products’ (WMPs). Issued by banks, WMPs typically yield returns of 3 to 5 percent and typically include bonds, properties and more. They are an attractive proposition for risk-driven investors who can earn far more than the traditional 1.5% p.a yields for deposits at a bank.
Earlier this year, the People’s Bank of China – China’s central bank – carried out investigations on both exchanges amid a wider crackdown on bitcoin trading activity in the country as a means to control capital flight. The PBoC pointed to ‘irregularities’ in the operations of both exchanges, accusing them of not establishing sufficient anti-money laundering measures for users.
Leading up to January this year, China was the world’s largest bitcoin trading market with a trader-friendly environment that included zero fees and margin (loan) trading. In a 2015 interview, Arthur Hayes, chief executive of bitcoin trading platform Bitmex commented on Chinese exchanges’ profit-making model with zero trading fees.
“China accounts for the vast majority of all on-exchange Bitcoin trading,” stated Hayes at the time. “Exchanges must, therefore, have a large balance of customer CNY and Bitcoin.”
Notably, he added:
Chinese exchanges act as shadow banks. They borrow at 0% from clients who wish to trade Bitcoin, and lend out customer funds by purchasing China debt instruments.
Following the PBoC-led crackdown, Chinese exchanges have since ended both zero-fee trading and margin trading services. Nearly four months after banning bitcoin withdrawals, Chinese exchanges only resumed withdrawals in early June after comprehensive reforms to existing AML/KYC practices.
Contrary to their US and Europe-based counterparts, Chinese exchanges are not restricted from using idle client funds. Pointedly, the report by Chinese state agency Xinhua did not include any details about the financial products or wealth management products that Huobi and OKCoin invested in, using idle customer funds.
The revelation was published in the days leading up to both exchanges launching trading of Bitcoin Cash (BCC), a digital currency that launched on August 1 following a hard fork split of the bitcoin blockchain.
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