China’s two biggest bitcoin exchanges helped themselves to $150 million in idle client funds – Quartz

For a long time up until recently, Chinese bitcoin exchanges didnt charge users transaction feesa major revenue source for other exchanges in the crypto market. How did they make a profit? At least part of the mystery has been solved.

Chinas two biggest bitcoin exchanges, Huobi and OKCoin, collectively invested around 1 billion yuan ($150 million) of idle client funds into wealth management productswhich are often high-yielding and riskyfor their own gain, state newswire Xinhua reported on Aug. 17 (link in Chinese), citing an investigation by the Peoples Bank of China. On the same day that the investigation was reported, bitcoin hit an all-time high of $4,500.

Yesterday (Aug. 21) Xinhua also published a rare commentary (link in Chinese) warning against bitcoins recent price surge. New things are developing so fast that regulations must keep pace, the article said, calling on the government to shut down dubious bitcoin exchanges and to never be soft on them.

Chinas central bank, fearing capital flight and money laundering, has tightened its grip on bitcoin trading in recent months. At the start of this year, the Peoples Bank of China launched an investigation into major bitcoin exchanges including Huobi and OKCoin, and issued warnings about possible risks on their platforms. In response, Huobi and OKCoin ended zero-fee trading and margin-trading services, which lets customers borrow yuan or bitcoin from the exchanges to boost their bets. The exchanges also suspended bitcoin withdrawals, and only reactivated them about two months ago. These moves ended Chinas dominance of the global bitcoin market, as measured by trading volume.

The Xinhua report didnt provide more details about the financial products Huobi and OKCoin invested in using those client funds. While bitcoin exchanges in the US and Europe typically hold client funds rather than use them, the same doesnt apply to their Chinese counterparts.

Huobi declined to comment. A representative for OKCoin didnt respond to a request for comment.

Employees of Beijing-based bitcoin exchanges and wallet apps, through which users send and receive bitcoin, told Quartz that their companies are now required to report to the central bank weekly about suspicious trading activities on their platforms. They are also anticipating that authorities will release new rules on bitcoin trading in Chinaa draft is now reportedly in the making. A 2013 central bank document contains some vague rules, such as requiring bitcoin exchanges to implement know your customer procedures, and abide by Chinas anti-money-laundering laws. The 2013 document also banned financial institutions and payment services from bitcoin-related businesses. That means Chinese banks are not allowed to serve as custodians and hold client money for bitcoin exchanges, a practice that is commonplace for Chinese stock brokers.

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China’s two biggest bitcoin exchanges helped themselves to $150 million in idle client funds – Quartz

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