China Exchanges Used Client Funds for Own Gains, Report Claims

Crime, FinTech, Investing, News, Regulation | August 22, 2017 By:

A Chinese news agency has reported that bitcoin exchanges Huobi and OKCoin invested client funds into risky financial instruments for their own gain.

The state-owned Xinhua Agency newswire reported late last week that Huobi and OKCoin collectively put a billion yuan (about $150 million US) in idle client funds into high-yielding but risky wealth management products. The dealings were uncovered after an investigation by the People’s Bank of China, the central bank for the country. The PBoC is expected to issue new regulations governing exchanges soon, with the report on client funds possibly prepping the public for what could be major changes.

The Xinhua revelation clears up one mystery – how some Chinese bitcoin exchanges were making money if they didn’t charge user transaction fees. Both Huobi and OKCoin were formerly fee-free, but began charging fees at the beginning of the year, when the Chinese government first started cracking down on exchanges as part of its ongoing battle against capital leaving the county.

The People’s Bank has been investigating major bitcoin exchanges in the country and issuing warnings on their risks, with some exchanges raided by authorities, which termed the visits “spot checks” seeking to determine any “rule violations.”

Reports indicated the People’s Bank of China probe visited Huobi, OKCoin and BTCC. The scope of the investigation at the time included allegations of money laundering, market manipulation and unauthorized financing. The Central Bank did not reveal at that point whether any such violations have been detected.

Fortune reported that the PBoC’s Shanghai division visited BTCC.

“The checks focused on whether the firm was operating out of its business scope, whether it was launching unauthorized financing, payment, forex business or other related businesses, whether it was involved in market manipulation, anti-money laundering or (carried) fund security risks,” according to Fortune, quoting the PBOC. Similar statements were issued by the PBOC branch in Beijing.

BTCC CEO Bobby Lee has issued a statement to Reuters that confirmed the visit.  “We think we are in compliance with all the current rules and regulations of running a Bitcoin exchange in China,” he told Reuters. “I wouldn’t call it an investigation. I think they are working closely with us to learn more about our business model and the bitcoin exchange industry.”

The Xinhua report did not specify which financial products the exchanges were investing in using client funds. Both exchanges did not comment on the events and are still operating.