Chinese Cryptocurrency Exchanges Invests Customer Funds in WMPs
A major risk of holding cryptocurrency on an exchange is the exchange is hacked. In China, the risk is more MF Global: the exchange takes your idle yuan (not cryptocurrency) and invests it in WMPs.
“I lost $10,000 investing in Bitcoin!”
“Oh, did the price crash? Was your account hacked?”
“No, the exchange took my yuan and bought an WMP that failed. My Bitcoin is fine!”
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 has been solved.
China’s two biggest bitcoin exchanges, Huobi and OKCoin, collectively invested around 1 billion yuan ($150 million) of idle client funds into “wealth management products“—which are often high-yielding and risky—for their own gain, state newswire Xinhua reported on Aug. 17 (link in Chinese), citing an investigation by the People’s 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 bitcoin’s 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.