Justin Sun hopes to restructure Huobi through the "China Plan"

Justin Sun is trying to revive the operations of digital asset exchange Huobi through a digital citizenship program launched in Dominica, and hopes to shift Huobi's business focus back to China.

Sun is pushing Huobi to win Chinese customers in Hong Kong, even though the mainland’s ban on cryptocurrency trading has prevented Huobi from accepting business from China.

Before China cracked down on the crypto industry, Huobi, founded in 2013, was one of the world's largest cryptocurrency exchanges, accounting for about 19% of global cryptocurrency trading volume in 2020, according to data provider CoinGecko . In 2022, Huobi's market share fell to 4% after it closed the accounts of its Chinese customers.

Other crypto exchanges based in China have either shut down or successfully pivoted to other markets following China’s crackdown on the crypto industry. Binance, the world’s largest cryptocurrency exchange, was founded in China in 2017 and quickly moved out of the country as regulatory pressure mounted. But Huobi has worked hard to adjust its business model following China’s crackdown.

Huobi doesn’t have any “C-level” executive titles, such as CEO or CFO, and it describes Sun, 32, as an advisor who is part of a team that provides strategic guidance to the company. But Sun has effectively assumed leadership of the company since late last year, according to people familiar with the matter.

Sun’s plan to increase Huobi’s revenue by circumventing China’s cryptocurrency trading restrictions, according to people familiar with the matter, is to partner with Dominica, a small island nation willing to grant so-called digital citizenship even to people who have never been there.

On Huobi's app, new users who select China as their nationality when verifying their personal information are prompted to apply for Dominican digital citizenship. People familiar with the program said that if Chinese users register for Dominican digital citizenship, they will be able to trade on the Huobi platform. Customers from other countries can also apply, but Huobi will not automatically instruct them to do so.

A Hu obi spokesman said the company "uses KYC verification to prevent Chinese users from doing this kind of thing," referring to the "know your customer" process that requires checking a customer's identity. But two Chinese citizens said they used Dominican digital identities to conduct transactions on the platform.

The company said in November that the partnership with the Dominican Republic, a country of about 72,500 people, was "the first important step in Huobi's global development strategy." Huobi will begin accepting applications for the program next month.

Justin Sun said in an interview that "the Caribbean strategy is definitely one of Huobi's most important priorities. We want to promote this concept of nationality freedom."

Ben Charoenwong, assistant professor of finance at the National University of Singapore, said the Dominican digital citizenship program could help Chinese citizens who want to trade cryptocurrencies evade Chinese regulators. “If you don’t present yourself as a Chinese citizen, it’s easier to trade cryptocurrencies because you can avoid the Chinese financial system,” he said.

Some users in China have been able to bypass crypto trading restrictions by accessing exchanges through virtual private networks that hide their true location and trading in peer-to-peer markets. Huobi’s efforts to win business in China go further than other exchanges, offering a more convenient way for Chinese customers to trade.

Sun has been clear about the company’s intention to attract Chinese customers. He called Huobi a “Chinese” exchange on Twitter and said on Feb. 20 that the exchange had listed a stablecoin pegged one-to-one to the offshore yuan, TCNH, a more freely traded version of the Chinese currency. The stablecoin runs on Tron, a blockchain company founded by Sun, and as of March, there were about 10 million in circulation.

Hong Kong is working to lure back digital asset companies after its reputation as a business hub was tarnished by strict Covid-19 policies. Huobi plans to set up its Asian headquarters in Hong Kong, Sun said in an interview. Huobi is applying for a license in Hong Kong and intends to set up a team there within the next six months, he said. Sun said he sees Hong Kong as a "testing area" for the rest of China and believes that Hong Kong cannot advance its friendly cryptocurrency policies without the approval of the central government in Beijing.

In response to questions about cryptocurrencies, China’s central bank said its attitude toward cryptocurrency-related activities has not changed, and that foreign exchanges are strictly prohibited from providing trading and other services to domestic people. The People’s Bank of China said it will “promptly regulate and control domestic and foreign trading platforms that provide virtual currency-related services to Chinese residents.”

U.S. authorities have stepped up their crackdown on the cryptocurrency industry. The Securities and Exchange Commission ( SEC ) said on March 22 that it had filed a civil lawsuit against Justin Sun and three of his companies, alleging that they offered two unregistered crypto tokens and manipulated the price of one of the tokens. Sun tweeted that the SEC's allegations "lacked substantive basis." When asked for comment, a spokesperson for Huobi referred the Wall Street Journal to Sun's tweet. Huobi's native token HT plunged earlier this month and fell again after Sun was charged.

Huobi's strategic shift comes with a series of aggressive cost cuts, in line with trends across the crypto industry. Huobi said in January that it planned to lay off about a fifth of its employees, a move Sun said was intended to help the company "prepare for a longer bear market." When Sun took over Huobi, the company employed at least 1,600 people, a number that had fallen to about 1,200 by mid-January, and layoffs are still ongoing, according to people familiar with the matter.

In December and January, Huobi informed its mainland Chinese staff through video calls and face-to-face meetings that full-time employees would be converted to freelance consulting contracts, with corresponding salaries reduced and their insurance and social security cuts, according to people familiar with the matter, which Huobi denied.

Hong Kong-based investment firm About Capital Management (HK) Co. took over Huobi from founder Leon Li, a former programmer at Oracle Corp., in October. Terms of the acquisition were not disclosed publicly.

Justin Sun is known for paying $4.6 million in a charity auction to have dinner with billionaire investor Warren Buffett. He was born in Qinghai Province in western China and attended Peking University before earning a master's degree from the University of Pennsylvania. He was appointed Ambassador and Permanent Representative of Grenada to the World Trade Organization in December 2021. He often uses the title "Your Excellency" or HE when referring to himself, and Huobi.com describes him as a Chinese-Grenada diplomat.

“We will be able to increase the profitability and operational efficiency of the exchange by reducing staff,” Sun said during a company-wide address in a chat group on Jan. 4.

He wrote in Chinese. "This is my 87th day at Huobi. During these three months, the new management team and I have been doing our best. In the past 87 days, we have worked until after 2 a.m. every day, hoping to gain recognition from all Huobi users and employees." Sun Yuchen signed his congratulatory message as "Your Excellency Sun Yuchen" and used his Chinese name.