OKEx’s Difficulty in Withdrawing and Breaking Through

Text | Essence

"After several days of sideways fluctuations, the bottoming out has been basically completed. Next, it's only a matter of time before the bulls start to exert their strength." Early in the morning on October 16, Andy, a veteran player in the cryptocurrency circle, talked in a WeChat group, and many people echoed him.

However, things don’t always go as planned, and just before their dream came true, they were hit head-on by a “black swan”.

At around 11 a.m., OKEx issued a "Notice on Suspending Withdrawals" stating that some private key holders are cooperating with the public security authorities in the investigation and are currently out of contact, making it impossible to complete the authorization. In order to maximize the interests of customers, OKEx has decided to suspend user withdrawals starting at [15:00] on October 16, 2020 (Hong Kong time).

As soon as this announcement was released, it quickly caused a stir in the WeChat group, with all kinds of rumors and even gossip flying everywhere. Then, it triggered a "domino effect" in the market, and the price of coins fell across the board. For those investors who entered the market with a bullish view, it was like a bolt from the blue, and they suffered huge losses in an instant.

In the past two days, the industry's speculation and concerns about OKEx have continued to ferment. Affected by this, many investors are eager to withdraw their money as soon as possible, and their words are full of helplessness and panic.

OKEx suspends withdrawals, Xu Mingxing is taken away by the police

"We issued the announcement only out of necessity, and its severity is still difficult to predict." An industry insider who declined to be named said that OKEx took the initiative to speak out, indicating that the matter could no longer be concealed.

According to Andy's recollection, at around 11 a.m. on the 16th, a link to the "Announcement on Suspension of Withdrawals" issued by OKEx appeared in the WeChat group.

The announcement stated that some of the private key holders of our company are cooperating with the public security authorities in the investigation and are currently out of contact, making it impossible to complete the authorization. According to Article 8.1 of the Terms of Service, "Service Changes and Interruptions", OKEx may change the service content and/or interrupt, suspend or terminate the service at any time or without prior notice. In addition, OKEx has decided to suspend user withdrawals starting from [15:00] on October 16, 2020 (Hong Kong time).

In view of this, a small number of sharp investors quickly withdrew their money. Later, due to the panic withdrawal behavior of users, OKEx changed its draft twice, first changing the withdrawal suspension time from 15:00 to 12:00, and later to 11:00. At the same time, Andy said that OKEx not only cancelled some orders that had already applied for withdrawal operations, but also closed the OTC channel.

OKEx issued the "Announcement on Suspending Withdrawals". Image source: OKEx

In this context, OKEx once topped the Weibo hot search list and became a hot topic. Zhu Rong, founder of Yinglian Capital, said on his Weibo that it was said that three people were arrested by OKEx this time for matters related to OTC business.

At 12:45 p.m. on the same day, OKEx CEO Jay Hao stated on his Weibo that please rest assured that the company, business, and platform operations are not affected. This is a personal issue of the private key manager. Withdrawals will be temporarily suspended. We will announce the follow-up arrangements to everyone as soon as possible. Please refer to the announcement for the final information.

OKEx CEO Jay Hao responded to user concerns on his Weibo. Image source: Jay Hao Weibo

At the same time, many media outlets published exclusive articles, causing strong repercussions.

At 17:00 on the same day, Caixin.com released an exclusive report titled "OKEx suspends withdrawals; founder Xu Mingxing has been taken away by police". The article stated that two sources close to OKEx told Caixin reporters that the person who "cooperated with the public security authorities in the investigation" in the announcement was Xu Mingxing, the founder of OKEx. One of the people also said that Xu Mingxing had been taken away by the police at least a week ago and had not appeared in the work group for many days. "In fact, the announcement clearly states what a private key manager is. Doesn't Xu have a private key?" Talking about the subsequent development of the platform, he said that Xu Mingxing is more meticulous in managing the company's financial expenditures. If he cannot authorize, it will affect various expenses and the authorization of withdrawals, "(unless) you find a connection to meet him in person to get authorization."

According to Mars Finance, an insider revealed that Xu Mingxing's being taken away by the police may have nothing to do with OKEx's digital asset trading services. At present, the two executives who were taken away with Xu Mingxing have been released on bail. The person said that the real reason why Xu Mingxing was taken away to assist in the investigation was related to OKEx's backdoor listing in Hong Kong last year. At that time, a sum of money for buying the shell was borrowed from an underground bank in Shanxi, and the bank has now been filed for investigation by the police. In response to many people comparing Xu Mingxing's incident with the previous incident in which RenrenBit founder Zhao Dong was taken away by the police to assist in the investigation, the person said, "The nature is completely different."

On October 18, OKLink officially issued an announcement stating that the company's board of directors was informed by legal counsel representing OKC Holdings Corporation on October 16, 2020 that Xu Mingxing is currently under investigation by Chinese public security authorities and that Xu Mingxing has not yet been contacted to verify the information.

From this, it can be seen that it is true that Xu Mingxing was taken away by the police, but there are still many mysteries to be solved as to why he was arrested.

OKB plummets, and panic continues to ferment

Once the announcement was issued, it had an immediate and huge impact on the cryptocurrency market, and its short-term market fluctuations caught many people in the cryptocurrency circle off guard.

OKB was the first to be affected. At 11:50 on the same day, OKB plummeted from around $5.7, and briefly touched $4.8 at 12:15, a drop of about 16%.

When the city gate is on fire, the fish in the pond will be affected. Under the negative background caused by OKEx, the entire cryptocurrency market fell on that day. Among them, BTC fell rapidly from $11,500 to $11,180 in a short period of time, a drop of about 2.8%; HT and BNB were also affected, falling by about 5%.

At the same time, there was a “liquidation” in the contract market. According to Coin data, within one hour after the announcement, a total of $88 million was liquidated across the entire network, of which $18.08 million was liquidated on the OKEx platform.

Subsequently, as the incident continued to ferment, panic sentiment was intensifying. According to CoinMarketCap data, OKB has been falling since its high of $5.9 on October 16. At 11:00 on October 18, OKB briefly hit $4, with the largest drop of 32% from its high on October 16.

OKB market trend chart since October 16. Data source: CoinMarketCap

"In the past two days, some investors were eager to cash out and sold their stocks." Eddie told Nuclear Finance APP that after OKEx closed the OTC channel, it became a game between panic users and greedy users. Nuclear Finance APP also noticed that various price news continued in the WeChat group, and it was difficult to distinguish the true from the false.

“I think this is where the fragility and uncertainty of the currency market lies,” Andy said with emotion.

Moreover, although OKEx has repeatedly reiterated that user assets are safe, some users are clearly not convinced. Eddie said that this is not enough to eliminate user panic, and in order to withdraw their digital assets from OKEx, some users have chosen to transfer at a discount, with USDT being sold at a 10% or even 20% discount.

However, some users are calm about completing the withdrawal in the future. On October 16, Glassnode tweeted that there are currently about 200,000 BTC stored in OKEx wallets, accounting for 1.1% of the BTC circulation, with a total value of about US$2.3 billion. Glassnode also stated that in the 48 hours before OKEx suspended withdrawals, a total of 10,000 BTC was transferred out in two batches.

There are about 200,000 BTC in the OKEx wallet. Data source: Glassnode

On the morning of October 18, Jiang Zhuoer, CEO of Litecoin Mining Pool, said on his Weibo that the OKEx suspension of withdrawals was a man-made disaster, not a natural disaster. He speculated that the private key problem was not that they could not, but that they were unwilling to do so. He also pointed out that all exchanges have the obligation to prove their private key management solutions.

Jiang Zhuoer expressed his views on the OKEx suspension of withdrawals. Image source: Jiang Zhuoer's Weibo

"Starting with OKEx users, all users should learn and master the knowledge related to private keys. If you don't want your assets to suddenly become uncollectible IOUs one day, please be sure to manage your own coins yourself," he said.

OKEx faces a big test as CEX and DEX come together

As the saying goes, one trick can get you everywhere. Among the global crypto asset exchanges, OKEx has made a lot of money by relying on its first-mover advantage in the contract field.

However, as many "latecomers" entered the market one after another, its market share was also eroded. In July 2020, the "2020 Q2 Digital Asset Derivatives Exchange Industry Research Report" released by TokenInsight showed that the trading volume of Huobi Futures and Binance Futures exceeded that of OKEx.

Comparison of perpetual contracts and delivery contracts trading volumes on the top five derivatives exchanges in Q2 2020. Data source: TokenInsight

It is worth noting that the contract is the key to OKEx's success, but it has also become a shackle. On September 28, TokenInsight released the "2020.09 Spot Trading Liquidity Report", which showed that Huobi showed the best liquidity in terms of trading performance from September 21 to 27, followed by Binance, and OKEx ranked third.

Exchange liquidity score ranking. Data source: TokenInsight

These two sets of data show that OKEx is at a disadvantage in the competition with its old rivals in both spot and contract trading.

After this incident, the industry is generally pessimistic about OKEx's competitiveness. Andy believes that the suspension of withdrawals on OKEx has undoubtedly triggered a crisis of trust among users. Currently, the suspension of withdrawals has left most users helpless, and once withdrawals are allowed, the assets stored in OKEx may be transferred out.

What he meant was that the suspension of withdrawals would inevitably lead to the loss of users and assets, which would damage the vitality of OKEx.

In addition, with the popularity of DeFi and DEX in the market this year, after the OKEx suspension of withdrawals, discussions about DEX and CEX have become popular again.

Some time ago, Bao Erye launched a vigorous "withdrawal campaign", calling on investors to withdraw their coins to wallets or DEX and short CEX holdings to fight against the human evil caused by centralization. On the day when OKEx suspended withdrawals, Bao Erye once again posted a video on his Weibo, saying that cryptocurrency users should withdraw their coins to wallets or DEX and leave CEX.

Bao Erye recommends users to withdraw their coins to a wallet or DEX. Image source: Bao Erye Weibo

At the same time, since September, CEX seems to have become a vulnerable group. From the founder of Bithumb being taken away by the South Korean police to assist in the investigation, to the Kucoin theft, to the Bitmex CTO being taken away by the US police, CEX's "thunderstorms" have been one after another.

"This time it's OKEx's turn." Andy said that with competitors such as Huobi and Binance in front and DEX dark horses such as Uniswap in the back, how to break out of the predicament will be a difficult problem facing OKEx.