OKEx Withdrawal Suspension: Market Infrastructure Vulnerabilities Questioned

This week, attention was focused on the drama that rocked the crypto markets, OKEx suspended cryptocurrency withdrawal while BitMEX owners were indicted. These events have made some to question the weakness in crypto market infrastructure.

October 22, 2020 | AtoZ Markets – OKEx, a major cryptocurrency exchange, has stopped withdrawing crypto assets. The exchange has been unable to contact one of its secret key holders because he is cooperating with a public security official investigation.

BitMEX owners were just charged with money laundering violations by the authorities a few weeks ago, as AtoZ Markets reported, and the situation over OKEx will draw market attention to the security of withdrawal procedures on major exchanges.

Fears of crypto exchanges suspending crypto withdrawal

When BitMEX was accused, it was feared that withdrawals on the exchange would be suspended. The withdrawal procedure required a certain number of approved signatories, one of whom was arrested. After all, the withdrawal was successful. However, the possibility of withdrawal suspension also overlaps with the case of OKEx, highlighting the peculiarity of the infrastructure of the crypto asset market.

Traditional market infrastructure companies, such as the stock market, are not immune to regulatory risk. In the stock market, customers do not deposit funds directly on the exchange, but through intermediaries. And even if the intermediary goes bankrupt, the funds are separated, so the intermediary's bank will return the funds to the customer.

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However, the crypto market is quite different. Customers' funds are usually held by the exchange and no bank can return the funds at the behest of the authorities.

The idea of decentralization and centralized exchange

This fact also highlights the irony that industries born with the idea of decentralization are dominated by centralized companies with centralized vulnerabilities. Exchanges generally have Multi-signature, or multisig procedures (like BitMEX, which could withdraw even if one of the signers was arrested), but not all exchanges.

Some traditional markets operate in less regulated areas, but unlike the crypto asset market, they do not dominate the market.

Jurisdiction is another issue. OKEx is based in Malta, a member state of the EU (European Union), but is headquartered in Hong Kong with offices in Singapore and San Francisco.

Chinese media reported that OKEx founder Star Xu was released in Shanghai after AtoZ Markets reported OKEx news. The exact charges remain unknown, and the company announced that the detention had nothing to do with OKEx. Rumors have surfaced that it's about money laundering, but if that's true, which jurisdiction should be accused? To what extent should Malta be involved in this issue?

Chinese media also reported that Mr. Shi's detention was also the result of investor disputes over forced liquidation, system crashes, and the company's response to them. The company claims it is unaware of such issues.

Complex corporate structure

Moreover, OKEx's corporate structure is extremely complex. Mr. Shi is the founder of China-based OKCoin and the CEO of OK Group. He also lives in San Francisco, according to his LinkedIn profile.

According to some reports, Mr. Shi was not detained by the police and sought protection from the police. He was detained two weeks ago but is now reportedly released. OKEx, a spin-out of the OK group, claims that Mr. Sea is no longer the representative. But if that is the case, the reason for the suspension of withdrawals cannot be explained.

By the time this article comes out, there will be news that clarifies the details of the detention and the withdrawal schedule. Or the situation may be more confusing. On the other hand, the company claims that its customers' funds are safe.

Immature but with a certain level of resilience

This situation highlights both the relatively immature crypto asset market and how well it has developed. The lack of customer protection on many exchanges reminded us that the market is still immature. Most of the market is still for individual investors and has grown without meeting the rigorous compliance and accountability demanded by institutional investors.

It also reminded me of how well the crypto asset market is developing in terms of resilience and adaptability. Bitcoin (BTC) prices initially plunged by more than 2% in response to the news. But it was less than the 4% drop after the news of the BitMEX accusation on October 1.

In the future, this will accelerate trends that have already begun. In other words, centralized exchanges are increasing their interest in DeFi (decentralized finance). According to Binance CEO Changpeng Zhao, DeFi is not a competitor to the centralized exchange, but a complement to it.

Opportunities to witness changes in market infrastructure are rare. And as is often said in the crypto-asset industry, a year of crypto assets is comparable to a decade of traditional finance.

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