A Crypto Mogul Who Ripped Off China Pushes The Envelope Again

Justin Sun is known for making bold bets, even by the standards of the crypto world. 

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He paid $4.6 million for a lunch with Warren Buffett in 2019 which irked authorities in his native country, which was completed days before the government banned such deals. That's the first initial coin offering he completed in China in 2017 which was completed before the government banned such deals. In addition, he launched a stablecoin last year and that instrument crashed with spectacular consequences, affecting large chunks of the cryptoasset market in a similar manner. 

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The fact that the 32-year-old is trying to turn around Huobi Global – which is among the world's largest crypto exchanges – involves the implementation of a strategy that might be considered risky. 

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The company, founded nearly a decade ago in China, was founded by Sun, and Sun says he doesn’t own any stocks or shares in the company — but he works at its main office in Singapore, sends out memos to all employees, participates in media interviews, and has used about $200 million of his own wealth to support its growth. As reported by Trade Algo, Sun allegedly paid a Hong Kong-based asset manager about $1 billion for a controlling stake in Huobi, which was about to be announced in November. 

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Similarly, the strategy that Sun has planned to regain marketshare after two dismal years is likewise at the center of controversy at Huobi, at least within the company. The issue is the way the company has approached Chinese customers, 18 months after Chinese authorities banned the trade in cryptocurrencies. 

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Cryptocurrency Market Struggles in the New Year

Despite being the culmination of an eight-year crackdown on cryptocurrency trading within China, the September 2021 ban on trading cryptocurrency within China's borders marked the start of a transitional period for the cryptocurrency sector. Though the ban did not specifically cover Chinese citizens living overseas, it triggered an influx of seismic changes. 

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Huobi, a seychelles-based company founded nearly a decade ago, relocated its most important operations to Singapore and stopped doing business with mainland Chinese nationals shortly after the ban was imposed. Huobi is headquartered in Beijing and has a service desk in Singapore. 

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The direction Huobi will take about a year from now, according to employees and ex-employees, will also change. 

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The hundreds of Huobi workers on the mainland are concerned that not enough controls are in place to prevent Chinese people from trading on the platform and may cause them to be antagonized by local authorities. According to Huobi, it meets Chinese regulatory requirements and does not serve clients in China. These people spoke on condition of anonymity to avoid reprisals.  

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It appears that Sun is attempting to turn the business around by wooing Chinese customers. According to Sun, Huobi lost roughly $10 million every month as a result of a loss, and the company announced in January that it would cut approximately half of its workforce as a result. When Sun grew up with Huobi, he was a big investor in the company's native token, the HT. As Sun explains, after amassing a large amount of HT, he decided to become an adviser.

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A person with direct knowledge of the matter who requested not to be identified when discussing confidential information said that in December and January, Huobi added thousands of Chinese citizens to its customer base on an average every single day. The details of these new customers have not been revealed, nor does any information exist on whether they are Chinese or not. It was mainly Chinese nationals using Chinese phone numbers or email addresses in late December, according to the person who spoke with me. 

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According to Huobi, when asked about its operations in China, the company replied that it did not operate in China. It further stated that a Chinese IP address is "strictly prohibited" from accessing the platform, and that the company's new users are "from everywhere but China."

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There have been no sign-ups or log-ins on Huobi, which means that it has left the Chinese market. Huobi also announced that it had stopped accepting Chinese users.

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As of today, Chinese regulators have not announced any sanctions on offshore exchanges that have signed up users located in China after the ban took effect. As a matter of fact, people living in these countries can also have relatively easy access to other crypto trading venues these days, for example by using a virtual private network that masks their location while they trade. 

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Among Huobi's two main competitors in China before the crackdown, Binance declined to respond to Trade Algo' questions about the company's policy on Chinese users or whether it has employees in China, stating only that it does not "operate in China." The other company, OKX, declined to comment. In response to a faxed request for comment, the People's Bank of China declined to comment. 

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Chinese Users Are Being Blocked

According to three people who worked at Huobi at that time, the platform used geo-location under previous majority owner Leon Li to ensure that people in China were blocked from accessing it after the ban. In addition to IP addresses, geo-location involves determining a user's location using methods such as GPS coordinates and cell phone towers. Under Sun, two of those people said, those safeguards have been dropped. 

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Asked whether Huobi has employed geo-location in addition to blocking Chinese IP addresses, Huobi replied that it does, in order to prevent Chinese users from accessing the platform, it uses a banking system called KYC (Know Your Customer) verification. That is short for know your customer.

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It is not possible for Huobi to access its main website, huobi.com, in China, and Huobi's mobile app is not available in the local app store either. A slight variation of the Huobi.com URL, however, can be used to download Huobi's trading application on the mainland using a web browser. In response to a question about the URL variation, Huobi stated that the company does not conduct crypto business in China. 

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In an obvious way, the lure of possible competition with Chinese traders is understandable. The nation of 1.4 billion people was once the largest trading and mining market for Bitcoin, and dominated the market for digital coins. 

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The pressure is on

It is Huobi's intention to go a little further than competitors in making the platform available to Chinese crypto traders by making it possible for them to register under a Dominican nationality on its mobile application. Huobi's user agreement lists eight other countries as being prohibited from using its services, but those citizens are not immediately given the same option.  

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As Sun is not unfamiliar with the regulatory environment in China, he has walked a tight rope before. In 2017, his Tron Foundation raised a total of $70 million in the sale of its TRX token in an initial coin offering that was conducted just days before Chinese authorities banned initial coin offerings. The Verge reported in March last year, citing unidentified sources familiar with the matter, that Sun, believing he was a fugitive, fled China shortly after the deal. Sun was placed on a "border control list" by the Chinese government amid accusations that he has been raising money illegally for years, according to Chinese news outlet Caixin in July 2019.

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According to the Caixin report, Sun was informed by Chinese regulators that TRX holders within their country would be refunded immediately after the ban took effect, and he has previously warned Caixin that the report was inaccurate.

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There is a lawsuit pending against Sun on March 22 by the US Securities and Exchange Commission accusing him of breaking anti-fraud and market manipulation regulations that have been enacted by the government. Sun claimed that the suit "lacks merit" at the time. 

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The so-called "Anti-China Strategy"

Then in 2021, he became permanent trade representative for Grenada to the World Trade Organization — a title that comes with diplomatic immunity — and adopted a Twitter alias that calls him "his excellency" since he subsequently settled in Geneva. In addition to working at Huobi's office in the main financial district of Singapore, Sun currently splits his time between Geneva, the Caribbean, and Geneva.

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It was Sun's belief in January that Li's "anti-China strategy" had led to Huobi's rapid loss of market share, which he blamed on the rapid loss of market share he had caused Huobi. Although he did not provide any specific information about how he was planning to reverse this, he suggested that Hong Kong – the Chinese enclave that’s increasingly embracing crypto – would serve as the initial focal point for Huobi’s expansion. The Hong Kong-listed company that Li controls could not be reached for comment. 

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Trade Algo interviewed Sun in early February, and he said that Huobi's revenue may have tripled during the month of January, and he said that in the first quarter of 2018, the company will likely be profitable the company will certainly be profitable. 

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As a result of studying Hong Kong, which is a separate legal and financial system from China, Sun believes that China is likely to reverse its crypto bans. However, he signals that he is willing to wait until that happens before establishing closer ties with Chinese cryptocurrency traders.

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As Sun told the New York Times in January, "the focus of our business at the moment is not on directly targeting Chinese users.  

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Become a Dominican citizen by following these steps

There is a different view to be had when a number of former and current employees speak on condition of anonymity. In Beijing, at least six employees had left or were in the process of leaving by mid-February, since they were concerned about the recent influx of Chinese clients that may attract local authorities, since they perceive that there are no safeguards in place to ensure that those users are not based in China as a result of the recent influx of Chinese users.

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Huobi declined to say how many of its Chinese employees remained in the country despite the fact that many of its top managers and other employees relocated to Singapore or Hong Kong following China's ban. Huobi declined to specify how many of its Chinese employees are in China.  

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There is probably no legal risk to offshore cryptocurrency platforms that sign up traders in China from the mainland - but it is possible for them to introduce themselves to Chinese authorities as well as any of their employees who may be resident there, according to Dominic Wai, of ONC Lawyers in Hong Kong. 

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As one of Huobi's distinctive features that sets it apart from its rivals, one of the options Huobi announced in November is that users can apply for an identity card through the tiny Caribbean island nation of Dominica. Huobi's app warns applicants who select China as their citizenship that they must obtain a Dominican digital identity, or DID, since there are "nationality restrictions." They then redirect them to a page where they can register for one. According to the people who have made use of this app, once they are onboarded, their profile appears on the app showing that they are Dominican citizens. 

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We have found a new way to fund our projects

As the current and former employees of the company interviewed for this story have said, the DID system seemed designed to facilitate the process of attracting Chinese clients who were trying to circumvent the cryptocurrency ban. In an internal memo seen by Trade Algo, written in Chinese, Sun claimed that DID was helping Huobi “mitigate regulatory risks” by reducing regulatory risks. Huobi said it was not aware of that memo. 

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The company stated in response to questions about DID that it didn't target Chinese users for KYC verification as it does other users from areas in which it does not have a presence, and it never singles out Chinese users for KYC verification. In addition, the company stressed that DID has nothing to do with KYC procedures.