OKEx CEO released from police custody in China

By Shu Yao Kong | DeCrypt

Most people found out about the Mingxing “Star” Xu’s release from police custody in a curious way: The mysteriously detained OKEx CEO’s  “WeChat Steps,” an application within WeChat that tracks users’ walking steps, showed that he finally started walking again.

That he’s been released is great news both for OKEx, the exchange he founded,  and for the thousands of users whose funds were recently frozen by it , due to its apparent central point of failure—Xu himself.

This week’s da bing reflects on the OKEx saga and asks where the company might go next.

An innocent man

After Xu was out of custody, he made a WeChat announcement on November 20 that his adventure with the police had nothing to do with money laundering, which many had suspected was the most plausible explanation.  Instead, he said the problem was a company he had bought, the LEAP Holdings Group, in order to be listed on Hong Kong’s stock exchange. No further details were released, other than Xu’s Wechat status update, and his statement that he’s been innocent all along.

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OKEx started out as OKCoin, and was forced to rebrand after Chinese government cracked down on crypto exchanges on September 4,  2017. It moved its headquarters to Malta, though most of its customers are generally believed to have remained in China.

Hoping to further legitimize its presence, OKEx followed in Huobi’s steps and bought a controlling share in LEAP Holdings, a Hong Kong Stock Exchange-listed firm. The company, of course, has nothing to do with crypto but mainly deals with construction and waste management. This is known as a reverse takeover, or backdoor listing.  Xu managed to “whitewash” the OKEx exchange and rebranded the whole enterprise as OKG Technology Holdings, and become a legitimate “technology company,” listed on the public market.

Subsequently, to appear more friendly to Chinese regulators, Xu made himself available in major government meetings that focused on blockchain and pledged to invest millions in China’s new “blockchain-not-crypto” island, Hainan.

Leap Holdings, the construction company turned into a technology company, rebranded itself as OKC Holdings Corp., with Xu as its CEO; he  “resigned” as CEO of OKEx and claimed that the word decentralization is incongruent with the Party and the country’s image. He famously said  “I’d hand over my firm anytime the government wants.”

History is hard to erase

Yet, despite Xu’s eagerness to comply, the Chinese government did not hesitate to take him away when questions arose. It’s hard to imagine that there’s only one problem behind his arrest. It’s probably a combination of OKEx’s OTC trading business, which has been the center of the government’s recent crackdown, and the reverse takeover in 2018.

Why? For a reverse takeover to happen, Xu needed access to millions of dollars to purchase  LEAP’s stock. That money had to come from somewhere, and that remains a mystery at this point. Regardless, the government released him and for now seems satisfied with how he has arranged his affairs.

The road is still long and hard

This is hardly the end of OKex’s saga. It has to think of ways to protect itself from such incidents in the future. Many have argued that this case could trigger OKEx to follow Binance’s lead and “decentralize” itself and continue its crypto exchange operations offshore.

However, that’s easier said than done. For a business to succeed in China, it needs to  be close to its customers. Binance lost many customers to Huobi and OKEx after its exodus from China in 2017 and is believed to be struggling to win them back.

Xu could go even further on the path to being regulator friendly and focus on OKEx’s blockchain business. However, the blockchain business without crypto is a money-losing one and needs to be subsidized by the exchange business.

The OKEx saga might have calmed down now that the private keys have been “found.” But the impact continues to reverberate. OKEx will need to change the way it manages its keys and China operation, to regain its users’ trust, while walking a tightrope under government scrutiny.

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