At least one key executive from crypto exchange Huobi is now in custody with Chinese police due to an investigation related to the exchange’s over-the-counter (OTC) trading service, multiple sources have told CoinDesk, giving more credence to rumors that have been circulating on Chinese social media.
The two people, including COO Jiawei Zhu, were taken by the police in November and December 2020, respectively. Trading on the exchange is not affected because the police are investigating a case related to the Huobi’s separate OTC trading business, said these sources, which include former employees close to Huobi’s core team members and industry executives with direct knowledge about the matter.
Zhu was taken by local police during a company trip in the city of Zunyi in South China’s Guizhou province in November. He is currently still in custody, according to the sources.
CoinDesk first asked Huobi to confirm details in the story on Jan. 15. The exchange had not provided comments as of press time.
Zhu was assisting the police with an investigation, according to a report by Chinese publication The Paper, dated Nov. 30. The police did not take coercive measures to make Zhu cooperate, and the situation is similar to OKEx founder Star Xu’s case, the report indicated. No further details regarding Zhu’s detention in November are provided in the report.
The other person, who is one of the managers in charge of Huobi’s OTC trading services, was detained in December but was released recently by the police, according to one former employee.
It remains unclear whether the local police also put in custody the exchange’s co-founder, Lin Li, during the trip. Li might have been assisting the police with investigations, according to the sources. “Few people know Li’s whereabouts nowadays,” one source said.
Huobi Tech, the Hong Kong-based public company acquired by Li through a reverse takeover, has yet to file any disclosure related to the incident with the Hong Kong Exchange, indicating Li is not facing any criminal charges.
A number of Huobi’s current employees across different departments including trading, finance and legal have been interviewed by the police to assist the investigation. But the police have not been able to bring in more people for questioning because a large part of the exchange’s operations is decentralized, one former employee said.
“Three of their key people are in prison,” Su Zhu, CEO of Singapore-based crypto investment firm Three Arrows, said of the investigation about Huobi in a Dec. 12 podcast. Zhu later clarified to CoinDesk about his comment on the podcast saying that he meant people were in custody rather than in jail and he is not certain why they are in custody.
Huobi came on the police’s radar, in part, because of a particular investigation in 2018, which is also related to major exchange OKEx’s OTC trading services, one former employee said.
The current investigation appears to be focused on potential financial crimes conducted through the exchange’s OTC trading services, including online gambling, two former employees said.
The investigation is related to a particular case the Shanxi local police have been working on, three of the sources said. It was the local police from Shanxi province who were trying to find Huobi’s key executives while they were on the trip in Zunyi, according to two of the sources.
The investigation took place at a time when local police in Shanxi province were ratcheting up their anti-corruption campaign and tightening surveillance over financial transactions via a variety of platforms, according to the sources.
Despite Huobi’s fairly close relationship with the Chinese government, the exchange was not exempt from the investigation because the case is politically sensitive, the sources said.
As one of the largest crypto exchanges founded in China, Huobi has been working with the Chinese government to develop blockchain technology. It has jointly launched multiple blockchain initiatives with the Chinese government and has a Communist Party committee setup in Beijing Lianhuo Information Services Company in 2018, which is one of its subsidiaries based in the city.
Star Xu, the OKEx founder, was reportedly held in custody in October to assist the Chinese police with an investigation. The rumors that Huobi’s executives were taken by the police emerged on Chinese social media in November shortly after the trip. A Huobi spokesperson at the time denied the rumors in an interview with CoinDesk.
The Chinese police appear to have intensified their crackdown on crypto exchanges’ OTC trading services in the last year.
Zhao Dong, one of the most prominent OTC traders in China and co-founder of crypto lending platform RenrenBit, was taken by the Chinese police to assist its investigations in July 2020.
OTC trading has become one of the major channels for Chinese crypto investors and miners to find counterparties and process trade orders since the People’s Bank of China, which is the country’s central bank, started to clamp down on crypto trading on centralized exchanges in September 2017.
Such trading tends to be difficult for Chinese authorities to trace, and is less strict about Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) compliance, compared to trading on centralized exchanges.
Read More: Huobi Guarantees Normal Operations During OKEx’s Suspension of Crypto Withdrawals
One of the reasons Huobi has yet to inform its customers of any information related to the incident is that, unlike OKEx, the exchange’s private keys to its crypto wallets are held by multiple people. Thus, Huobi can still process withdrawals, the sources said.
OKEx, by contrast, informed its customers the exchange would be suspending withdrawals because the private key holder was assisting an investigation with the Chinese public security bureau and could not be reached at that moment. The exchange resumed withdrawals on Nov. 26, five weeks after the suspension.
Muyao Shen contributed reporting.