Crypto Mogul Who Riled China Before Pushes the Envelope Again

Even by the to-the-moon standards of the crypto world, Justin Sun is known for making bold bets.

(Bloomberg) — Even by the to-the-moon standards of the crypto world, Justin Sun is known for making bold bets. 

There’s the 2017 initial coin offering in his native China, completed days before the government banned such deals. The $4.6 million he paid in 2019 for lunch with Warren Buffett, which irked authorities back home. And the stablecoin he launched last year, just as a similar instrument crashed in such spectacular fashion that it took down large swathes of the cryptoasset universe. 

So it’s perhaps no surprise that the 32-year-old’s attempt to turn around crypto exchange Huobi Global hinges on a potentially risky strategy. 

Sun says he doesn’t own any stock in the company, founded in China almost a decade ago, and his official title is “adviser” — yet he works at its main office in Singapore, sends mass memos to employees, represents it in media interviews and has used about $200 million of his own wealth to help prop it up so far this year. Bloomberg News reported in November that Sun allegedly paid about $1 billion through a Hong Kong-based asset manager for a controlling stake in Huobi. 

His plan for regaining market share after two dismal years is likewise the source of controversy, at least inside Huobi. At issue is Sun’s approach to catering to Chinese customers, 18 months after the country outlawed all trading in cryptocurrencies. 

The September 2021 ban on cryptocurrency trading within China’s borders was the culmination of a years-long crackdown on the sector. While the prohibition didn’t explicitly encompass Chinese citizens living abroad, it triggered seismic changes in the crypto industry. 

Huobi, founded in Beijing almost a decade ago, relocated much of its operations to Singapore, stopped signing up mainland Chinese clients and said it would cut off any existing ones shortly after the ban. It is headquartered in the Seychelles. 

About a year on, Sun is changing Huobi’s direction again, according to current and former workers. 

Some of Huobi’s hundreds of workers on the mainland say they’re concerned that insufficient controls to keep people in China from trading on the platform could antagonize local authorities and put them at risk. These people spoke on condition of anonymity to avoid reprisals from Huobi. The company says it complies with Chinese regulations and doesn’t serve clients in the country.  

For Sun, wooing Chinese customers represents a potentially lucrative way of turning the business around. Sun said in an interview with Bloomberg News in January that Huobi was losing roughly $10 million a month, and the company announced it would cut about a fifth of its workforce to help stem the bleeding. (Sun says he became an adviser to Huobi after amassing a large position in its native token, called HT.)

Throughout December and January, Huobi added thousands of Chinese citizens as customers per day on average, according to a person with direct knowledge of the matter who asked not to be identified discussing confidential information. There’s no information on whether these new customers were based inside or outside China. In late December, the majority of the roughly 80,000 clients it signed up daily did so using either a Chinese phone number or an email address used predominantly by Chinese nationals, the person said. 

Huobi said in a response to questions from Bloomberg News that it doesn’t operate in China. It added that Chinese Internet Protocol addresses are “strictly prohibited” from accessing the platform, and the new customers are “from anywhere but China.”

“Huobi has exited the Chinese market and barred Chinese users from signing up or logging in,” the company said.

Chinese regulators haven’t announced sanctions on any offshore exchange operators for signing up users based in China since the ban took effect. And people living in the country can also access other crypto trading venues with relative ease these days, for example by using virtual private networks to mask their location. 

Binance, one of Huobi’s two main rivals in China before the crackdown, didn’t answer questions from Bloomberg News about its policy on Chinese users or whether it has employees there, saying only that it doesn’t “operate in China.” The other one, OKX, declined to comment. The People’s Bank of China, which oversees crypto regulations, didn’t respond to a faxed request for comment. 

Blocking Users in China

Under previous majority owner Leon Li, Huobi used geo-location to ensure that people in China were cut off from the platform after the ban, according to three people who worked there at the time. Those safeguards have been dropped under Sun, two of the people said. Geo-location involves methods such as using GPS coordinates or the location of cell-phone towers to determine where a user is, in addition to IP addresses. 

Asked about whether it currently uses geo-location beyond banning Chinese IP addresses, Huobi said it employs “KYC verification to prevent China users” from accessing the platform, using the acronym for know-your-customer procedures.

The company’s main URL is blocked in China, and Huobi’s mobile application isn’t available on local app stores. However, using a slight variation of the URL on a web browser allows users on the mainland to download Huobi’s trading app. Asked about the URL variation, Huobi said only that it “doesn’t engage in crypto business in China.” 

The lure of potentially taking on Chinese traders is obvious: The nation of 1.4 billion people was once the world’s biggest market for Bitcoin trading, and dominated mining of the token. 

Huobi has gone further than competitors in making the platform available to Chinese crypto traders by enabling them on its mobile app to register under a Dominican nationality. Citizens of the eight other countries listed as barred from using Huobi in its user agreement aren’t immediately given the same option.  

Sun is no stranger to walking the regulatory tightrope in China. In 2017, while he was based there, his Tron Foundation raised about $70 million in an initial coin offering of the TRX token that was completed just days before Chinese authorities banned ICOs. Sun, believing he was “a fugitive,” hurriedly left China soon after the deal, The Verge reported in March last year, citing unidentified people familiar with the matter. In July 2019, Chinese news outlet Caixin said Sun had been placed on a “border control list” by the government amid allegations of illegal fundraising.

Huobi declined to comment on the two reports. Sun has previously said he worked with Chinese regulators to refund local TRX holders quickly after the ban took effect, and he’s called the Caixin story “completely inaccurate.”

The US Securities and Exchange Commission on March 22 sued Sun for allegedly violating securities rules, accusing him of breaking anti-fraud and market manipulation regulations. Sun tweeted at the time that the suit “lacks merit.” 

‘Anti-China Strategy’

He eventually settled in Geneva and in 2021 became permanent trade representative to the World Trade Organization for Grenada — a title that comes with diplomatic immunity — and adopted the honorific “his excellency” on his Twitter profile. Sun currently splits his time between Geneva, the Caribbean and Singapore, where he’s been working at Huobi’s office in the main financial district.

In the January interview with Bloomberg News, Sun blamed what he called Li’s “anti-China strategy” for Huobi’s rapid loss of market share. At the same time, he was vague on how he plans to reverse it, saying that Hong Kong — the Chinese enclave that’s increasingly embracing crypto — will be an initial focal point for Huobi’s expansion. Li couldn’t be reached for comment through the Hong Kong-listed company he controls. 

In a Bloomberg Television interview in early February, Sun said Huobi’s revenue may have tripled in January, adding that the company would probably be profitable in the first quarter. 

Sun says he believes China is likely to reverse its crypto ban after studying how the industry develops in Hong Kong, which has a separate legal and financial system. However, he signaled he’s content to wait until that happens before actively courting Chinese traders.

“Currently, our focus is not to directly go to Chinese users,” Sun said in January.  

Becoming Dominican

Interviews with 11 current and former employees who spoke on condition of anonymity paint a different picture. As of mid-February, at least six workers in Beijing had left or were in the process of leaving because they were concerned that the recent influx of Chinese clients could attract the attention of local authorities, given what they describe as a lack of safeguards to ensure those users aren’t based in China.

Even as Huobi’s top management and other workers relocated to Singapore or Hong Kong after China’s ban, many employees — mostly in areas like engineering and marketing — remained in the country, according to the people. Huobi declined to say how many workers it has in China.  

Overseas-based crypto platforms that sign up traders in China are probably not at legal risk from authorities — but any employees located on the mainland could be, along with the users themselves, according to Dominic Wai, a partner at ONC Lawyers in Hong Kong. 

One thing that distinguishes Huobi from rivals is an option, announced in November, that lets would-be users apply for a “digital identity” with the tiny island nation of Dominica. Those selecting China as citizenship when applying on Huobi’s app are told that because of “nationality restrictions,” they will be redirected to a page where they can apply for a Dominican digital identity, or DID, the people said. Once on-boarded, their profile on the app then shows them as Dominican citizens, according to the people. 

New Funding Route

The current and former employees interviewed for this story said they perceived the DID system as designed specifically to make it easier to attract Chinese clients trying to get around the crypto ban. A Jan. 4 internal memo from Sun written in Chinese, seen by Bloomberg News, said the introduction of DID was helping Huobi “mitigate regulatory risks,” without elaborating. Huobi said it’s “not aware” of the memo. 

“Huobi treats Chinese users in the same way it treats those from areas where it has no presence, and it never singles Chinese users out for KYC verification,” the company said in response to questions about DID. It also said DID has nothing to do with KYC procedures. 

Starting March 1, clients who sign up using DID have a new avenue for funding their Huobi accounts through Chinese banks like ICBC, according to marketing materials seen by Bloomberg News. The process involves a roundabout method of buying a so-called “digital collectible” — basically a Chinese version of nonfungible tokens that’s legal there — on online marketplace Yuanhou. In effect, the client buys a collectible designated by Huobi on Yuanhou, and Huobi then funds their trading account by the equivalent amount. 

Sun retweeted a Feb. 28 Twitter post advertising the yuan funding method from a person whose account identifies them as working at the exchange. Huobi said in response to questions about the initiative that it doesn’t issue the collectibles on Yuanhou and that it doesn’t support yuan-denominated trading. ICBC, China’s largest bank, didn’t respond to a request for comment. 

Some recent comments and actions by Sun and Huobi’s management indicate they’re aware of the risks. In January, human resources staffers told workers in China that their employment contracts would be terminated and asked them to sign consulting agreements with overseas Huobi entities instead, four people with direct knowledge of the matter said. Huobi also wanted to pay them in Tether’s stablecoin USDT instead of in yuan, they said. 

The people said one reason given for the changes was ensuring employees’ safety given the push to on-board Chinese customers. Local staffers pushed back and went so far as to start a group on popular chat app QQ decrying the proposal and discussing ways to fight it. 

After initially pausing the switch to consulting contracts and payment in crypto, Huobi has revived it and the changes were implemented in mid-February, two of the people said. Huobi didn’t comment on the matter, saying only that it “has been taking active measures to protect employees’ interest.” 

At a management meeting in October, Sun said employees in China should hang up Grenada flags in their offices along with his picture as a reminder of his diplomatic status, in case officials come knocking, according to a person who attended. While some attendees privately expressed surprise at Sun’s proposal after the meeting, he appeared to be serious, the person said, declining to be identified for fear of alienating Sun. (Huobi said the account of the meeting is “not true,” without elaborating.)

Sun never followed up on the suggestion, the person said.

–With assistance from Sarah Zheng, Kiuyan Wong and Ran Li.

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