Chinese Bitcoin Exchanges Under Scrutiny for Diversion of Funds into WMPs

China's two biggest Bitcoin exchanges, Huobi and OKCoin, are currently facing scrutiny by the People’s Bank of China for the alleged diversion of idle client funds into wealth-management products (WMP), according to a report from Xinhua, the official Chinese new agency.

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Until recently, Chinese Bitcoin exchanges did not charge transaction fees from their clients, which were a major source of revenue for other crypto exchanges around the world. Instead, the exchanges would invest idle funds in client accounts into WMPs to generate revenue. An investigation by the People's Bank of China found that Huobi and OKCoin collectively invested 1 billion yuan ($150 million) into WMPs.

In response to the investigation, Huobi and OKCoin have stopped free Bitcoin trading and margin trading services. The exchange also stopped Bitcoin withdrawals, only to reactivate them some two months back.

Star Xu, CEO of OKCoin, commented on the news report: "We are, of course, prohibited from using our client’s fund for our own gain, and do not do so." He also added: "We at OKCoin have a strict policy of placing idle client funds into lower-risk banking products. This policy is in keeping with general practices in the banking and securities industry, for both the purpose of safeguarding clients funds, as well as assuring proper record keeping and segregation of funds. We refute allegations to the contrary as patently false."

WMPs are issued by banks and are a key tool to attract funds for lenders. They usually offer 3 to 5 percent returns against 1.5 percent for one-year bank deposits. They do not have any specific investment objectives and invest in bonds and industries. These are mostly off-balance sheet products and are not principal-guaranteed. They are considered to be high risk to capital.

As per Regulation , use of idle funds in client accounts is prohibited. But it looks like Chinese Bitcoin exchanges do not necessarily follow these regulations. Recently, China's central bank has tightened its grip around Bitcoin trading, fearing capital flight and money laundering. This move has ended China's dominance in the global Bitcoin market, which is measured by trading volume.