We at Executium follow our exchanges where we provide API connectivity very closely. We become concerned anytime there are troubles at a certain exchange, and we look to enlighten our users with some of our insight into such exchanges. We start with this most curious case of OKEX, a longtime running exchange, originally serving Mainland China customers mostly before pivoting in 2017.
Problem with OKex
October 16th, 2020 provided quite a nasty surprise to OKEX users, with the exchange announcing that all withdrawals were suspended for an indefinite period of time. It's noted that a keyholder for withdrawals was taken into police custody and so was unable to make such withdrawals (from likely Cold to Hot wallets). It is also implied that the person was also inaccessible.
By the same day, a major China news source, Caixin, provided a glimpse into this key holder, thought to be Star Xu, a co-founder of OKEX and also the main holder of a Hong Kong listed company OKG (1499.HK)*. As of right now, there is no public information as to the nature of his detention, but there is speculation that it is regarding the use of an underground bank in the Shanxi province to acquire funds in Hong Kong in order to buy the listed shell company.
It was noted that Mr. Xu was detained for over a week, and we assume that he was taken into custody immediately after the October golden week holidays around October 9th. It might make sense that around the 7th day after such detention, on the 16th, that the concern about the whereabouts and accessibility of Mr. Xu would be raised to warrant a gate placed on withdrawals. It does seem that hot wallets did account for 12% of assets anyways, so this likely was done pre-emptively against a run on hot wallet assets.
A crypto related writer, Colin Wu, has reported on some of the timing of this matter*, and provides some starting insights on the potential wait for Okex for the release to Mr. Xu. As per Chinese law, there is a particular mention of 37 days, and this is regarding procedural detention times. There is an initial holding period that can be requested by the police for 7 days for questioning and investigation of a person, and such period can be extended for another 30 days. Within this period, the police must present evidence to the prosecutor, so that the prosecutor can bring formal charges on the detainee.
Others have noted to us a far more speculative (less likely) but concerning scenario that may involve the entirety of Okex and the police may look to seize and unwind the company and its assets. This would be somewhat similar to a P2P lending site that has been seized by the authorities and then wound down. This would spell out to be a messy situation as wallet access is held in one jurisdiction while the entities supposedly in question would be in other jurisdictions. This, we feel, could have users in limbo over assets for years. You can find a visual of the timeline below:
While we don’t know for sure if it could take a long time to potentially withdraw assets from the exchange.
Converting Assets to Markers
How do I withdraw from OKex? It costs a spread, but you can use some OTC method in China, or use a wrapper through some providers.
Since the announcement, we have heard of OTC transactions in China quoting OKex assets (namely USDT) at around 80 to 85 cents on the dollar. This would mean that 0.8 USDT freely moving in the outside world could buy one up to 1 USDT stuck in OKEX.
CoinEx Exchange then started a wrapper, tethered to 1 USDT stuck in Okex*. This will be done through users still able to utilize the internal transfer functions within OKex. Where an internal transfer would be exchanged for an IOU type of asset on CoinEx and traded. Their tokens now trade nearly 86-87 cents on OK USDT. Poloniex has also just launched the same. However, to date, it seems that the CoinEx internal transfer address has now been disabled by OKex.
Outright Rescue Shot Down
Over the following week from October 19th, Tron Foundation attempted to allow TRX holders to send via internal transfer, TRX to a Tron related account and then offer TRX outside of OKEX. This would have at least for TRX, made users whole on TRX*. However, OKEX banned such transactions as well by Wednesday, October 21st.
Restart OTC P2P Trading and NOBTC/WBTC Uniswap Pool
OKEX has restarted P2P OTC trading for fiat on its platform, enabling users to trade P2P on their assets in OKEX, namely BTC, USDT and others. This has allowed at least where OTC platforms are widely used, a mechanism for risk transfer.
Furthermore, the week of October 19th-23rd saw the launch of NOBTC*, a wrapper for BTC assets within OKEX, with what appears to be a sound KYC program and some onboarding measures that gives comfort for the asset transfer process within OKex. Following this coin, a Uniswap Pool has been launched and is pooled with WBTC.
At this point, it is important to take note that there are facilities to price and transfer the non-withdrawal risk through a few means.
Pricing Asset Risk Transfer
So how much is an asset currently stuck in OKex worth? We believe the most accurate way is to examine the price one can sell USDT for CNY (Chinese Yuan in China) in OKex P2P OTC platform versus the price to buy USDT for CNY in the Huobi P2P OTC platform. One can divide the OKex price by the Huobi price in these OTC platforms to get a precise risk-adjusted value of OKex assets. Currently, this figure has moved between 75% to 93%. It is selling 1 USDT for example in OKex OTC P2P would get one between 0.75 to 0.93 USDT on another platform.
Of course, as a quick view, one can also look at the price of the OKU/USDT pair in CoinEx Exchange and when the NOBTC/WBTC pair in Uniswap attracts more liquidity and volume, it could also be a good gauge of this.
Forecasting and Estimating Asset Risk Transfers
Assuming that OKex’s withdrawal issues are caused by the detention of a keyholder, the risk is dependent on the release of the said person and the access to the equipment needed to enter the key.
We have estimated and built a timeline below as to the possible paths on the detention of this person. Currently, now until November 15th, 2020 is the most critical time for Mr. Xu and OKex as the authorities determine if or what penalties or procedures would be imposed. By or around this time, if there is a release (on bail or outright clearing) of Mr. Xu, this would most likely lead to full resumption of withdrawals on OKex. However, if the situation remains murky near this date, the chance of withdrawal resumption will become, in our opinion, significantly worse.
If the situation looks to be the more dire one, we assume that the fair estimate of withdrawal time (as this is only a guess) would be around 5 years, as it is dependent on keyholder release. Also, at some point if this were to occur, the exchange would likely have to socialize the withdrawable assets (around 12% it seems in hot wallets), and any recoverable assets (such as stable coins with issuer “centralized” controls). Easier recoverable assets we believe can be recovered within 1 year.
The “dire” case result value of assets, we would calculate to be the present value of assets, where CCR would be the cost of capital:
12% (Hot Wallet Value) / (1+CCR)^1
20% (Early Recoverable Coins – Our very rough guess) / (1+CCR)^1
68% (Unrecoverable Coins) / (1+CCR)^5
Given that the current deposit rates for USDT and BTC, for example, are around 10% and 5% according to NEXO rates*. Using an average of the rates, we have decided to use 7.5% as the CCR rate. Given theses parameters, we think the dire case value is around 77%.
We have also guessed some probabilities for a super dire case (0% recovery, 10% chance of occurrence and a 60% chance of withdrawal function ability within 30 days, and a 30% chance of the dire case above). By multiplying the probabilities and the recovery values, (10%*0%, 30%*77%, and 60%*100%) and adding them together, we guess that the current fair value of OKex assets to be around 83% - and is quite similar to market prices. Of course, as the situation changes (hopefully for the better), these recovery values and probabilities would need to be adjusted and thus the fair value could significantly change.
We hope that OKex can return to full operations quickly. However, given the current circumstances, we feel it would be beneficial for our users to give them some thought process to approach the non-withdrawal OKex asset pricing, and a way to dynamically adjust the model to reflect changes in both outcome values and probabilities.
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