The dangers of storing crypto on custodial platforms were once again brought into sharp relief as internal problems within the OKEx crypto exchange saw the company suspend withdrawals.
With about $2.3 billion in Bitcoin (BTC) stuck on OKEx vaults, the news of OKEx pausing withdrawals did cause some shockwaves in the market. Bitcoin has since recovered from the 3% decline suffered at the time and is now trading at the $11,970 price mark.
Paused withdrawals and temporary market turbulence
As previously reported by BeInCrypto, OKEx suspended withdrawals on its platform on Oct. 16. The sudden nature of the news consequently caused a significant Bitcoin price decline.
As reported, 30 minutes after the OKEx announcement, Bitcoin lost over $300 bottoming out at the $11,200 price mark. OKB — the OKEx native token — also suffered an even greater decline, tumbling from $6 to $4.22 amid the negative press generated by the news.
Despite the withdrawal suspension, reports began circulating on social media about large outflows from OKEx wallets. Tweeting on Oct. 16, Philip Gradwell, chief economist at on-chain analytics platform Chainalysis, clarified that those transactions had nothing to do with OKEx.
The exchange itself later debunked those rumors via a press release issued on its website, on Oct. 17. As part of its statement, OKEx assured users that funds remained safe and that all other non-withdrawals operations were still functioning normally.
In a statement shared with BeInCrypto, OKEx CEO Jay Hao explained:
“We understand that the suspension of withdrawals directly impacts our users’ experience on OKEx, and we wholeheartedly apologize for this. All other activities — including deposits, spot trading, derivatives, staking, etc. — remain unaffected, and we would like to provide our assurance to all our customers that their funds are safe.”
Indeed, on-chain monitoring bots flagged several high-value OKEx deposits despite the suspension of withdrawals. In two separate transactions, blockchain tracker Whale Alert announced almost 2,000 BTC inflow to OKEx.
Star Xu arrested
As part of its initial announcement, OKEx revealed that it had lost contact with one of its private key holders. BeInCrypto later reported a story by Chinese news agency Caixin that the police arrested Star Xu earlier in October.
In a conversation with BeInCrypto, an OKEx spokesperson declined to comment on the matter, adding:
“We are unable to disclose the nature of an ongoing investigation but would like to assure all OKEx users that their funds are safe and that all other functions on OKEx are unaffected. We understand that the temporary suspension of withdrawals will cause inconveniences, and we sincerely apologize. However, we feel that it is necessary in order to maintain our high standard of security for users’ funds on OKEx.”
Numerous unverified claims abound regarding the nature of Xu’s latest run-in with law enforcement in China. One theory claims the OKEx founder is involved in shadow banking and attempted illegal company listing on the Hong Kong Stock Exchange (HKSE). This rumor even states that Xu’s arrest is in connection with the detainment of other actors with ties to multiple Chinese cryptocurrency exchanges.
Xu’s arrest also highlights some questions about the exact nature of the OKEx leadership structure. Star Xu is the founder of OKCoin and OK Group. According to data from Chinese business registration, OKEx is run by the same holding company that operates OKCoin. However, reports on Chinese social media claim OKEx has distanced itself from Xu.
Proof of Keys
The inability of OKEx users to withdraw their funds apparently provides yet another disadvantage of storing cryptocurrency on exchanges. Despite the decentralized ethos of the crypto and blockchain industry, these platforms exhibit the vulnerabilities of centralized businesses in that they present a single point of failure.
“Not your keys, not your coins” is a popular refrain among many crypto industry participants. The logic is simple, coins held on custodial platforms can be easily confiscated or become inaccessible to the depositor.
Spot exchanges appear to offer even greater risks than their mainstream counterparts which belie the point of the novel tech being an improvement over the current financial architecture. Traditional bourses do not receive direct deposits from traders as these payments go through brokerage firms.
Brokers, by law, hold bank accounts that domicile user deposits. Thus, any regulatory action taken against a brokerage firm does not necessarily affect customer funds. The broker’s bank should be able to return all deposits made by the traders while the firm faces whatever issues it has with regulators or law enforcement.
Customers of platforms like the defunct Mt. Gox and QuadrigaCX are still waiting to see if they will ever recover their stolen funds. Back in September, KuCoin became the latest exchange to fall victim to hackers, with over $150 million stolen from the platform.
Every Jan. 3rd, the crypto community celebrates the Proof of Keys event on the anniversary of the Bitcoin Genesis block. On this day, cryptocurrency owners are advised to move their “coins” off centralized exchanges to more secure hardware wallets and other cold storage options.