Chinese police vs. Web3, blockchain centralization continues: Asia Express

Chinese police is on the hunt for Web3 cofounders — and their money. Gov't lead blockchain efforts continue in the Mainland. Meanwhile, South Korea mandates insurance protection for crypto exchanges.

by Zhiyuan Sun 5 min August 1, 2023
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According to one insider, Chinese police are after Web3 co-founders, not to serve and protect, but for their wallets. 

In a recent blog post, Wuwei Liang, the brother of imprisoned CoinXP co-founder Liang Liang, warned that under no circumstances should executives hand over their private keys when detained by Chinese police. Responding to news of Multichain co-founder Jun Zhao’s arrest, he wrote: 

“As long as the police see the money and get the money, they will make up their minds, charge the case with crimes, and confiscate the assets. If you lose the secret key, you will lose everything, you will lose your life and wealth, and you will be imprisoned wrongly.”

Earlier in July, China’s largest cross-chain protocol used by the likes of Fantom and Binance alike, with over $10 billion in total value locked at its peak, closed down for good after developers disclosed that its CEO, Jun Zhao, was arrested by Chinese police in May. Zhao allegedly held control of all protocol MPC nodes, access to private keys and investors’ funds.

Without Zhao, the protocol and users’ assets were as good as gone. While cryptocurrency exchanges, mining and initial coin offerings are illegal in China, outright ownership of cryptocurrencies isn’t illegal, and there is currently a gray area regarding crypto projects outside of prohibited categories.

But Liang says that “profit-driven law enforcement projects are fundamentally after money,” raising the example of CoinXP’s ongoing case. In 2018, Liang Liang founded the CoinXP blockchain and its ecosystem DApp Hubdex after raising 13,000 Ether (around $30 million) from an initial coin offering. 

On April 14, 2021, Liang and other developers were arrested by Chinese police on charges of “illegal use of information networks.” Hubdex was subsequently shut down by authorities shortly after, while the co-founder’s charges were later upgraded to “illegal solicitation of public funds” and “multi-level marketing.” (which carries the possibility of confiscation of all assets if proven guilty) As Liang’s brother Wuwei Liang says: 

“The virtual currency involved in the case was transferred to other addresses by the Wuxi Public Security Bureau, and 20 Bitcoins disappeared during the transfer process and have not been recovered so far.”

The trial has been ongoing since the last week of July; however, multiple sources seem to confirm that things aren’t going that well. First, the presiding judge reportedly said, “The presumption of innocence is not a correct principle of law [in our country]” when questioned by the defense attorney on the opening day. Second, Liang’s defense attorney Zhongwei Li was reportedly “kidnapped” by police at the entrance to the Wuxi People’s Court and held for over five hours without due cause before being released. Meanwhile, one bystander was reportedly detained for 10 days in jail just for, well, listening in to public court procedures. 

A Wuxi Police ad warning against unauthorized solicitations of public funds.
A Wuxi Police ad warning against unauthorized solicitations of public funds. (Wuxi Public Security Bureau)

That said, users may expect the worst for Zhao in the ongoing Multichain saga. As one anonymous individual in the Multichain Telegram put it: 

“It’s become a total supply chain. Third-party tracking companies will supply clues to the police as long as the [Web3] co-founder is in China and has money to take them into custody.”

The East is red

Believe it or not, China is actually quite bullish on the outlook of blockchain technology, so long as it is under the control of the central government. 

On July 31, the city of Shanghai laid out a two-year plan for its municipal advancement of blockchain infrastructure. Government officials envision that by 2025, Shanghai’s “Pujiang Digital Chain” will officially launch. It combines a computation layer, a layer for public services and a layer for government affairs. Developers wrote: 

In the case of container shipping MaaS, [the Pujiang Digital Chain] will explore one-stop customs declaration and release inquiry services, promote the popularization of electronic bills of lading, carry out on-chain storage of related data such as ships, crew, risk management and transportation environment, and provide services for shipping insurance pricing, insurance claims, and liability determination. 

In addition to regional initiatives, Chinese President Xi Jinping has emphasized the need to develop central bank digital currencies for local currency trade settlements between “friendly” countries such as Russia and Iran. In cities such as Kunming, local communist party officials must also incubate at least 20 blockchain-specific applications and encourage the development of at least 10 “strongly competitive” blockchain firms by the end of 2024.

Chinese president Xi Jinping during the Shanghai Cooperation Summit (CCTV)
Chinese President Xi during the Shanghai Cooperation Summit. (CCTV)

Korean regulators mandate insurance for crypto exchanges

On July 27, the Korean Federation of Banks announced that crypto exchanges signing contracts with banks for withdrawals and deposits using real-name customer ID must accumulate a reserve of 3 billion won ($2.35 million) to fulfill liabilities to users in events such as hacking or computer failure. The maximum reserve amount is set to 30% of the daily average of deposits, with a compensation limit of 20 billion won ($15.7 million).

The changes are scheduled to take effect in early September. South Korea has been plagued by issues surrounding digital asset operators for much of this year, ranging from scandals at crypto exchange Bithumb to the collapse of crypto lending firms Haru Invest and Delio. 

First regulated Malaysian digital assets fund launches 

Halogen Capital has become the first digital assets fund regulated by the Securities Commission Malaysia (SCM). 

Local news outlet fintechnews.my reported on July 26 that Halogen had been granted a full Capital Markets Services license to manage cryptocurrencies, nonfungible tokens and tokenized assets. The firm has since rolled out Shariah (Islamic) law-compliant Bitcoin and Ethereum funds. Customers’ assets are, by law, segregated between accounts owned by SCM trustees.

The Halogen Capital investment team (Halogen)
The Halogen Capital investment team. (Halogen)

Earlier this month, fund managers Hann Liew and Lucas Ooi announced they would be stepping down from their executive roles in fintech firm Jirnexu to focus on building Halogen Capital. “It’s time to get building again. Will share more in posts to come…” the founders said at the time. Digital asset firms are required to register with SCM before operating in the country, with companies such as Huobi being reprimanded for failing to do so. 

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Zhiyuan Sun

Zhiyuan Sun is a journalist at Cointelegraph focusing on technology-related news. He has several years of experience writing for major financial media outlets such as The Motley Fool, Nasdaq.com and Seeking Alpha.