How the ICO Boom Saved China's Crypto Exchanges

By Eva Xiao

When China cracked down on token-based crowdfunding and cryptocurrency trading last September, it looked like Beijing had dealt a death blow to China's booming crypto trade.

The timing appeared to be terrible. The price of Bitcoin had just surpassed US $4,000 -- about a 60% jump from a month earlier. Initial coin offerings (ICOs), where blockchain startups issue and sell their own tokens, were also on fire. By the end of last August, an estimated US$1.7 billion had already been raised from ICOs in 2017, surpassing early stage venture capital funding for internet companies. Blockchain was on the rise, and now China was about to be left behind. Or so it seemed.


Fast forward eight months. Today, Chinese exchanges are killing it. Okex and Huobi Pro are regularly ranked in the top five exchanges worldwide, according to their exchange volume (though those numbers have been disputed). Binance, whose core team used to be based in mainland China, is often ranked as number one. In the last few days, all three exchanges have turned over more than a US $1 billion in trade volume.

Part of this is due to the fact that Okex, Huobi Pro and Binance are all crypto-to-crypto exchanges, meaning that they avoid dollars, euros and other fiat currencies, and deal exclusively in digital currencies. "The crypto-to-crypto exchanges have certainly ballooned in the past couple of years," says Kiran Nagaraj, who leads consulting firm KPMG’s cryptocurrency services.

Compared to fiat-to-cryptocurrency exchanges, purely crypto exchanges "have the advantage of being subject to a different regulatory standard, at least right now, in a number of different countries," Nagaraj tells Longhash.

China's drastic shutdown of yuan-based cryptocurrency trading forced exchanges like Okcoin (the parent company of Okex) and Huobi to switch to crypto-to-crypto and focus on the overseas market. Since halting its domestic exchange, for instance, Huobi has since set up offices in Singapore, Japan, South Korea, Hong Kong, and the US. While the Chinese yuan accounted for 80% of Bitcoin trades in 2015, according to a report by Goldman Sachs, today it accounts for less than one percent.

But several Chinese cryptocurrency exchanges have made a strong comeback, thanks in part to the altcoin market. Even as China put the brakes on cryptocurrency, the global appetite for altcoins was exploding. Altcoins presented a lucrative new market for crypto-to-crypto exchanges. In particular, ICOs were launching hundreds of new tokens into creation, driving demand for crypto-to-crypto exchanges where users can exchange one token for another. Previously, crypto-to-crypto exchanges like US-based Poloniex, which was founded in 2014, had a limited variety of tokens to choose from. Now, the diversity of altcoins is overwhelming.

Even before Chinese regulators cracked down, exchanges in the country were eyeing the booming altcoin market. By the end of July last year, both Huobi and Binance had launched their crypto-exclusive trading sites.

"Everyone is out there trying to find the next Bitcoin, the next Ethereum, or the next Litecoin," says Nagaraj. "And those other altcoins don't show up on some of the [fiat-to-crypto exchanges] until they become a little bit bigger. From that perspective, there's definitely a reason for people to bounce around between fiat-to-crypto and crypto-to-crypto exchanges."


More than tokens

To compete with exchanges from other countries, Chinese platforms have had to bolster their edge in other ways, not just offer users a large token portfolio. While the growing number of blockchain assets is "an unprecedented opportunity for investors in secondary markets," says Wu Xing, senior director at Huobi Pro, it also comes with "high risks." Exchange platforms have to be discerning - "the key is to pick the best projects." US-based exchange Bittrex, for instance, has removed a number of tokens for failing to comply with regulatory standards, suspicious trading activity, user complaints, and other reasons.

From the point of view of cryptocurrency traders, security and liquidity are also important factors to consider. "If there's a particular token that I'd want to purchase, I'd want to get it at an exchange with high liquidity. These exchanges typically have better price stability," says Alan Seng, a Singapore-based blockchain enthusiast who trades cryptocurrencies on a weekly basis.

That being said, "a good way to attract investors is to list new tokens fast," he says, especially for users who might not have had the chance to participate in a token's crowdsale or ICO.

Huobi Pro, Okex, and Binance are also building out a broader repertoire of services and products, such as blockchain incubators, over-the-counter trading services, cryptocurrency wallets, and decentralized exchanges, where users transact directly with one another on the blockchain, instead of using a centralized exchange as an escrow. Indeed, as companies like Huobi and Okcoin aim to increase their global market share, the race to build the stickiest "ecosystem" is on.

All three exchanges have also launched their own tokens as an incentive program for users. For instance, Binance users that pay with BNB, or Binance Coin, enjoy reduced transaction fees. Huobi Pro, which launched its own eponymous Huobi Token (HT) in January, has followed Binance's lead with up to 50 percent discounts on trading fees for users who pay with Huobi Tokens.

These tokens can also be used to facilitate transactions in other businesses. For instance, Okex's OKB token, which is also used for trading discounts, can serve as the payment token for the company's decentralized exchange, which hasn't been launched yet.

However, dominating the global exchange market could boil down to companies that are able to cooperate with local regulators and adapt to different markets. Crypto-to-crypto exchanges are just one piece of the puzzle. The fiat-to-crypto market, as regulated as it is, is key for more mainstream adoption, according to Nagaraj.

"Fiat-to-crypto exchanges certainly have their space and they will absolutely persist," he says. The market capitalization of cryptocurrencies is dwarfed by that of gold, real estate, and other traditional stores of value, and crypto-to-crypto exchanges still need a way to convert fiat into digital currencies. "If you think about the biggest markets in the world with maximum capital flows, they're all pretty heavily regulated.”

In other words, for Chinese exchanges to continue to grow, they may eventually have to comply with more regulation.

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