Abstract : One and a half years later, the OTC market using direct bank transfer is still existent. Merchants and users are able to avoid restrictions by using clandestine methods without explicit reference to AliPay or WeChat, which, by its very nature, is a cat-and-mouse game between a yet to be perfected supervision system and interests of the underground industry chain.
On January 25, both AliPay and WeChat Pay sent notifications to Houbi, requesting Huobi to remove the OTC (Over the Counter) payment channels and cease the unlawful use of their trademarks.
ChainDD App logged on Huobi's online platform on January 31 and discovered that the formerly clearly visible logos of “UnionPay”, “AliPay” and “WeChat Pay” had been removed from Huobi's OTC trading desk. Instead, words were used, including “Bank cards”, “AliPaly” and “WeChat Pay”. By using these “uniquely designed payment nomenclature”, Huobi “cleverly” has cleverly avoided risks of impinging on commercial interests of other businesses.
(Huobi exchange web page before letters were sent by AliPay and WeChat Pay.)
(Huobi exchange web page after letters were sent by AliPay and WeChat Pay.)
Let's put how Huobi handled this aside for the moment. ChainDD App carried out an in-depth analysis of the incident of AliPay and WeChat Pay's requesting Huobi to remove all OCT payment channels and pursued with the question using relevant keywords: Why did they request the removal of OTC payment channels? What's the real picture of OTC trading? Why was Huobi singled out in this incident of third-party payment platforms' removal request? What other exchanges' payment channels have been impacted besides Huobi's?
The follow-up handling of the incident by exchanges and the supervision organization will further influence the direction of the whole digital currency market. It is a cat-and-mouse game between profitability and supervision and a battle between the law and the system.
A Carnival Yet to be Celebrated
One day before AliPay and WeChat Pay sent out their letters, CEO Li Lin of Huobi just dispatched an internal letter to all employees, listing Huobi Group's glories in the past year. A highly experienced digital currency practitioner told ChainDD App that “Huobi's OTC trading volume should account for the largest share of trading among all exchanges. My understanding is that it takes up 50% of the market, or maybe even more.”
Many people have expressed the same opinion that the main reason Huobi was “singled out” by AliPay and WeChat Pay is that its largest proportion of trading comes from its OTC trading.
When ChainDD App pursued with the question whether AliPay and WeChat Pay will send similar letters to other exchanges, AliPay chose to avoid the question and instead replied, “As far as I know, virtual currency trading is currently forbidden. Existing exchanges are circumventing the ban using clandestine methods such as asking users to upload pictures or adding friends on WeChat etc. Using a series of programs, exchanges direct users to AliPay or WeChat Pay web pages for payment, which is just personal transfer, same as Huobi's practice.”
An Elusive Trading Method
The operation of OTC on its own is not complicated. When BTC just emerged, there were no exchange platforms and all trading was OTC trading. Right now, volume of on exchange trading has dropped while OTC platform trading volume is setting new records again and again.
“OTC trading volume is roughly three or four times of on-exchange trading volume, or even far more. In reality, most likely, majority of real trading happens OTC.”
However, it is impossible to verify who are brokering OTC trading and how much profit they make since OTC trading is the most opaque trading method and even industry insiders shun from elaborating on the topic.
What's hidden behind these opaque transactions is rampant gray area operations such as transfer of assets and money laundering, another reason why OTC trading is thriving.
“Trading of several hundred or thousand BTCs is quite troublesome for on exchange trading. First of all, these transactions will have a strong impact on the market and the commissions will also increase. Second, for on exchange trading, account information of traders is in the hands of platforms, posing risks of information leaking to other people's hands, including those of the supervision departments,” said Wang Qi to ChainDD.
Wang Qi is an agent for OTC trading for years. He revealed often times, some “high status” individuals with assets worth hundreds of millions commission him to do OTC trading. For on exchange trading on centralized third party platforms, a large transaction may become public knowledge in the industry within one day. OTC trading on the contrary, has barely any impact.
Wang Qi doesn't think the incident of AliPay and WeChat's sending the letters to Huobi dealt a heavy blow. The major payment method for OTC transactions brokered by him is offline peer-to-peer bank card payment, “cash on delivery.”
He said frankly that it is inconvenient to use WeChat Pay and AliPay, mainly due to difficult cash withdrawal. The transfer channels are better though. However, in order to exchange for cash, payment has to be first transferred to another bank account, which is not so convenient as bank card payment.
“What will happen if Union Pay also closes large number of OTC accounts?” Wang Qi answered with a smile, “I will definitely not mark the transfer as OTC trading payment.”
A unsolved technological problem
This is an industry consensus: technologically, it is difficult to achieve payment separation for C to C transfers.
The so-called OTC trading doesn't have much creditable source to trace. After closing on account, a trader can easily use another account for trading.
“AliPay and WeChat's sending letters to Huobi is an act of public announcement that they will not not technologically support QR scanning on exchange platforms or tolerate exchange platforms' using of AliPay and WeChat's logos,” said Chen Lei, Secretary General of Peking University Blockchain Club.
However, currently, the “coin circle” with trading exchanges as the representatives relies heavily on fiat money.
In the harsh market condition, the significance of OTC payment channels to exchanges is not that simple.
An experienced digital currency practitioner told ChainDD App, “To exchanges, the nature of OTC trading is making profit from commissions. However, in a long term perspective, the reason why the overall digital currency market is low is insufficient fun. The priority of the people outside the coin circle planning digital currency speculation is how do digital currency and fiat money exchange. The people who can work this out will acquire more incremental fund and incremental users.”
Li Xiang, a former exchange employee expressed the same opinion. OTC trading itself will bring commission revenue to exchanges, which is direct revenue. However, indirect revenue generated is more important than direct revenue: a large number of customers and sizable business brought or retained by the OTC business module.
Therefore, although OTC business is not generating novel “benefits”, existing exchanges will still maintain their effort to make sure OTC trading stays stable. After all, OTC has played the role of a gateway for customer and fund influx.
A cat-and-mouse between profitability and supervision
At the level of state system, the attitudes are clear: trading between fiat money and digital currencies is forbidden in China.
However, after one and a half years, effectively, OTC market with direct bank transfers still exist, and merchants and users are able to avoid restrictions using clandestine methods without explicit reference to AliPay or WeChat. Even more, some exchanges developed substations with different domains (the so-called “sockpuppet” exchanges) in order to evade third-party payment organizations' scrutiny.
The nature of all these is a cat-and-mouse game between an imperfect supervision system and interests of an industry chain in the gray area.
ChainDD App has learned that OTC data released by exchanges is really quite curious since exchanges themselves play the roles of buyers and sellers to promote deals, which means, strictly speaking, OTC transactions by many exchanges are actually on exchange transactions.
On the other hand, OTC trading itself has many problems that need to be solved. Besides the possibility of money laundering and transfer of assets, the limited number of real finalized OTC transactions is another big problem, caused by asymmetric information on exchange platforms and a large number of fake traders.
“Less than 10% of all transactions handled by me get finalized and many traders are fake,” a digital currency investor told ChainDD App.
There are a large group of highly active Chinese who are engaged in OTC trading. They have a strong desire to facilitate the trading and thus, the demand for OTC trading appears strong.
However, the reality is the success rate of OTC trading is very low since there are too many middlemen associated with OTC trading. Sometimes a sell order can divide further into a dozen transactions, creating a fake transaction number. Furthermore, the commission for OTC trading is not transparent and many sellers share tangled interests with platform service providers and will promote the selling of packaged services.
Overall, domestically, existing digital currency trading supervision is relatively relaxed and exchanges need to impose self-discipline to safeguard users' interests for healthier development for themselves and the industry.