PBoC’s Bitcoin Withdrawal Suspension Serves as Reminder For Wallet Security
On February 9, Huobi and OKCoin, two of the largest bitcoin exchanges in China, officially suspended withdrawals for both bitcoin and Litecoin users in compliance with the demand of the People’s Bank of China (PBoC).
In late January, PBoC asked Huobi and OKCoin to overhaul their Anti-Money Laundering (AML) and Know Your Customer (KYC) systems to remain on par with industry standards. Local publications including Shanghai Observer reported that the PBoC warned OKCoin and Huobi about their AML and KYC systems, declaring that their trading platforms aren’t compliant with local regulations.
“Preliminary inspection on “OKCoin” and “Huobi” showed that these platforms provided margin trading which violated rules, resulting in abnormal price fluctuations in the market. During the inspection it has also been discovered that these platforms had not established sound anti-money laundering system according to regulations,” Shanghai Observer reported.
Within a month after the statement of PBoC and the report of local publications were released, OKCoin and Huobi were asked by the PBoC to halt all withdrawals until their AML and KYC systems are upgraded. Both exchanges told their users that the entire process would take at least one month and during that period, only RMB funds will be accessible by users.
Essentially, two of the largest bitcoin exchanges in China which control nearly 25 percent of the global bitcoin exchange market over the past seven days halted withdrawals and blocked accounts of users overnight, causing significant discomfort to users that are in urgent need of their funds.
Because the termination of withdrawal effectively disallows any users of the two trading platforms to withdraw their funds, until the systematic upgrade is completed, not a single user of bitcoin and Litecoin on OKCoin and Huobi will be able to liquefy their assets in the meantime.
While the incident was controversial and led the price of bitcoin to plunge in the main markets including the US, China, and Japan, it served as an important and necessary reminder to users that have been using bitcoin exchanges as a method of storing their bitcoin and user funds.
Bitcoin exchanges are centralized infrastructures laid upon the decentralized architecture of Bitcoin. Bitcoin balances and user funds on bitcoin exchanges are closer to an IOU, a signed document acknowledging a debt, rather than actual bitcoin. Operators of bitcoin exchanges can freely block an account, suspend a user and move user funds at their will.
Regardless of the intent of bitcoin exchanges, regulations and policies within the financial industry of most markets disallow operators to maintain a decentralized and non-custodial trading platform. To comply with local regulations, they are required to set up an exchange wherein they are in a position of authority over users.
There exist some bitcoin wallet platforms like South Korea’s Coinplug that are associated with bitcoin trading operations. These non-custodial wallets can also be suspended and blocked by operators at their will. For instance, an active member of the Seoul Bitcoin Meetup in South Korea had his account temporarily banned by Coinplug due to his old age. Operators of Coinplug blocked his account and suspended trading until the user agreed to a face-to-face meeting with the company.
To avoid these incidents wherein operators take control of user funds and block user accounts at their will, all bitcoin users must utilize trading platforms solely to trade the cryptocurrency and non-custodial bitcoin wallet platforms to store bitcoin. Wallet service providers like Blockchain do not have control over private keys of users. Thus, they cannot block user accounts even under regulatory pressure.
Hardware wallets manufactured by prominent companies including Trezor, Ledger and KeepKey are viable alternatives to bitcoin exchanges and online wallet platforms to store bitcoin. Also, many individuals are coming up with inventive ways to store bitcoin in cold storage, such as James Hogan and Jacob Lyles’ open-source cold storage method.