Some Context
“Huobi” was founded in 2013 by Li Lin in Beijing, China and quickly became a leading crypto asset exchange not only in China but internationally. The exchange operated without any real regulatory hurdles to overcome, by 2018 the exchange known at this time as “Huobi Global Limited (Seychelles)” and still controlled by Li Lin. In 2018 Li Lin made a takeover bid and bought all the shares in a Hong Kong stock exchange listed company (Stock Code 1611).
Now headquartered in the Hong Kong SAR and serving Chinese mainland users under the “Huobi” brand, the exchange continued to expand taking advantage of the increase in popularity of crypto assets during the Covid-19 lockdowns. After eight years of unchallenged growth in China, regulatory bodies decided in 2021 to ban all crypto currency transactions, making them illegal on mainland China.
Li Lin did not want to leave China with his family, he decided to comply with Chinese regulators and remove millions of users from the platform living in mainland China by December 31, 2021 and focus on gaining more international users. Rumors appear that Li Lin is quietly looking for a buyer of his stake in “Huobi”.
The influence of Sun Yuchen (Justin)
Sun Yuchen has been a controversial figure in the blockchain industry for years. With the suspicious timing of the Wave Field TRON Initial Coin Offering (ICO) being completed and TRON tokens issued the day before the Chinese ICO ban took effect on September 4, 2017, raising $70 million.
The alleged misappropriation of Poloniex user crypto assets finding their way into Sun Yuchen’s custody and rumors that Sun Yuchen was the investor using About Capital Management (HK) Co. as an acquisition vehicle for the sale of “Huobi". It is unclear exactly how much control Sun Yuchen has over the exchange, but his unique style can be seen since the sale of “Huobi” in October 2022.
Dominica Digital Identity
An announcement was made on November 29, 2022, that “Huobi” had partnered with TRON and the Commonwealth of Dominica to issue the Dominica Digital Identities, the launch of this service went live on April 28, 2023.
This announcement was seen as an attempt by “Huobi” to start targeting mainland China users again and avoid China’s crypto asset trading ban, this was documented in Chinese media in early January 2023. Given Sun Yuchen’s history of avoiding regulation and fondness for small island nations it would be logical that he had influence over the decision to implement the Dominica Digital Identity.
This bold new strategy caused Li Lin to file a trademark dispute lawsuit against the exchange on June 21, 2023 claiming Huobi Global Limited (Seychelles) had no permission to use the trademark. Later in August 2023 rumors emerged that “Huobi” executives had been detained in China. These events ultimately lead to the rebranding of “Huobi” to “HTX”.
Why is any of this indicative of a mixing service?
It isn’t, but it shows there is a certain unwillingness to work with regulators around the world. This is problematic for the industry’s development. With an exchange of this size, you would expect it to have a mandatory KYC in place and adequate measures to prevent criminal activity, this isn’t the case at “HTX”. In fact, all that is needed to sign up is an email address, you can even sign up using the TOR onion browser to obfuscate the user’s identity even further.
Granted you cannot withdraw fiat currency without uploading KYC documents, but you do get a daily crypto asset withdrawal limit of 5 BTC, which depending on the value of BTC can be a substantial amount in fiat currency. You can also create as many of these accounts as you like, from anywhere in the world including sanctioned jurisdictions. This is where the value of using “HTX” as a crypto asset mixing service is found, as it is regarded as an exchange which claims to hold regulatory licenses in six jurisdictions, thus giving the illusion that all crypto assets that are withdrawn from the exchange have no ties to illicit activity.
The “HTX” crypto asset mixing example
The time came to put this to the test, set up a new email account using TOR and the darknet email service mail2tor[.]com, this was a simple task. Then signed up to the “HTX” platform using the newly created email address.
The registration confirmation email was in the inbox, and was ready to start trading (mixing).
The goal was simple, deposit Bitcoin on the Bitcoin network into the “HTX” account, swap the Bitcoin for Tether USD and withdraw the Tether USD on the Tron blockchain to an external address as “clean” tokens. This would conduct mixing and chain hopping anonymously. Chain hopping is usually done by using various crypto asset bridging platforms like Avalanche Bridge.
Depositing the Bitcoin was simple as expected.
Trading the Bitcoin for Tether USD using a market order, the purchaser of the Bitcoin would assume “HTX” had done the relevant due diligence on the maker of the market order to avoid transacting with any illicit or sanctioned entities.
Withdrawing the Tether USD to the Tron blockchain was processed without any verification needed, at this point all that was provided to “HTX” is an email address that has no personally identifiable information associated with it.
With the objective completed, it is difficult to see where, if at all, compliance procedures were implemented to combat money laundering and terrorist financing using the FATF’s Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers. TRON (TRX) and the exchange “HTX” have an almost symbiotic relationship with each other which was concerning even before the recent report by the United Nations Office on Drugs and Crime where it claims that Tether USD on the TRON blockchain has become the preferred choice for crypto asset money launderers:
“USDT on the TRON blockchain has become a preferred choice for crypto money launderers in East and Southeast Asia due to its stability and the ease, anonymity, and low fees of its transactions. Law enforcement and financial intelligence authorities in the region have reported USDT among the most popular cryptocurrencies used by organized crime groups in the region, particularly those involved in the regional cyberfraud industry, demonstrated by a surging volume of cases and unauthorized online gambling and cryptocurrency exchange platforms offering underground USDT-based services.”
What does it all mean?
As shown above it is easy for anyone in the world to access the “HTX” trading platform, exchange crypto assets across blockchains and move them off the platform without even giving a name to “HTX”. The process has been completed using three accounts created the same way as above to ensure that the process remained consistent with each new account created on the "HTX" platform. From intelligence gathering and blockchain analysis active money launderers were found that use the method above to move crypto assets through the “HTX” platform obfuscating the flow of illicitly gained assets for any investigating law enforcement agency.
It is likely that “HTX” enables, and perhaps even encourages illicit actors due to the seemingly nonexistent compliance protocols for users that do not want to disclose their identities. The trading platform “HTX” is enabled by big names in the industry either through partnerships or services provided and or supplied. Obfuscation has become the main goal of the decision makers, there is no public company structure available after 2022. New financial gateways for users in jurisdictions that “HTX” is banned from operating in are being explored with the addition of the Dominica Digital Identity. All of which suggest avoidance of regulation and compliance responsibilities.
Deciding if “HTX” is a mixing service or not is dependent on what you would consider a “mixer”. Can the trading platform be used anonymously to obfuscate the flow of crypto assets? Yes, with the bonus of being able to move crypto assets across blockchains and when withdrawn those crypto assets will look like they came from an exchange.
The key point is the anonymity of the process which prevents illicit actors from being pursued. Unfortunately, any service that allows for the anonymous movement of crypto assets with a high value will always be abused by illicit actors to conduct their activities. It is important for the service provider, in this case “HTX” to prevent the abuse of its services and hold those that do abuse the service accountable.
There is no segregation of user crypto assets or users by jurisdiction, which means that individuals in the EU, UK and US who have completed the KYC process will inevitably be trading with illicit actors from sanctioned jurisdiction or entities, darknet marketplace vendors, terrorist organizations and all other types of organized crime groups. This is somewhat similar to the charges from US agencies that Binance pleaded guilty to on November 21, 2023.
