Arthur Hayes, CEO of Seychelles-based bitcoin futures exchange BitMEX, has come out with an explosive speculation about Chinese spot exchanges 0% fee model. Many people have wondered how they make money with this business model, and Arthur makes a strong case for how they logically must be investing customer deposits into speculative Chinese debt instruments. Read the latest BitMEX newsletter here.
Essentially it boils down to: these exchanges don't make money by charging 0% on trading fees, and make a pittance from withdrawal fees, so they have to be making a revenue stream somehow.
And since they are taking in loads of CNY deposits which they otherwise only sit on and credit numbers into their own database for customers to use to trade, then OKCoin, Houbi, and BTCC are taking those customer deposits (most of them at least) and making investments in liquid short-term Chinese debt. However, the safe deposits which pay 3-5% APY are not enough to cover the basic costs of the business. Thus, they must be investing in 10-20% higher yielding "Wealth Management Products" (WMPs), which carry significantly more repayment risk.
Arthur points out that the main cause of this is the disjointed Chinese credit markets and high demand for private credit. Because Chinese state owned enterprises have exclusive access to bank credit, small private companies have to use shady means to get financing, and institutions with excess cash invest in these WMPs and take on a bank-like role, aka shadow bank.
It's a very likely scenario and it's not necessarily a bad thing. As long as the speculative debt that the Chinese exchanges are investing the customer deposits in doesn't go bad, then the deposits of customers is safe, and the traders that are using balances reflecting these deposits are robust.
However, if things get messy in China, leading to problems with debt repayments, then it may spill over and affect the bitcoin market too. Remember, it was shadow banks at the heart of the 2007-09 financial crisis, Lehman Brothers is the most notorious shadow bank in history.
And since they are taking in loads of CNY deposits which they otherwise only sit on and credit numbers into their own database for customers to use to trade, then OKCoin, Houbi, and BTCC are taking those customer deposits (most of them at least) and making investments in liquid short-term Chinese debt. However, the safe deposits which pay 3-5% APY are not enough to cover the basic costs of the business. Thus, they must be investing in 10-20% higher yielding "Wealth Management Products" (WMPs), which carry significantly more repayment risk.
Arthur points out that the main cause of this is the disjointed Chinese credit markets and high demand for private credit. Because Chinese state owned enterprises have exclusive access to bank credit, small private companies have to use shady means to get financing, and institutions with excess cash invest in these WMPs and take on a bank-like role, aka shadow bank.
It's a very likely scenario and it's not necessarily a bad thing. As long as the speculative debt that the Chinese exchanges are investing the customer deposits in doesn't go bad, then the deposits of customers is safe, and the traders that are using balances reflecting these deposits are robust.
However, if things get messy in China, leading to problems with debt repayments, then it may spill over and affect the bitcoin market too. Remember, it was shadow banks at the heart of the 2007-09 financial crisis, Lehman Brothers is the most notorious shadow bank in history.
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