Here are the ways users are moving their locked crypto-assets out of OKEx — at a discount

It has been nearly a month since the OKEx halted crypto-asset withdrawals, telling users the issue had arisen because the exchange was "out of touch" with one of its private key holders.

Although the OKEx has said the pause was temporary, anxious users with locked funds have begun been trying several different ways to get their assets back.

Whatever approach they choose, however, users must deal with a significant discount to the value of their locked assets. The Block explains the various methods below.

1. Over-the-counter fiat platform

OKEx, like Binance and Huobi, offers over-the-counter (OTC) fiat-to-crypto trading within its mobile or Web application.

An OKEx user, once they have completed the KYC process and linked their OKEx account with WeChat Pay, AliPay or a bank account, can go to a third-party OTC merchant on OKEx to buy or sell crypto-assets.

Once they have completed the fiat transactions via AliPay, WeChat Pay or bank wire, the OTC buyer and seller transfer their crypto assets between their OKEx accounts.

OKEx initially halted the fiat OTC tunnel as well after it announced on October 16 that crypto-assets withdrawal was suspended because a private key holder was "assisting police investigation" in China. But the exchange resumed the OTC trading function on October 21 for Chinese yuan, Vietnamese dong and Indian rupee.

However, immediately after OTC trading resumed, major crypto assets such as USDT and bitcoin were being quoted on OKEx at a roughly 10% discount compared with their fair market value trading against fiat currencies.

The discount rate on OKEx's OTC platform widened to more than 20% last week, according to real-time quotes seen by The Block, with one unit of USDT at one point trading for only 5.02 Chinese yuan. For context, the bid and ask for one USDT on Huobi or Binance's fiat OTC platforms center around 6.52 yuan while one USD is worth 6.6 Chinese yuan in foreign exchange.

The discount rate has since then narrowed to about 15%. As of press time, the bid and ask for one unit of USDT on OKEx's fiat OTC platform spreads between 5.29 and 5.30 yuan. A similar discount rate applies to locked bitcoin as well. 

One risk of selling crypto assets via OTC desks in China at the moment is the potential of getting one's bank accounts frozen by law enforcement amid a wider crackdown on money laundering in China. 

Since June this year, Chinese police have stepped up efforts to crack down on illegal economic activities like Ponzi schemes and online gambling sites that use crypto to launder proceeds via OTC merchants. A user selling crypto to Chinese yuan via OTC desks may be exposed to the risk of unknowingly receiving fiat money that is tainted. 

2. Internal transfers

OKEx has suspended on-chain crypto-asset withdrawals. But under the "asset withdrawal" feature on the exchange's mobile or web app, the "internal transfer" is still functional. That means users can send their locked crypto assets to another user's account at OKEx or other platforms affiliated with OKEx such as CoinAll, among others.

Some users have been taking advantage of this to look for people interested in trading other assets, for instance, USDT, for locked bitcoin or ether.

They typically negotiate the trades outside of OKEx and complete the USDT transactions, for example, via on-chain transactions or internal transfer on other exchanges. Then the buyer and the seller transfer the locked bitcoin or ether via OKEx’s internal transfers. The locked-up crypto assets won't leave OKEx's custodian wallets but the ownership would change according to OKEx's internal accounting. 

While there are no public data showing the prices of these trades, which are largely private, several traders told The Block that the discount could also be around 20%. This trade also adds counterparty risk.

3. Redeem later

Another method is swapping bitcoin locked at OKEx for an ERC-20 token that can either be traded immediately at a discount or redeemed at 1:1 once OKEx resumes withdrawals.

Zulu Republic, for instance, launched a ERC-20 token called NOBTC specifically for this purpose. OKEx users can apply to claim one unit of NOBTC for one bitcoin locked on the exchange. NOBTC can then be traded on decentralized exchanges such as Uniswap against WBTC, but also at a 20% discount at the current rate.

For instance, one WBTC is worth around 15,300 USDT at the moment on Uniswap while one WBTC trades for 1.25 NOBTC. That means one NOBTC is only worth 0.8 BTC, which is down from the 0.9 BTC that NOBTC was worth when it launched around October 22. 

According to the token's smart contract on Ethereum, the total supply thus far is 322 NOBT, which is worth about $4 million.

4. Long/short positions

The flip side of the discount being applied to locked OKEx funds is a potentially lucrative opportunity for traders willing to buy cryptos at a 20% discount and attempt to move those assets at a cost lower than 20%.

One particularly risky avenue that some traders have explored is to open a long or short position for their locked assets on OKEx and at the same time open an opposite position on a different venue for the same asset.

The strategy, in theory, is to lose money on the OKEx positions and gain profits on other platforms while ensuring the margins on OKEx don't get liquidated. But one trader told The Block that the cost of this strategy can also vary significantly.

If executed extremely carefully, and given some luck, the cost could be less than 20%, the trader said, but it could also easily reach 30% to 40%.

The obvious risk is that if the bet doesn't match the outcome then it would funnel even more money into one's locked account at OKEx.

"If you don't lose, you end up with a ton of capital on OKEx," said Sam Bankman-Fried, founder of derivatives exchange FTX. "I mean you lose value if you sell at a discount, but this strategy doesn't really solve it."