Ben Zhou, Bybit’s CEO, said residents of mainland China can access the crypto exchange with a VPN and bypass restrictions from China’s government while stressing that it will not accept the Yuan national currency.

The company blocks IP addresses from mainland China but began allowing overseas Chinese users to sign up for the exchange back in June. As reported by the South China Morning Post, Zhou stated that Bybit wouldn’t trade yuan but noted that mainland residents can use a VPN. He claimed the risks of allowing mainland Chinese residents to trade on their platform were “acceptable.”

Zhou additionally stated, “What the Chinese government dislikes the most about crypto is that it can facilitate capital outflow, so we won’t touch this red line.” China currently bans cryptocurrency trading, but Hong Kong allows it through licensed crypto exchanges.

Zhou also claimed that Bybit is planning to reapply for that Hong Kong license at the start of 2025 and intends to find a new compliance officer. This, he said, wouldn’t do much in terms of bringing in business from Hong Kong but rather act as a “confidence booster.”

Bybit’s VPN stance contrasts Coinbase

Coinbase recently received social media backlash for its tougher stance on VPNs after a user claimed that using a VPN and sending $25,000 in USDC locked their account. 

Coinbase’s product designer said, “Attackers always use VPNs, so our risk models take that as a negative sign even if you’re legitimately using your own account.”

When asked to comment on their VPN stance, Coinbase told Protos, “VPNs are a valuable tool for privacy, and simply using one won’t result in your account being flagged.” 

Read more: Polymarket bans French users but still can’t stop VPNs

However, it conceded VPNs can “trigger additional security reviews” when combined with “unusual activity—like a login from a new, unrecognized device.”

“This is a common practice across financial institutions to help prevent account takeover (ATO) attacks,” Coinbase said, and it recommended that users utilize a Passkey or a Physical Security Key for 2-factor authentication instead.

Bybit is currently the second largest crypto exchange in terms of 24-hour volume, according to Coingecko. Bybit is beaten only by Binance and remains larger than Coinbase.

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Rumors of problems with Ethena’s $2.5 billion so-called stablecoin USDe have been fueled this week by reports that giant exchange ByBit — where Ethena trades some of its assets — is experiencing financial problems, possibly even insolvency.

Some claim that the rumors were attributable to a dashboard error at Arkham while others believed them to be true. Observers noted a small amount of exchange outflows relative to ByBit’s total assets.

ByBit itself has since refuted any claims of insolvency.

Update: ByBit issued the following statement after the original publication of this article:

In regards to insolvency rumors, these claims are entirely unfounded and lack any factual basis. Such misinformation may come from individuals who do not meet Bybit’s stringent compliance requirements. Bybit remains a stable and secure platform for all clients’ assets. Our commitment to transparency and security is unwavering. Official and on-chain data confirm our consistent stability, with improvements noted over the past week. We lead the industry in transparency by verifying a total of 40 crypto tokens in our proof of reserves – the highest in the industry.

Over the last seven days, neither the price of Ethena’s proprietary token ENA nor its stablecoin USDe have declined in price.

For its part, Ethena claims to hold all of its collateral off-exchange at third-party custodians like Copper or Cobo. Although it clears trades via crypto exchanges, it claims to hold the collateral backing its positions, including ByBit perpetual futures, off-exchange.

Give us money, we trade it, earn 37% APY

Ethena’s marketing pitch is simple. It accepts capital, executes trades on various exchanges using this capital, and pays out a stratospheric yield above 37%. It also incentivizes extra deposits with an airdrop of its proprietary token ENA — a classic crypto marketing ploy.

Its hook is only slightly new. Ethena crafted a scheme that would take Ethereum’s 3.4% and add complexity and lots of leverage. It would also supposedly allow investors to earn the staking yield from Ethereum without subjecting themselves to the price fluctuations of ETH, via its USDe.

Ethena claimed to accomplish this feat by establishing a leveraged delta-neutral ETH trade. Its leaders would also control the private keys and exchange login credentials to hold most of the protocol’s assets. It would call itself the ‘internet bond,’ its proprietary token a ‘synthetic dollar,’ and its unsustainable 37% APY an ‘internet native yield.’

Delta neutrality is a way to invest so that the value of a portfolio usually doesn’t decrease when small changes occur in the value of the underlying asset. A trader hedges ‘delta,’ a greek financial term meaning ‘sensitivity to changes in the price of the underlying,’ by buying an equal amount of long and short positions simultaneously.

In a perfect world, this delta neutrality allows a trader to preserve the USD value of a position, regardless of whether the price of an asset like ETH declines. If ETH declines, the short position gains in value to compensate.

No free lunch on Wall Street

Of course, there’s no free lunch in finance, and holding delta neutrality in order to capture Ethereum’s staking yield carries significant risks. The two most important risks are Ethena leadership’s control of keys and funds, as well as the risk of crypto exchanges going under.

Ethena has both risks in spades. By its founding backer’s own admission, “Ethena is not decentralized, nor is it trying to be.”

Ethena backs each USDe, which is supposed to be worth $1, with two major assets. First, it buys a staked ETH (stETH) position from LidoDAO, Ethereum’s largest liquid staking protocol. Second, it collateralizes perpetual futures short contracts on crypto exchanges, including ByBit. Lido pays out most of Ethereum’s staking yield to Ethena, which Ethena then eventually leverages and passes along to USDe tokenholders who stake their USDe.

With the USD price of ETH hedged against a decline thanks to its perp shorts, as long as management and custodians don’t steal or lose the money, Ethena hopefully stays delta-neutral.

Ethena aimed to differentiate itself from failed stablecoins like Charles Hoskinson’s BitUSD, Mark Cuban’s Iron Titanium, Mark Lamb’s flexUSD, Huobi’s HUSD, or Do Kwon’s Terra and Basis Cash. Its marketing campaign worked. It rebranded itself away from ‘algorithmic’ stablecoin — a tarnished word after the multi-billion dollar collapse of Do Kwon’s algorithmic stablecoin Terra — and instead claims that USDe is a ‘synthetic dollar.’

Synthetic is, of course, different from algorithmic.

Arthur Hayes is Ethena’s biggest cheerleader

Arthur Hayes, who made millions by trading against his own customers at BitMEX and later pleaded guilty to federal crimes, is the main cheerleader for Ethena. Hayes predicts that USDe
“}[=, which has a market capitalization of $2.6 billion today, will one day grow larger than its $111 billion stablecoin competitor, Tether (USDT). 

“Combining physical staked ETH plus a short ETH/USD perp swap position creates a high-yielding synthetic USD,” Hayes wrote glowingly. He also assured his fanbase that despite similar, nose bleeding-high interest rates above 30% advertised for both USDe and UST during their respective launch phases, “USDe generates yield in a completely different fashion than UST.”

Read more: Two years after blowing up his own fund, Zhu Su offers advice to $2B Ethena

Ethena investors won’t be critics

Ethena also gained significant support from crypto influencers who might have otherwise criticized the project. Influencers like Cobie, Andrew Kang, Dovey Wan, and the founders of three DeFi protocols are backers. Ethena’s own fundraise was financially supported by the crypto exchanges that process trades using its collateral.

On Ethena’s own cap table are ByBit, Deribit, OKX Ventures, Binance Labs, Gemini, and Kraken. Meltem Demirors likened USDe’s 37% yield to USDC’s 5% yield, as though the two are comparable. The founders of two competing stablecoins, Synthetix and Frax, are backers of Ethena.

Delphi Digital — which invested in the now-collapsed Terra Luna scheme, heavily broadcast Terra to wealthy New York traders, and charges over $5,000 per year for so-called research — employed an author who owns Ethena assets USDe and ENA to write a glowing, nine-chapter report.

Coincidentally, that Delphi author concluded that Ethena is “democratizing access to the delta-neutral basis trade and allowing it to seamlessly compose with the rest of DeFi.” Incredibly, Delphi alluded to a Bloomberg article about “the closest thing to a risk-free bet in the cryptocurrency market” as though Bloomberg analysts were referencing Ethena’s delta-neutral trade. They were not.

Edit 14:19 UTC, May 24: Added statement in third paragraph received from ByBit after press.

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Dubai-based derivatives exchange Bybit and 11 of its products have been listed as ‘suspicious’ by Hong Kong’s market regulator.

The country’s Securities and Futures Commission (SFC) added Bybit to its ‘Suspicious Virtual Asset Trading Platforms Alert List’ on Thursday.

At the same time, it added a number of the company’s products, including ‘Futures Contracts and Inverse Futures Contracts,’ ‘Bybit Leveraged Tokens,’ and ‘Bybit Wealth Management’ to its ‘Suspicious Investment Products Alert List.’

In a statement, the SFC said, “The SFC is concerned that these products have also been offered to Hong Kong investors and wishes to make it clear that no entity in the Bybit group is licensed by or registered with the SFC to conduct any ‘regulated activity’ in Hong Kong.”

It added that it “will not hesitate to take enforcement action against unlicensed activities where appropriate.”

This month, the SFC also issued warnings about Hong Kong-headquartered exchange BitForex after it shut down withdrawals and saw outflows of nearly $60 million.

Read more: Crypto exchange BitForex shuts down withdrawals and disappears

Coinbase received subpoena possibly linked to Bybit

Late last year, Coinbase reportedly contacted users, informing them of a subpoena it received from the Commodity Futures Trading Commission (CFTC) demanding user account information and transaction history.

The email sparked speculation that the CFTC is targeting Coinbase users who interacted with Bybit — suggesting the commission may be preparing for legal action against the exchange.

“We write to inform you that Coinbase has been served with a subpoena,” the email to select users read, “seeking information related to your account and account transaction activity.”

However, the email stated that Coinbase may decide to counter the CFTC subpoena — and therefore user information will not yet be handed over.

“No action is required from you,” the email continued, “but Coinbase may respond to the Subpoena unless served before November 30, 2023 with a motion to quash or other objection to the subpoena that has been filed with the Court — including by sending information concerning your Coinbase account to the [CFTC].”

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The Ontario Securities Commission (OSC) announced yesterday that it’s banning crypto exchange Kucoin from operating in Ontario and slapping digital asset platform Bybit with a CA$2.5 million ($1.9 million) fine.

In March 2021, the OSC demanded that any crypto trading platforms offering trades in derivatives or securities within the province must contact the regulator by April 19 2021 or face enforcement actions.

Kucoin and Bybit failed to contact the OSC in time and continued their operations, prompting an inquiry from the commission. 

However, Kucoin didn’t play ball and continually refused to supply the OSC with the required information. On the other hand, it appears Bybit was more than happy to help.

“Unlike KuCoin, Bybit responded to the OSC’s enforcement action, maintained an open dialogue, provided requested information, and committed to engaging in registration discussions,” the OSC announced on Wednesday.

OSC dealing out crypto exchange fines

Kucoin’s punishment for refusing to submit any information for the OSC inquiry is a permanent ban on trading within the Ontario province and a CA$2 million ($1.5 million) fine, according to regulatory filings on Tuesday. 

Bybit is still allowed to operate in Ontario, but for flouting regulations in 2021, it’s been fined CA$2.5 million as part of yesterday’s settlement. 

As part of its settlement with the OSC, Bybit also confirmed that:

• New accounts for Ontario residents will not be accepted. 
• Existing investors and their accounts will not be offered any new products.
• It will not engage in any marketing and promotional activities targeted at Ontario residents.

Any remaining assets in Ontario retail investor accounts may be used for non-restricted products or withdrawn from the Bybit platform. If all this fails, Bybit has said it will “wind up its Ontario operations.”

Director of OSC enforcement, Jeff Hehoe, said: “The outcomes announced today should serve as a clear indication that we refuse to tolerate non-compliance with Ontario securities law.”

Cryptocurrency companies using “gambling-style” marketing and promotions could also break securities law according to the commission.

So far eight companies have registered with the OSC.

Read more: Canada’s largest markets watchdog banned Tether — is USDT a security?

Canada wants to woo crypto investors

In February, Protos reported how Canadian prime minister Justin Trudeau was under pressure from the country’s Conservative Party to adopt a national crypto framework in order to ‘woo investors.’

MPs called for the country to take crypto seriously by introducing new legislation — like the Encouraging the Growth of the Cryptoasset Sector Act — or they say Canada risks missing out on billions of dollars in investment.

Part of the framework would “focus on lowering barriers to entry into the crypto asset sector while protecting those working in the sector and minimizing the administrative burden.”

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