It began like this: officials from the People's Bank of China stepped into the offices of the largest crypto exchanges in the country and sat down with their executives.
From the financial regulator's Shanghai and Beijing bureaus, the officials told the exchanges they were interested in identifying whether anti-money laundering and capital control mandates were being met.
But according to Robin Zhu, chief operating officer at Huobi, the regulators had an ulterior motive that January day.
"The regulator wanted to grab a big picture of how significant cryptocurrency trading was in China - how does bitcoin work; where does the money come from; where does it go to; how do people make and lose money?" Zhu said.
The PBoC also requested information on the exchange's trading volume and user numbers. In addition to the platform's data, Huobi had been regularly submitting information and reports about worldwide government policy in an effort to help the PBoC understand the industry.
Zhu definitely thought something was up. To him, it seemed like the PBoC was gathering information in an order to create a framework for regulating the industry, something many exchanges wouldn't have necessarily been worried about.
But then September came and with it the announcement that the PBoC was banning initial coin offerings (ICOs) and shutting down domestic fiat-to-crypto order book trading.
It seems the inquiries paved the way for the ultimate clampdown, one that severely affected cryptocurrency exchanges in the country.
In a previous interview with CoinDesk, Huobi's founder and CEO Leo Li reported trading volumes followed suit. On November 1, 2017, these figures were just 5 percent of what they were on Sept. 15, the last day before the close of order-book trading.
Yet, not to be deterred, exchanges such as Huobi have continued to thrive, finding new ways to grow their business.
Zhu told CoinDesk:
"Whatever the policy may be, we will comply with the rules and are here to say. The [bitcoin] trend is irresistible. And down the road it is very likely China will lift its ban on cryptocurrency trading."
Westward and eastward expansion
In fact, two of China's largest exchanges at the time, Huobi and OKCoin, already have offerings that again rank within the top 10 in the world by trading volume - Huobi Pro and OKEx, two platforms that now trade cryptocurrencies only.
And Zhu told CoinDesk that Huobi Group has more than doubled its staff to over 400 since September, signaling a strong commitment even facing a tightened regulatory landscape.
"The shift to over-the-counter trading is an unexpected pivot to us. We had never anticipated that to be one of our business strategies," said Zhu.
But until some of the pressure is lifted, Huobi is proceeding with an aggressive expansion plan.
Over the past few months, the exchange has opened offices in Hong Kong, Singapore, South Korea and the U.S.
Through partnerships with Japan's SBI Group and an unnamed partner in South Korea, Huobi is expecting its new exchanges in those countries to be running by March of this year. And in San Francisco, the company's new office is focusing on research and fostering blockchain startups, but Huobi has also employed compliance experts that as well, hinting at a possible crypto service launch in the U.S. too.
"Once we have fully understood the legal issue in the U.S., opening a new exchange remains to be the next phase of the plan," Zhu said.
While Zhu claimed that opening up operations overseas has always been a part of Huobi's long-term strategy, the PBoC's actions undoubtedly forced the platform to expedite its pivot.
All in all, the pivot has been good to Huobi, which is already seeing a more diverse user base, according to Zhu. For instance, Huobi Pro currently has about 3 million users and less than half of them are from mainland China today.
Loyalty, and revenue, token
Yet, Huobi is still focused on its adding services for its existing user base.
Toward that goal, Huobi even launched its own token, HT, which runs on the ethereum blockchain, as a way to create user loyalty (and bring in some additional revenue).
Instead of following the ICO model that most startups do, whereby tokens are sold to interested investors, Huobi is giving the tokens away as a free gift to users that purchase service fee packages on its platform.
Over the course of 14 days, the announcement of the HT tokens resulted in investors rushing to buy some $300 million as pre-paid service fees, which Huobi Pro is able to collect in advance.
Following the launch of its own token, Huobi Pro announced a new exchange named HADAX, which allows investors to vote with HT on which new cryptocurrency assets they want listed for trading on the platform.
"We can't evaluate every new cryptocurrency because there are simply too many of them," Zhu explained. "HADAX gives investors the choice to vote for tokens they believe are worth trading."
According to Huobi's data, as of Feb. 24, the HADAX platform has collected 8.5 million HT from 104,308 users who have cast a total of 85 million votes for 75 different crypto assets.
And with this, Zhu said:
"In the long term, we think crypto-to-crypto trading has more potential than fiat currencies because of the large number of trading choices that can be available."
The rise of Binance
But the PBoC's ruling didn't only add hurdles, it also seemed to lift up a new crypto exchange which has a significant connection to the country.
Binance was launched in July of last year (just two months prior to the PBoC's ruling) by former top executives from OKCoin, Zhao Changpeng and He Yi. At the time, Binance also disclosed that its first round of funding came from two Chinese venture capital firms - Blackhole and Funcity.
Yet, because its base was outside of mainland China, Binance was in the right place at the right time. When uncertainty prevailed in the domestic market, Chinese investors began withdrawing crypto assets and shifting them onto overseas platforms, according to Zhu.
He said:
"The timing was perfect for Binance."
Six months after its launch, Binance has now grown into one of the top cryptocurrency exchanges, having seen $2 billion in trading activity in the past 24 hours, according to CoinMarketCap.
"Although Huobi already launched Huobi Pro at the time, we didn't have as many tokens available for trading as Binance did," Zhu said, adding that the service is now recording more than $1 billion in daily trading volume.
And even though Binance has previously announced it would limit the access for users from inside China, Zhu said, "One can always surf the internet 'scientifically'" - referring to the use of Virtual Private Networks (VPNs), which mask user's IP addresses.
Zhu continued:
"If you have assets in an exchange and now you are prohibited from accessing it through a normal process, you definitely will rack your brain to get in there.