SEC case against Crypto Mogul Sun raises questions about Huobi

by Arthur · March 23, 2023

(Bloomberg) — The TRX token at the center of fraud allegations against digital-asset mogul Justin Sun makes up a significant portion of the reserves of Huobi Global crypto exchange, where the China-born entrepreneur is an adviser.

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TRX – commonly referred to as Tron – accounts for 18% of reserves on Huobi, a major crypto platform, according to data from DeFiLlama. Doubts about the coin could raise concerns about the strength of Huobi in a digital asset sector that fears collapse following the dissolution of the FTX exchange.

TRX, the initial coin of Sun’s Tron ecosystem, fell nearly 16% at one point on Wednesday after the US Securities & Exchange Commission accused him and his firms of market manipulation to make the token appear actively traded. The SEC also sued Sun for allegedly violating securities rules. The 32-year-old denied the allegations, saying in a tweet that the SEC complaint “lacks merit.”

Another large part of Huobi’s reserves is in the stock exchange’s own currency, HT. Together, TRX and HT make up about 41% of the platform’s reserves. Crypto markets have become increasingly wary of native tokens after the implosion of FTT, the coin of FTX, contributed to the latter’s chaotic demise.

Crypto exchanges have attempted to assure they have sufficient assets to support investor deposits, but are facing demands for a full audit.

“Exogenous, stable and uncorrelated assets, whose success is independent of the stock market, act as a better form of security,” said Kunal Goel, a research analyst at Messari.

Huobi’s total reserves are $3.1 billion, according to CryptoQuant. Excluding native tokens, the figure drops to around $1.8 billion – a metric CryptoQuant refers to as pure reserves. Huobi’s net reserve ratio is the lowest among the eight exchanges listed by the digital asset data provider.

“There may be a risk in the liquidity of the exchange if a self-issued token has a significant percentage of the total reserve amount,” CryptoQuant’s website states.

When asked about the concentration of HT and TRX in its asset reserve, Huobi said it has a strong and healthy reserve pool in place to handle any risk.

Stablecoin injections

Sun this year twice injected $100 million of stablecoins — a type of token meant to hold a constant $1 value — into Huobi to boost its financial cushion.

The last transfer was earlier in March, when he tried to counter concerns triggered by a lightning crash in HT. The previous infusion was in January after Huobi was hit by a wave of withdrawals. Huobi said the combined $200 million worth of stablecoins came from Sun’s personal funds.

Sun spent about $1 billion last year to buy a roughly 60% stake in Huobi, Bloomberg News reported in November. He denies owning the majority share and says he is only an adviser to the stock exchange.

Huobi, a platform with Chinese roots, has stepped back from global leadership of crypto exchanges, but still achieved $11 billion in monthly trading volume in February this year, CryptoCompare data shows.

TRX recovered some of its Wednesday swoon in Thursday’s session, rising about 5% as of 8:45 a.m. in London, data compiled by Bloomberg show. HT has fallen around 9% in the last 24 hours, according to CoinGecko.