The Multichain Mystery: A Tale of Crypto, Capital, and Conspiracy

The recent arrest of Multichain’s CEO in China has been the cause of a lot of speculation and concern. But is this just another case of regulatory oversight, or is there a deeper, more sinister plot at play?

TLDR

• Multichain’s CEO, Zhaojun, was arrested in China leading to a halt in operations and a significant outflow of funds.
• Despite protections in place, the arrest led to a loss of access to servers.
• Some speculate that China’s actions are part of a broader crackdown on capital outflows and a campaign to control the wealth of China’s ultra-rich.
• The truth behind Zhaojun’s actions and the “abnormal outflows” remains unclear, fueling speculation and uncertainty.
• The incident sheds light on the extreme measures countries like China might take to protect their liquidity and control over capital.
• The arrest of Zhaojun is part of a larger trend of disappearing Chinese businessmen, raising questions about China’s control over wealth and influence.
• China’s strict capital control measures are highlighted by this incident, showing the potential threat posed by platforms like Multichain.

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Setting The Stage

Cross-chain bridges were once a popular way to connect two blockchains. However, the high amount of liquidity held in bridge protocols makes them extremely susceptible to hacks. In 2022, nearly $2 billion worth of stolen funds were accounted for by these hacks, making up 70% of all crypto hacks in the year.

Previously known as Anyswap, Multichain was first hacked in 2021 when attackers stole $8M worth of stablecoins from the protocol. The journey for the bridge protocol has been rocky since then.

In May, just days before Multichain announced it could not reach Zhaojun, Binance announced it would halt deposits into BSC from 10 Multichain-associated bridged tokens due to users reporting delayed and stuck transactions.

Multichain saw the most significant impact on tokens moving from the Fantom into either Ethereum or the BSC. This liquidity pool on the Multichain bridge suffered the largest exploit, with about $118M being transferred out of it.

Late in May, the Multichain team revealed that they had lost contact with their CEO and co-founder, known only as Zhaojun. This news followed rumors of his arrest in China circulating on Twitter. Zhaojun, who co-founded the company with DJ Qian, was the sole holder of the access codes needed to rectify technical issues with the protocol.

Zhaojun had put several protections in place to safeguard Multichain’s operations, though these were clumsily handled. Furthermore, the arrest led to a loss of access to the servers, effectively freezing operations.

The Founder’s Actions

While it’s clear that the arrest has had a catastrophic impact on Multichain, it’s less clear whether Zhaojun did anything wrong. The “abnormal outflows” have been characterized as a potential “rug pull,” However, there’s no concrete evidence to support these claims, and the truth remains shrouded in mystery.

Zhaojun’s family have provided no further updates, and his sister was also arrested following her transferring of funds apparently in an effort to safeguard the protocol, though these wallets were under her control.

China’s Motives

The arrest of Zhaojun, was not an isolated incident. Similar events have occurred in the past, such as the arrest of Zhao Dong, a Bitfinex shareholder and founder of the VC fund D Fund, in 2020. Dong was sentenced to three years in prison for money laundering and operating without a money services business license.

China’s motives behind the arrest are a subject of intense debate. Some speculate that it’s part of a broader crackdown on capital outflows from the country. Over the past few years, China has been tightening its capital controls to prevent a potential financial crisis. The ability of platforms like Multichain to facilitate capital movement outside the country could be seen as a threat to these efforts.

The incident also coincides with a series of high-profile disappearances of Chinese billionaires. This has led to theories that the arrest could be part of a larger campaign to control the wealth and influence of China’s ultra-rich.

The Multichain saga has shed light on the extreme measures countries like China might take to protect capital and maintain control over all aspects of their economy.

The arrest of a CEO, the freezing of operations, and the potential implications for capital control all point to a very high risk environment for crypto protocols operating in China. Furthermore, China’s actions could set a precedent for how countries deal with the challenge of crypto and capital controls, making an example of protocols that don’t comply.

Macro Climate and Capital Controls

If Multichain is not a rug, the protocol should be viewed as a small chess piece on a very large board.

China has implemented strict regulations governing the flow of money in and out of the country. These capital controls have been a key part of its economic development over the past decade, with a focus on restricting the outflow of capital and currency. This strategy encourages domestic households and businesses to reinvest their money into the Chinese economy

China’s economic model has been shifting towards internal circulation and independence from global imports. The country is reducing its reliance on imports while maintaining the value of its exports.

This shift is influenced by global opinions towards China’s foreign policy and the desire to protect its economy from potential international backlash due to ongoing territorial disputes.

Capital controls and a state-dominated banking system have led to several issues, including what some believe to be an artificially inflated GDP. The country has also banned the trade of virtual currencies like Bitcoin and Ethereum, and launched its own digital yuan currency (e-CNY), further solidifying state control over the economy.

Wrapping Up

The arrest of CEO Zhao Jun and the subsequent shutdown of the protocol highlight the vulnerability of such platforms, especially when they are highly centralised and reliant on a single figure.

These events underscore the regulatory complexities of operating within the crypto industry, particularly in countries like China where the government is taking a hard stance against capital outflows and maintaining a strict control over its economy.

The Chinese government’s actions are not only about maintaining financial stability but also about asserting sovereignty over its economic affairs.

In the broader context, the Multichain incident could be seen as part of a global trend towards increased scrutiny and regulation of the crypto industry. As governments worldwide grapple with the challenges posed by crypto and DeFi we’re likely to see many similar incidents playing out in China and different variations in the U.S.

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