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Anyone who has followed the development of cryptocurrencies in Hong Kong following the launch of its Virtual Asset Trading Platform (VATP) licensing regime in June this year would have already heard or read about the JPEX crypto exchange.
The JPEX saga is shaping up to be one of the most significant challenges facing the city’s crypto sector – barely four months into the new regulatory regime – and the response from Hong Kong authorities will be critical in determining whether the industry remains unscathed.
A recap of the JPEX saga
For those who haven’t heard of JPEX, here’s a quick recap of the highlights so far:
- The Securities and Futures Commission of Hong Kong (SFC) on 13 September issued warning on JPEX for actively promoting its products and services to the public in Hong Kong, even though it is not licensed or has applied for a license to operate VATP. The SFC also highlighted various false claims made by JPEX and related parties. These include that it has obtained licenses from foreign regulators; cooperates with and receives investment from a company listed on the Hong Kong stock exchange; and suggestions on social media that she has applied for a VATP license in Hong Kong.
- Five days later, the Hong Kong Police (HKPF) raided the premises of the crypto exchange and arrested six people, including prominent influencers Joseph Lam and Chan Wing-yee, who were promoting the exchange to their audience on Youtube and other online platforms. The action came after authorities received more than 1,400 calls complaining of fraud of up to HK$1 billion ($128 million). A day later, on September 19, the authorities carried out press conference to emphasize that it will scrutinize the regulation of digital assets, step up efforts to educate investors, “monitor the situation very carefully and ensure that investors are sufficiently protected.”
- In response to the initial raid and arrests, JPEX halted all crypto transactions on its platform, citing “negative news” and what it called “unfair treatment by relevant institutions” that caused its partners to freeze funds. Company stated on its website its “extreme disappointment with the SFC’s unfair practices that disrupt market order” and views that “contrary to the direction of the government’s policy development to make Hong Kong a Web 3.0 city”. Over the next few weeks, the confrontational exchange continued to take a defiant tone publishing confidential emails with the SFC – which allegedly showed JPEX engaging the SFC on licensing issues – to deny the authorities’ damaging revelations, and even introduced a “dividend plan” to attract new investors.
- September 20, SFC released statement exposing JPEX’s misleading claims in its communications with the agency. JPEX is said to have been on the SFC’s radar since March 2022 for its misleading representations and unlicensed activities. Due to the lack of cooperation and inability to respond to the SFC’s inquiries, the SFC placed JPEX on its warning list in July 2022. The SFC also confirmed that JPEX has never approached the SFC regarding any potential VATP license application nor has any related entity licensed by the SFC or has applied for a licence. Due to subsequent information suggesting fraud, the SFC referred the matter to the HKPF.
- By October 5, the alleged amount involved in perhaps one of the biggest financial fraud cases Hong Kong has ever seen had risen to HK$1.55 billion ($198 million) with more than 2,500 complaints received by the HKPF. Since the first arrest, the HKPF has detained 20 more people and now believed that it had frozen bank accounts and assets – including property and luxury vehicles – including HK$100 million (US$13 million) in connection with investigations into JPEX.
Actions by Hong Kong authorities
In addition to public statements, arrests and seizures, Hong Kong authorities have taken other coordinated actions to shore up faltering investor confidence, as well as send a clear signal that nefarious crypto actors will not be tolerated and that investor protection is paramount.
September 25, SFC announced that – in light of growing public concern about unregulated VATPs – will publish four lists of Virtual Asset Trading Platforms (VATPs) licensees, closing firms, deemed licensees and applicants for clarity and transparency. Other measures to be introduced by the SFC include issuing a special list of suspected VATPs to help identify such entities operating in Hong Kong and increase public awareness.
It will also launch a public campaign with the Council for Investors and Financial Education to protect against fraud and facilitate public understanding of the risks associated with virtual assets. Finally, the SFC reaffirms its commitment to detect and take enforcement action against suspected VATPs and refer them to the HKPF when necessary.
Just over a week later, the HKPF and SFC announced On October 4, the establishment of a joint task force to closely monitor and investigate illegal activities involving virtual asset trading platforms (VATPs). Based on a high-level meeting between the two agencies on September 28, the working group’s objectives are threefold – to facilitate the exchange of information on suspicious activities and violations by VATP; implement a risk assessment mechanism for suspected VATPs; and improve coordination and cooperation in related investigations.
The spokespersons pointed out that the new platform will be “instrumental for fast tracking […] vital intelligence sharing and joint cooperation in responding to challenges arising from VATPs” and allow both agencies to deploy their “appropriate expertise and resources to combat problematic VATPs”. The task force will also enable the city to “better protect the general public in Hong Kong and […] interest of investors”.
On October 6, during an online interview organized by the Investment and Financial Education Committee, the Secretary for Financial Services and the Treasury in Hong Kong he said that the JPEX incident reflected the risks of unregulated platforms and the importance of oversight.
Citing previous incidents of price volatility and collapses that cast doubt on investors’ ability to buy back supposedly reserved stablecoins, he also stated that retail sales of stablecoins will not be allowed until they are regulated in Hong Kong.
Hong Kong’s crypto aspirations are unfettered
While the ongoing JPEX saga continues to send ripples through the city’s nascent crypto industry, it is heartening to see Hong Kong authorities united in their determination to protect the integrity of the sector and implement new measures to protect investors. The joint task force, as well as the SFC’s commitment to information dissemination, is a testament to the cooperation between regulators and law enforcement that resulted in swift action being taken against JPEX to limit damage to investors.
These initiatives that provide clarity on government actions allow investors to make informed decisions and also alert wrongdoers to potential consequences. Given that rogue actors are inevitable in any industry, they bring much-needed reassurance to the public, who might otherwise be hesitant to look again at legitimate VATPs.
Many countries have not taken similar measures to improve information disclosure due to the conflicting interests of investor protection and information privacy. This is good for the development of the industry as creating public trust and confidence is definitely key. It’s another example of the Hong Kong crypto industry’s amazing navigation through treacherous waters!
If you want to know more about regulations in Hong Kong, check out our country guide or Contact us to understand how we can help your crypto business comply with financial crime.
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