On Monday, Hong Kong’s financial regulator, the Securities and Futures Commission(SFC), announced that “only four companies have so far applied for cryptocurrency exchange licenses from the SFC, namely HKVAX, HKBitEx, Hong Kong BGE and Victory Fintech Company”. With the recent JPEX debacle making headlines, this is an official reaffirmation by the regulator to prevent further damage.
Not only that, but the SFC also said that “following the implementation of the mandatory exchange licensing regime on June 1, only two exchanges are currently qualified to provide services to Hong Kong-based retail users, OSL Digital Securities and HashBlockchain, the Hong Kong branch of Hashiki.” The license applicants are literally just asking the agency for permission. The license application cannot indicate that the platform is compliant.
The SFC is now planning to publish a separate list of unlicensed crypto platforms to prevent investors from being harmed. It will also work with the Financial Education Commission to strengthen investor education through media and social media. To protect investors, the SFC will also work closely with the police to share information on platforms suspected of illegal trading in the future.
How JPEX case started
Here’s how it all started. At Token 2049, a conference in Singapore, JPEX had set up a booth and participated in the event. However, it abruptly withdrew.
The SFC said, “A cryptocurrency trading platform called JPEX has been promoting its services to the Hong Kong public through social media. However, SFC has neither received nor granted a crypto-asset license application from JPEX-related entities.”
Hong Kong police have launched an investigation. During the arrests, police seized approximately 67 million HKD in assets, including 8 million HKD in cash and 12 million HKD in bank deposits, believed to be proceeds of crime. (There are currently 2,265 victims of JPEX who are under police investigation for fraud.)
Hong Kong police also arrested Lin Zuo, an influencer associated with JPEX. The Hong Kong Economic Crimes Investigation Department raided Zuo’s office. “After JPEX suspended some trading functions, there were concerns among users that they would be unable to withdraw their money,” Lin Zuo reassured investors, saying, “I am also affected by this action and will work to normalize JPEX.
What’s the damage?
Since the SFC issued a warning statement about unlicensed cryptocurrency exchange JPEX last Wednesday, more than 167 million HKD worth of cryptocurrency had been withdrawn by September 22. Hong Kong police are investigating whether the exchange is involved in money laundering or other crimes. As of 6 p.m. on September 22, the total losses related to the JPEX scam were estimated at 1.4 billion HKD, with 2,265 people reporting to police.
Hong Kong police said, “On September 20, three more male JPEX officials were arrested on suspicion of conspiracy to commit fraud and are currently in custody. This brings the total number of JPEX officials arrested to 11. They are four men and four women, aged between 22 and 52 years old, who participated in the JPEX scam as JPEX company directors and local cryptocurrency OTC stores in Hong Kong.” More arrests may be made in the future.”
The charges
Hong Kong police and the SFC held a joint briefing on the case of JPEX, an unlicensed cryptocurrency exchange. At the briefing, they outlined five allegations of fraud against JPEX.
– JPEX never applied for an SFC license. However, it advertised on its website that it was a “licensed cryptocurrency platform” and attracted investors.
– Influencers promoting JPEX flaunted their wealth. Misleading statements were made. The SFC issued a warning letter in advance, but the influencers continued their activities even though they knew it was illegal.
– JPEX promoted that its exchange token, JPC, could be transferred and traded on overseas platforms. However, an investigation revealed that it could not be traded on other platforms. Furthermore, the exchange controlled user assets by forcing users to stake JPC in a manner similar to a time deposit.-After being warned by regulators, JPEX arbitrarily limited the withdrawal limit to 1000HKD, with a 999HKD fee. This was done in order to limit asset withdrawals.
On the 18th, JPEX suspended all interest-bearing products on its website.
It turns out that JPEX does not hold any crypto-related licenses in Hong Kong, as well as in Canada, United States, and Australia. Contrary to its claims, JPEX could not be found on the Canadian Financial Transactions and Reporting Analysis Center(FINTRAC) or the Canadian Securities Administrators(CSA) registration lists. The Hong Kong government has announced that convictions for cryptocurrency-related fraud offenses are punishable by up to seven years in prison and one million HKD fine.
How have regulators reacted?
Some say the JPEX case proves the need for more regulation. “The case has shown that investors should invest in cryptocurrencies through platforms authorized by the Hong Kong SFC,” said John Lee, Hong Kong’s Secretary for Administration.
Doreen Kong, a member of the Hong Kong Legislative Council, strongly criticized the SFC for failing to fulfill its roles and responsibilities in the wake of the JPEX scam, an unauthorized cryptocurrency trading platform. “The SFC did not name JPEX as a platform of concern when the Hong Kong Police Department warned of unregulated platforms in early August. The SFC’s failure to fulfill its responsibility to educate investors ultimately resulted in investors bearing the brunt of the damage. The public has learned a costly HK$1.2 billion lesson.”
Angelina Kwan, a former Hong Kong SFC executive, predicted that Hong Kong authorities will tighten regulation of exchanges in the wake of the recent case of JPEX, an unlicensed cryptocurrency exchange that was accused of running a $200 billion fraud. “JPEX accused the SFC of being high-handed, but that’s not true. The SFC politely asked the industry to submit an application early on. JPEX’s announcement to increase withdrawal fees was a death knell. There will be more law enforcement in the future.”
“The Hong Kong authorities have decided to allow retail users to invest in cryptocurrencies within guardrails. If the deregulation is reversed by a case like JPEX at a time like this, the Hong Kong crypto industry will suffer.”
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