Author: Hu Xiner; Source: The Paper
· Hong Kong unlicensed virtual asset trading platform JPEX is involved in a conspiracy to commit fraud. Hong Kong police launched a large-scale law enforcement operation against JPEX starting from September 18. As of 5 pm on September 20, 11 people suspected of “conspiracy to commit fraud” have been arrested, and a total of 2,086 victims have reported cases for assistance, involving approximately HKD 1.3 billion.
· The JPEX case occurred only 3 months after the new licensing system for virtual asset trading platforms in Hong Kong took effect on June 1. Hong Kong Legislative Council member Wong Chun Shu said: “The purpose of the new legislation is to regulate these activities related to virtual assets and provide better protection for investors. However, this JPEX incident happened, so we need to follow up on whether the legislation needs to be improved in a timely manner.”
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Hong Kong police launched a large-scale law enforcement operation against JPEX starting from September 18 and seized a large amount of physical evidence.
JPEX, an unlicensed virtual asset trading platform in Hong Kong, has recently been involved in a conspiracy to commit fraud, becoming the largest financial fraud case in Hong Kong in recent years. The JPEX case occurred only 3 months after the new licensing system for virtual asset trading platforms in Hong Kong took effect on June 1, which has attracted attention from various parties regarding the regulation of virtual assets in Hong Kong.
Hong Kong police launched a large-scale law enforcement operation against JPEX starting from September 18. As of 5 pm on September 20, 11 people suspected of “conspiracy to commit fraud” have been arrested, and a total of 2,086 victims have reported cases for assistance, involving approximately HKD 1.3 billion. Hong Kong police stated that JPEX is suspected of making false and misleading statements, using exaggerated and untrue methods to mislead investors. The investigation is still ongoing.
On September 20, the Securities and Futures Commission of Hong Kong issued a statement stating that JPEX has never contacted the Commission regarding any possible license application, and there is no entity within the JPEX Group that has been licensed by the Commission or has applied to the Commission for a license to operate a virtual asset trading platform in Hong Kong. Previously, the Commission pointed out that JPEX promoted its services and products to the Hong Kong public through social media “celebrities” and over-the-counter virtual asset currency exchange shops, and “the methods used have many suspicious aspects”.
On September 19, Carrie Lam, the Chief Executive of the Hong Kong Special Administrative Region, expressed great concern about the JPEX case, stating that “the development of virtual assets must have an effective regulatory system to protect investors”. Lam also emphasized that the authorities will vigorously promote investor education, ensure information transparency, and enable the public to fully understand the risks and operations of virtual assets.
Wu Jiezhuang, a member of the Legislative Council of the Hong Kong Special Administrative Region, pointed out that there are approximately 8,000 victims of the JPEX case, and at least 30 cases related to JPEX have been received, with defrauded amounts exceeding HKD 100 million. He believes that the Securities and Futures Commission of Hong Kong can actively disclose suspicious virtual asset platform websites as soon as possible, because retail investors “do not know whether the platform holds a license and hope that regulatory agencies can remind them in a timely manner”.
Multiple players in the virtual asset market have expressed to Lian Guai Technology (www.theLianGuaiper.cn) that the JPEX incident is essentially a “Ponzi scheme,” using new investors’ money to pay short-term returns to old investors in order to create an illusion. Similar “pyramid schemes” have appeared before. The JPEX incident involves a large amount of money and a large number of victims, which may be related to JPEX’s high-profile advertising in Hong Kong through “internet celebrity” Lin Zuo and off-exchange exchange shops.
The Enigma of JPEX
The Hong Kong police have stated that they have arrested multiple individuals involved in the case, including employees of the implicated company, owners and managers of off-exchange exchange shops. The police also searched multiple locations related to JPEX, such as the residences of the individuals involved and multiple off-exchange exchange shops, seizing approximately 8 million Hong Kong dollars in cash, valuable jewelry, phones, computers, and documents related to JPEX.
This is not the first time JPEX has been involved in controversy. As early as its establishment in 2019, JPEX claimed to be a “Japanese cryptocurrency exchange,” with a name similar to the Japan Exchange Group (JPX). However, the group issued a statement stating that it has no relationship with JPEX and warned against JPEX impersonating the group. JPEX then claimed to collaborate with credit card service company Visa to launch a cryptocurrency debit card, but Visa quickly clarified that JPEX is not their partner and there are no related plans.
Starting in 2021, JPEX has been posting large billboards with high-profile advertisements in Hong Kong subway stations, bus stations, the top floors of buildings, and crowded places, accompanied by misleading text such as “Japanese cryptocurrency exchange.” One victim who lost a six-figure sum in Hong Kong dollars stated that they initially learned about JPEX through TV and subway advertisements.
It is worth mentioning that the JPEX website claims to be a “licensed and recognized digital asset and cryptocurrency platform,” but the Hong Kong Securities and Futures Commission has stated that JPEX has not applied for a license and its promotional claims are false. In addition, the website introduces its operational headquarters in Dubai, United Arab Emirates and claims to hold “virtual currency platform-related licenses” in Australia, the United States, and Canada. Although JPEX registers companies under different legal entities around the world, the actual responsible person and operational location have never been disclosed. “The police seem to have not found the directors and shareholders of the main company,” Wu Jiezhuang expressed concern that if the assets involved are not frozen in a timely manner, the victims will be left with nothing.
After the Hong Kong Securities and Futures Commission issued a warning to JPEX on September 13, JPEX immediately restricted customer fund withdrawals and significantly increased transaction fees. The withdrawal fee was increased from 3 Tether (USDT) for withdrawing 1000 Tether to 999 Tether for withdrawing 1000 Tether, effectively allowing investors to only withdraw 1 Tether. In addition, JPEX removed its wealth management page on September 18 and suspended all transactions, but ongoing transactions will continue until the end date of the products. “The Hong Kong Securities and Futures Commission currently does not have specific regulations on transaction fees, only stating that they should be in line with market levels, but the current situation is unreasonable.” Wu Jiezhuang believes that it is worth exploring the regulation of licensed institutions charging transaction fees in the future.
“Most victims have no experience in virtual asset investment”
During a joint press conference held by the Hong Kong Police and the Securities and Futures Commission on September 19th, Senior Superintendent of the Commercial Crime Bureau, Kong Hing-fung, stated that the amount of losses and the number of victims involved in this case are very significant, and most victims have no experience in virtual asset investment. Kong Hing-fung hopes that the public can have a deep understanding of the products they invest in and choose carefully. In addition, the police investigation has found that JPEX required investors to provide their cryptocurrency private keys, effectively giving JPEX control over users’ assets. “Trading on unregulated platforms and entrusting the custody of cryptocurrency private keys to the platforms is equivalent to putting one’s own assets into the wallets of others.”
Police Inspector of the Commercial Crime Bureau, Li Mu-hin, pointed out that the cryptocurrency JPC issued by JPEX cannot be traded on other platforms and cannot be used for payment. “It has low liquidity and is not valuable.” However, compared to other virtual currencies, JPC can receive higher commissions when promoted by over-the-counter exchange shops, which is “deviation from reason.” The police believe that JPEX’s operating model and promotional methods are suspicious, as users are unable to withdraw their virtual assets, and JPEX, through influencers like Lin Zuo and over-the-counter exchange shops, made false and misleading statements, such as falsely claiming that some of the platform’s products can provide extremely high returns.
Prior to the implementation of the new licensing regime for virtual asset trading platforms in Hong Kong on June 1st this year, there were no direct regulations on virtual assets in Hong Kong. “Because there is no regulatory authority, the Securities and Futures Commission included JPEX in the list of unlicensed companies and suspicious websites in July last year to alert the public,” said Thomas Atkinson, the Director of Licensing and Fintech at the Securities and Futures Commission. “Since then, the Securities and Futures Commission has issued more than nine reminders to investors to be cautious of the risks of unlicensed and overseas platforms.”
“On August 7th, the Securities and Futures Commission issued a warning to some unlicensed platforms without naming them, but JPEX did not stop its illegal sales,” explained Thomas Atkinson at the press conference. Due to possible fraud, the Securities and Futures Commission sent 21 letters to influencers and over-the-counter exchange shops related to JPEX, requesting them to stop promoting JPEX’s services and products.
Why doesn’t the Securities and Futures Commission disclose the names and numbers of virtual asset trading platforms that are applying for licenses, three months after the implementation of the mandatory licensing regime? Thomas Atkinson explained that if disclosed, investors may mistakenly believe that these platforms can be trusted and regulated. Therefore, at present, only two exchanges that have obtained licenses before the implementation of the new regime, namely OSL Digital Securities Limited and Hash Blockchain Limited under the HashKey Group, are publicly announced. On August 3rd, both exchanges announced the completion of their license upgrades, expanding their business scope from professional investors to local retail investors. Thomas Atkinson also stated that under the current regime, over-the-counter exchange shops for virtual assets are not regulated by the Securities and Futures Commission.
“It is necessary to follow up on whether legislation should be improved in a timely manner”
“The JPEX case involves a large amount of money and a large number of complainants, and the situation is not ideal.” In the opinion of Mak Chui-choi, Associate Professor of the Department of Accountancy, Economics and Finance at Hong Kong Baptist University, the Hong Kong government should learn from this lesson, strengthen supervision, proactively inspect existing virtual trading platforms for potential transaction risks, and enhance legal regulatory requirements and investor education.
In addition, Mak Chui-choi believes that local virtual asset trading platforms in Hong Kong are relatively difficult to obtain virtual asset trading licenses, “because the relevant companies must prove to the Hong Kong Securities and Futures Commission that they have sufficient funds, a stable trading platform, and a certain number of personnel. If the platform has already obtained trading qualifications abroad and has been recognized in Hong Kong, it will be easier to obtain a license.” However, these conditions pose certain difficulties for most trading platforms, and the Hong Kong Securities and Futures Commission’s review also takes time. Therefore, Hong Kong currently only has two licensed virtual asset exchanges.
For other trading platforms that are providing virtual asset services in Hong Kong before June 1 and are ready to comply with the guidelines of the Hong Kong Securities and Futures Commission, they can continue to provide virtual asset services in Hong Kong between June 1, 2023, and May 31, 2024. But this one-year transition period may also become a gray area, allowing unlicensed virtual asset platforms to take advantage of it.
Hong Kong Legislative Council member Wong Chun-suk believes that if JPEX has no intention of applying for relevant licenses during this one-year transition period, it should gradually end its business instead of expanding it. At the same time, attention needs to be paid to whether JPEX’s true intention involves elements of fraud. “The purpose of the new legislation is to regulate these activities related to virtual assets and provide better protection for investors. However, with the occurrence of the JPEX incident, it is necessary to follow up on whether the legislation needs to be improved in a timely manner.”
Wong Chun-suk further pointed out that the purpose of the one-year transition period is to avoid a one-size-fits-all approach because there were already some service providers before the new legislation was introduced, and the transition period allows these companies to apply for licenses or gradually phase out their business from the market. “But what was unforeseen is that the market may see service providers taking advantage of this gray area to commit fraud.”
Wong Chun-suk stated that Hong Kong needs to balance regulation and market development in order to maintain its status as an international financial center. If virtual assets are not allowed to be traded in Hong Kong at all, it may lead investors to invest in overseas platforms. If someone is eventually deceived, it will be even more difficult for Hong Kong’s law enforcement agencies to follow up.
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