Hong Kong fraud probe tests city’s pro-crypto stance

The teal-and-white commercials of cryptocurrency group JPEX, or Japan Trade, had been inescapable in Hong Kong final yr on constructing partitions, taxis and trams. The corporate’s slogan “funding: extra than simply shares”, was marketed for weeks on a large billboard within the centre of the town’s monetary district.

Months later, JPEX’s title is outstanding for a special cause: Hong Kong police have opened an investigation into alleged fraud and arrested JPEX employees, whereas the town’s regulator, the Securities and Futures Fee, has accused the corporate of deceptive traders.

The investigation into the alternate is testing Hong Kong’s dedication to a rigorous however crypto-friendly regime. As soon as house base to main crypto firms together with Sam Bankman-Fried’s FTX and Crypto.com, the territory launched a brand new licensing regime in June, permitting retail buying and selling in an try and cement its high place as a buying and selling hub for digital property.

“I feel the regulators will look again and see that they need to have clamped down on non-licensed gamers on day one, when the licensing regime went reside,” mentioned Carlton Lai, head of blockchain analysis at Daiwa Capital Markets. He added: “The ball is now within the regulator’s court docket to show that their new regime can defend traders who use licensed platforms.”

In September, police arrested a minimum of 11 folks, together with JPEX staff, employees at crypto shops and on-line influencers, on suspicion of conspiracy to commit fraud for allegedly working an unlicensed crypto alternate. Hong Kong authorities mentioned they acquired greater than 2,300 complaints in regards to the platform, with claims of losses totalling as a lot as HK$1.4bn ($179mn).

The allegations towards JPEX embrace deceptive traders by claiming to have utilized for a crypto buying and selling licence and charging customers exorbitant charges to withdraw funds, based on police and the regulator. Police have frozen property price greater than HK$60mn, together with HK$44mn in actual property, in reference to the case.

The regulator positioned JPEX’s web site on its alert record of firms it believes are focusing on Hong Kong traders with no licence as early as July final yr, and has constantly warned traders about buying and selling on unlicensed platforms. It additionally cautioned that not all firms claiming to have utilized for licences may very well have accomplished so.

The regulator this month issued an announcement warning towards JPEX particularly, noting that it had not utilized for a licence within the metropolis nor was it licensed for digital asset buying and selling abroad, regardless of the corporate’s claims to carry permits from regulators in Australia and Dubai. Final yr, Japan’s bourse JPX issued an announcement saying it had no ties to JPEX.

JPEX disputes the allegations. “SFC has instantly made a sequence of accusations towards our platform’s working mannequin and promotional strategies, which we vehemently resent as they had been made with out investigation or evaluate,” mentioned JPEX in an announcement on September 20.

JPEX couldn’t be reached for additional remark. The value for JPC, JPEX’s in-house cryptocurrency, fell 67 per cent in per week as of Friday, based on CoinMarketCap.

Lawmakers have mentioned that the case vindicates the town’s crypto rollout as a result of it demonstrates Hong Kong’s means to take motion towards non-compliant teams.

“The incident relating to JPEX really displays the need for a correct regulatory system for digital property buying and selling,” mentioned metropolis chief John Lee at a press convention final week.

Hong Kong lawmaker Johnny Ng, a member of the Chinese language Folks’s Political Consultative Convention, China’s high political advisory physique, mentioned he believed that JPEX was an remoted incident and was unlikely to sluggish the town’s crypto push.

However Foster Yim, a barrister at Liberty Chambers, mentioned the scandal might enhance scrutiny of some functions for crypto buying and selling licences and was more likely to sluggish the method down. “I feel the most important takeaway is for most people, particularly the retail traders, to be actually cautious about this new funding,” he mentioned, referring to the crypto market.

JPEX’s formidable promoting marketing campaign and its co-operation with native influencers gave it an outsize presence within the metropolis.

“They understood very properly the psyche of the native retail public, they understood very properly find out how to persuade folks to speculate cash with them,” mentioned Donald Day, chief working officer at Hong Kong-based digital asset buying and selling platform VDX and a former regulator on the SFC.

JPEX centered on “the Hong Kong retail investing public with very particular focused messages, together with high-yield, high-return, low-risk”.

One investor in JPEX in her 30s, who put HK$1.2mn on to the platform, mentioned the commercials and the recommendation of employees at an over-the-counter retailer attracted her to the alternate.

“The SFC has probably not revealed clearly who’s now licensed and who isn’t,” she added. “Many individuals are nonetheless fairly confused.”

The SFC on Monday mentioned it might launch a listing of firms which have utilized for crypto buying and selling licenses within the metropolis, having solely final week mentioned that such a transfer would create “a false sense of safety” for traders.

JPEX alleged victims have a really slim likelihood of having the ability to retrieve most of their crypto property on the platform due to its obscure possession construction and the shortage of element about which entities personal which property, based on Jason Chan, a accomplice at Howse Williams who specialises in digital property.

“Will this knock confidence? Sure, I feel initially, particularly if folks aren’t capable of recuperate their property,” mentioned Jonathan Crompton, Hong Kong-based accomplice at regulation agency RPC.

“The crypto trade absolutely expects there to be extra FTX-like points popping out of the woodwork as regulatory regimes come into impact and as markets mature.”