Last year, blue and white ads for cryptocurrency group JPEX, or Japanese exchange, were inevitable on building walls, taxis and trams in Hong Kong. The company’s slogan, “Investing: More than just stocks,” was promoted for weeks on a giant billboard in the heart of the city’s financial district.
Months later, JPEX’s name was in the spotlight for another reason: Hong Kong police had launched an investigation into alleged fraud and arrested JPEX employees, while Hong Kong regulator the Securities and Futures Commission accused the company of misleading investors .
The investigation into the exchange is testing Hong Kong’s commitment to a strict but crypto-friendly regime. The region, once home to major cryptocurrency companies such as Sam Bankman-Fried’s FTX and Crypto.com, launched a new licensing regime in June this year to allow retail trading in an attempt to solidify its status as a top digital asset trading hub.
Carlton Lai, head of blockchain research at Daiwa Capital Markets, said: “I think regulators will look back and say they should have cracked down on unlicensed players on the first day the licensing system came into effect.” He Adding: “The onus is now on regulators to demonstrate that their new regime protects investors using licensed platforms.”
In September, police arrested at least 11 people, including JPEX employees, cryptocurrency store workers and online influencers, on suspicion of conspiracy to commit fraud by operating unlicensed cryptocurrency exchanges. Hong Kong authorities said they had received more than 2,300 complaints about the platform, with claims totaling HK$1.4 billion ($179 million) in losses.
Police and regulators say the charges against JPEX include misleading investors by claiming it had applied for a cryptocurrency trading license and charging users exorbitant fees for withdrawing funds. The police have frozen more than HK$60 million in assets involved, including HK$44 million in real estate.
As early as July last year, the regulator included the JPEX website on its alert list of companies it believed were targeting Hong Kong investors without a license, and has been warning investors not to trade on unlicensed platforms. It also warned that not all companies claiming to have applied for licenses had actually done so.
The regulator this month issued a statement specifically targeting JPEX, noting that it had not applied for a license in the city nor received an overseas virtual asset trading license, although the company claimed to hold licenses from regulators in Australia and Dubai. Last year, the Japanese stock exchange JPX issued a statement saying it had no relationship with JPEX.
JPEX disputes the allegations. JPEX said in a statement on September 20: “We are strongly dissatisfied with the sudden series of accusations made by the Securities Regulatory Commission against our platform’s operating model and promotional methods, as these accusations were made without investigation or review. “
JPEX could not be reached for further comment. As of Friday, the price of JPEX’s internal cryptocurrency, JPC, had fallen 67% in a week, according to CoinMarketCap.
Lawmakers said the case vindicated the launch of Hong Kong’s cryptocurrencies because it showed the city’s ability to take action against non-compliant groups.
“The JPEX incident actually reflects the need to establish a proper regulatory system for virtual asset transactions,” City Leader John Lee said at a press conference last week.
John Ng, a member of the Chinese People’s Political Consultative Conference, China’s top political advisory body and a member of the Hong Kong Legislative Council, said he believes JPEX is an isolated incident that is unlikely to slow down cryptocurrency development in Hong Kong.
But Liberty Chambers lawyer Foster Yim said the scandal could intensify scrutiny of some applications for cryptocurrency trading licenses and could slow down the process. “I think the biggest takeaway is that the public, especially retail investors, need to be very cautious about this new investment,” he said, referring to the cryptocurrency market.
JPEX’s strong advertising campaign and partnerships with local influencers have given it a huge presence in the city.
“They have a very good understanding of the psychology of local retail investors and a very good understanding of how to convince people to invest in them,” said Donald Day, chief operating officer of Hong Kong-based digital asset trading platform VDX and a former regulator.
JPEX focuses on “Hong Kong’s retail investing public, with very specific targeted information, including high yield, high return, and low risk.”
A JPEX investor in her 30s who invested HK$1.2 million on the platform said advertising and advice from OTC shop staff attracted her to the exchange.
“The SFC has not really revealed clearly who is now licensed and who is not,” she added. “A lot of people are still confused.”
Hong Kong’s Securities and Futures Commission said on Monday it would publish a list of companies that had applied for cryptocurrency trading licenses in the city, a move it said only last week would give investors a “false sense of security.”
Jason Chan, a partner at Howse Williams, said the chances of JPEX’s alleged victims being able to recover the majority of their crypto assets on the platform are slim because of the platform’s vague ownership structure and lack of details about which entities own which assets. Focus on virtual assets.
“Is this going to be a knock on confidence? Yes, I think initially, especially if people can’t get their assets back,” said Jonathan Crompton, a partner at law firm RPC in Hong Kong.
“The crypto industry fully expects that as regulatory regimes take effect and the market matures, more issues like FTX will arise.”