JPEX Cryptocurrency Scandal Shakes Hong Kong’s Reputation

Hong Kong, a global financial center and gateway to China, has been rocked by a massive cryptocurrency scandal involving JPEX. The Dubai-based cryptocurrency exchange allegedly defrauded thousands of investors out of more than $160 million. The case exposed regulatory gaps in Hong Kong’s nascent cryptocurrency industry, a lack of investor protection, and the risks of relying on social media influencers to promote unlicensed platforms.

JPEX stands for Japan Exchange and claims to be the first cryptocurrency exchange in the world to offer dividends to its users. It has also established partnerships with major institutions such as HSBC, Standard Chartered Bank and Alibaba. It lured investors with promises of high returns and low fees, and used aggressive marketing tactics such as billboards, online ads and influencer endorsements.

Influencers promoting JPEX include Joseph Lam, a barrister-turned-insurance salesman who calls himself Hong Kong’s “troll king”, and YouTube celebrity Chan Yee, who has 200,000 subscribers. They show their followers how Bitcoin profits can help them buy homes and cars, and encourage them to sign up for JPEX using a referral code.

However, things started to go wrong in September 2023, when JPEX announced it was facing a “liquidity shortage” and suspended withdrawals. Many investors were unable to access funds or contact the platform’s customer service. Some have also discovered that JPEX has been operating without a license from Hong Kong’s Securities and Futures Commission (SFC), which regulates virtual asset trading platforms.

The Securities and Futures Commission revealed that it had issued a warning letter to JPEX in June 2023, requiring it to cease its activities in Hong Kong or apply for a license. But JPEX ignored the letter and continued to operate illegally. The Securities and Futures Commission also said it has no jurisdiction over JPEX’s Dubai-registered operations.

Hong Kong police launched an investigation into JPEX after receiving complaints from more than 2,000 investors claiming losses of HK$1.3 billion ($166 million). The police arrested 11 people including Lin and Chen on suspicion of fraud, money laundering, and conspiracy to commit fraud. Police also seized computers, mobile phones, bank cards and documents from the suspect’s residence.

The case sparked public outrage and raised questions about Hong Kong’s regulatory framework for crypto assets. Hong Kong has been trying to position itself as a global innovation and technology hub, especially after the introduction of a national security law in 2020 that eroded the city’s autonomy and freedoms. In November 2020, the China Securities Regulatory Commission announced a new licensing system for virtual asset trading platforms to strengthen investor protection and combat money laundering activities.

The system will only come into effect in June 2023, leaving a gap of more than six months for unregulated platforms such as JPEX. Furthermore, the regime only covers platforms that trade at least one security token, a crypto-asset that represents ownership or rights in an underlying asset or business. Platforms that only trade non-security tokens, such as Bitcoin or Ethereum, do not need an SEC license.

This means that a large portion of Hong Kong’s cryptocurrency market remains unregulated. According to CoinMarketCap, there are currently more than 11,000 cryptoassets in circulation, with a total market capitalization of more than $2 trillion. Many of these assets are highly volatile and speculative; some may be fraudulent or illegal.

The JPEX case also highlights the dangers of trusting social media influencers who endorse crypto products or platforms without proper disclosure or due diligence. Influencers may have ulterior motives or conflicts of interest when promoting certain platforms or tokens. They may also lack the expertise or credibility to provide accurate or reliable information about the risks and rewards of investing in cryptoassets.

Investors should be wary of any platform or product that promises unrealistic returns or guarantees without disclosing the risks involved. They should also do their own research and verify the credentials and reputation of any platform or product they intend to use. They should also check whether the platform or product is licensed or regulated by any authority in Hong Kong or elsewhere.

The JPEX case also draws attention to Dubai’s role as a cryptocurrency haven for questionable operators. Dubai, part of the United Arab Emirates (UAE), has always attracted cryptocurrency businesses with its low taxes, relaxed regulations and friendly attitude.

Dubai has no specific laws or powers to regulate crypto-assets, nor does it require crypto platforms to be licensed or registered with any agency. Dubai also does not have an extradition treaty with Hong Kong, making it difficult for authorities to pursue JPEX or its founders.

However, Dubai’s crypto-friendly stance may come at the cost of its reputation and security. Dubai may attract scammers, hackers and terrorists who use crypto assets to evade sanctions, launder money or fund illegal activities.