Following the arrest of eight individuals linked to the JPEX cryptocurrency exchange scandal that saw investors lose over $150 million in assets, John Lee, the Chief Executive of Hong Kong, said the autonomous special administrative territory will be taking stringent measures to regulate cryptocurrencies and related products.
On Monday, the Police received complaints from more than 1,600 investors who had invested HK$ 1.19 billion (approximately $153 million) in cryptocurrencies on the platform only to be duped by its operators.
The single largest financial fraud case in Hong Kong’s history has raised questions about how the government plans to protect local investors from crypto-related risks while pushing to transform the financial capital of China into a global hub for virtual assets.
Hong Kong Police Froze Bank Accounts And Seized Assets
Hong Kong police have detained eight people with connections to JPEX, including social media influencers who were paid to promote its services and several employees.
JPEX, which was one of the largest crypto trading platforms in Hong Kong, began to face trouble after the Securities and Futures Commission (SFC) issued a public warning last week saying the platform was unregulated and had made false claims about its regulatory compliances.
As a follow-up, on Monday, the exchange announced it was suspending all trading activities, citing a liquidity shortage, and said it was in negotiations with “third-party” market makers to resolve the issue.
The exchange had been actively promoting its products and services to Hong Kong residents through social media influencers and key crypto opinion leaders, who were suggesting JPEX was one of the very few exchanges that had obtained a crypto trading license from the SFC.
Hong Kong Securities Regulator Said JPEX Was Operating Without A License
However, on Tuesday, Elizabeth Wong, SFC’s director of licensing and head of its fintech unit, said the company had never contacted the Commission prior to its warning and is looking into whether the exchange had violated Hong Kong’s anti-money laundering laws.
JPEX retaliated by complaining of “unfair treatment by relevant institutions” in Hong Kong, even accusing an unidentified third-party market maker of “maliciously” freezing its funds.
Authorities froze several bank accounts linked to JPEX that had deposits worth around $2 million and seized three properties valued at $5.6 million that were owned by company executives.
In a recent press conference, Hong Kong Chief Executive John Lee stressed the importance of investing only in crypto platforms that had received regulatory approval from the SFC. Authorities also ensured that those affected by the JPEX debacle will be protected.
Meanwhile, the senior superintendent of the city’s Police department, Kung Hing-Fu, said the investors affected by the scandal were mostly inexperienced and easily fell for promises of high yields with low risk that were made by JPEX.
JPEX Spends Millions Advertising To Gain The Trust Of Hong Kong’s Retail Investors
Established in 2021, JPEX has been spending aggressively to advertise and market its products in Hong Kong. According to reports, the crypto firm spent over $5 million just on advertising in the city’s hotspots.
It was also revealed that the exchange paid $70,000 to become the “Platinum Sponsor” of Token2049 – one of the world’s largest cryptocurrency conferences, to be held in Singapore.
Hong Kong Establishes New Regulatory Regime For Crpto Service Providers
In June, the city-state established a new framework to better regulate the volatile Bitcoin (BTC) and crypto market. Hong Kong, which has long been a haven for crypto companies, will now require firms to obtain an operational license from the SFC to legally offer their services to retail and institutional investors. Virtual asset service providers (VASP) have been given a grace period of one year to comply with the new regulations.
To date, only two cryptocurrency exchanges – OSL and Hashkey – have received licenses from the regulator to provide virtual asset trading services to retail and institutional investors.
SFC Strengthens Its Efforts To Educate Investors On Cryptocurrencies
In preparation, the SFC even ramped up its investor education program to educate potential investors about the risks they may have to face when involved with unregulated or overseas crypto platforms. The regulator first issued a warning about JPEX through its Investor and Financial Education Council in July 2022.
The Hong Kong government’s action to crack down on JPEX was lauded by market analysts as being favorable for licensed firms. In a research note, financial analysts Steven Niew and Carlton Lai of Daiwa Capital Markets said the event proved that regulators in Hong Kong will take fierce action towards illegal players “with no hesitation”.
Hong Kong has grown into a crypto hub ever since China imposed a complete ban on cryptocurrency transactions and investments within the Mainland. Beijing’s regulatory action forced many domestic and international firms to move their operations to Hong Kong and other crypto-friendly jurisdictions overseas.