Cryptocurrency investor Jenny first discovered the digital asset in March at a Hong Kong shop promoting cryptocurrency exchange JPEX, but by September she was among more than 2,000 "inexperienced" victims who police say were been scammed by the platform.
“Many of my classmates and friends invested heavily in our investments,” Jenny (a pseudonym), who lost a “six-figure sum” in Hong Kong dollars, told reporters.
“We never thought it was a scam.”
The JPEX scandal led to the arrest of 11 employees and influential members of the company this week for “fraudulent conspiracy,” and losses for victims topped $175 million.
The JPEX case casts a shadow over the adoption of digital assets in Hong Kong. Experts say the regulatory shortcomings were highlighted just three months after the introduction of regulations requiring cryptocurrency exchanges to obtain licenses and meet investor protection standards.
Last week, the Securities and Futures Commission issued a warning about the platform, saying it misrepresents itself as "licensed" and has suspicious features such as abnormally high profits.
In response, JPEX abandoned its for-profit products and charged exorbitant withdrawal fees.
Police carried out major raids on Monday at 20 locations, including cryptocurrency companies and private homes, confiscating cash, computers and luxury bags.
Two telecommunications service providers confirmed on Thursday that they had asked police to block access to the JPEX website.
Investigators are investigating whether JPEX colluded with influencers and shops to increase the legal status of the platform and the value of virtual coins issued by JPEX.
“Victims often have the mentality of 'fear of missing out' and impulsively believe in such advertisements... (But) there is no such thing as a free lunch,” Chief Inspector Kung Hing-fun said, describing the scale of the incident as follows: "shocking".
According to its website, Dubai-based JPEX called the regulatory action "unfair" and "biased."
He did not respond to several requests for comment from AFP.
- “Bad Player” –
Cryptocurrency trading is banned in China, but Hong Kong, which has its own financial regulations, has received support from Beijing to realize its ambitions of becoming a digital asset hub.
By contrast, US regulators took tough action against the sector following the collapse of FTX last year, costing investors billions and triggering a “crypto winter”.
Christy Schwartz, a fintech lawyer at DLA Piper, said Hong Kong faces a difficult balancing act as it must promote crypto firms while building guardrails to protect retail investors.
The licensing system approved in June targets exchanges, but excludes over-the-counter brokers – brick-and-mortar companies that outwardly resemble exchanges – which Schwartz called a “loophole.”
As for enforcement action against JPEX, Swartz said regulators "may be a little harsh, but I think it's the right message."
“This is an area where there are a lot of bad players.”
Some OTC companies are supported by famous influencers and run courses that expose victims like Jenny to harsh sales tactics.
He said the store where he first discovered blockchain felt “like an extended family” to him.
A Hong Kong cryptocurrency entrepreneur, who asked to remain anonymous, told AFP that JPEX offered big incentives to partner with OTC firms, including better exchange rates and advertising and rental subsidies.
- "Resurrection" -
Regulators admitted on Tuesday that they "do not have data on how many discretionary stores are actually operating in Hong Kong."
Clara Chiu, former director of licensing at the SFC, told AFP that such arrangements were less popular when she drafted Hong Kong's fintech regulations in 2019 and were therefore not a priority.
“The time has come to consider revitalizing and expanding our licensing and oversight system for OTC cryptocurrency businesses,” Chiu said, citing “more aggressive” deal marketing in recent times.
Carlton Lai, head of blockchain and cryptocurrency research at Daiwa Capital Markets, said the scandal "could be a wake-up call" for authorities.
“In terms of anti-money laundering and knowing your customer, there may be a need for more regulation for OTC shops,” but the CEO will be firm, he said.
Despite the crackdown, JPEX launched a “stakeholder dividend plan” on its website on Wednesday, allowing users to vote – and invest – in the company's future.
“Even in the face of this oppression and unfair treatment, our platform will continue to operate as usual,” he said.
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