Written by: Mu Mu

Editor: Wen Dao

After Hong Kong implemented the virtual asset trading platform licensing system (VASP), the regulatory authority, the Securities and Futures Commission of Hong Kong (SFC), began to manage the risks of unregulated and suspicious platforms in accordance with the Anti-Money Laundering and Counter-Terrorist Financing Ordinance which came into effect on June 1.

According to the latest news from the SFC on September 25, the SFC plans to publish a "List of Licensed Virtual Asset Trading Platforms", a "List of Closed Virtual Asset Trading Platforms", a "List of Authorized Virtual Asset Trading Platforms" and a "List of Virtual Asset Trading Platform Applicants" to optimize supervision during the transition period of VASP applications and ensure information transparency for investors.

In addition, the SFC will also publish a special "List of Suspicious Virtual Asset Trading Platforms" to alert the public to risks as early as possible.

JPEX, which operates for Hong Kong investors, became the first "suspicious virtual asset trading platform" to run into the SFC's gun.

On September 13, the SFC stated that JPEX, which relies on celebrities and influencers to attract traffic, made false and misleading statements such as "licensed" and "entered into business cooperation with Hong Kong listed companies", and its entities have never submitted any virtual asset trading platform license applications to the SFC. As early as July 2022, the platform was included in the SFC's "List of Unlicensed Companies and Suspicious Websites".

After being named by the SFC, JPEX users encountered difficulties in withdrawing funds. According to the Hong Kong police, more than 2,000 reports have been made, involving an amount of more than HK$1.4 billion, and 12 suspects have been arrested. This case has also been called "the largest financial fraud case in history" by the Hong Kong media.

The JPEX incident and the SFC’s latest “4+1” list measures have also sounded the alarm for virtual asset exchanges operating in Hong Kong. Exchanges that want to apply for Hong Kong VASP must abandon their “wild” methods of attracting traffic as soon as possible.

01 SFC plans to release the "4+1" list to improve transparency

On September 25, the SFC held a press conference to reiterate that the public should be vigilant against local unlicensed or suspicious operating platforms. SFC Chief Executive Officer Leung Fung-yee also stated that the existing virtual asset trading supervision will be optimized.

According to the SFC statement, the optimization measures include 4 lists of virtual asset trading platforms, namely:

  • List of licensed virtual asset trading platforms;

  • List of closed virtual asset trading platforms, i.e. the names of virtual asset trading platforms that are required to adjust their business within a specified period in accordance with the law

  • The list of authorized virtual asset trading platforms, that is, the names of virtual asset trading platforms that have been authorized as of June 1, 2024, will be listed. When the license application of a virtual asset trading platform previously identified as a licensed platform is approved, withdrawn or rejected, the name of the platform will be transferred to the "List of Licensed Virtual Asset Trading Platforms" or "List of Closed Virtual Asset Trading Platforms".

  • List of applicants for virtual asset trading platforms

In addition to these four lists, the SFC will also publish a list specifically targeting suspicious virtual asset trading platforms, which will be published on the SFC website for easy access. The SFC will also consider providing more information on unregulated virtual asset trading platforms to alert the public early and ensure that information is released in a clear, transparent and timely manner.

In fact, this "4+1" list initiative is also an important supplement to the implementation of the Hong Kong Virtual Asset Service Provider License (VASP) and the one-year transition period for license application. The SFC has also continued to demonstrate its regulatory subjectivity over virtual asset transactions after the new policy.

Starting from June 1 this year, Hong Kong has established a new licensing system for centralized virtual asset trading platforms. All virtual asset trading platforms that operate virtual asset exchange businesses in Hong Kong or actively promote their services to Hong Kong investors must apply for and obtain a digital asset license and a virtual asset service provider license (VASP license) from the SFC.

After the policy was introduced, many virtual asset trading platforms announced that they would "apply for VASP licenses". The cryptocurrency exchanges that went to Hong Kong were mixed, and the public could not tell which platforms were really applying for licenses and fulfilling their compliance review obligations. The SFC has obviously noticed this and has been issuing risk warnings to the public since August.

SFC issues warning statements

On September 13, JPEX appeared in the SFC’s warning statement, becoming the first virtual asset trading platform named by the SFC as “unregulated” and “suspicious”. This trading platform was almost the trigger for the SFC to introduce the “4+1” list measures.

02 JPEX was under surveillance for a long time and was named by SFC before it collapsed

Hong Kong citizens may be familiar with the JPEX trading platform. The advertisements of the trading platform have been all over the major streets and subways in Hong Kong. Hong Kong star Zhang Zhilin, model Zhuang Simin and other celebrities have endorsed it, and local Hong Kong Internet celebrities such as "Coin Master" Huang Zhengjie and Lin Zuobang have repeatedly supported JPEX on social media.

JPEX advertisements that appeared on the streets of Hong Kong

"Actively promoting the platform's services and products to the Hong Kong public through social media influencers and over-the-counter virtual asset currency exchangers (OTC money changers)" became one of the reasons why JPEX was targeted by the Hong Kong Securities and Futures Commission. It is worth noting that as early as March 2022, the platform had already entered the SFC's field of vision and was included in the SFC's "List of Unlicensed Companies and Unlicensed Websites" in July of that year, reminding the public that the platform is not regulated.

JPEX was included in the SFC "blacklist" in July last year

JPEX, which was included in the "blacklist", did not stop operating in Hong Kong. After June this year, the SFC began to take action against JPEX after obtaining the regulatory power over virtual asset transactions in accordance with the law.

On August 7 this year, the SFC officially warned the public of risks that some unlicensed virtual asset trading platforms falsely claimed that they had submitted license applications to the SFC, or misled the public into believing that the trading platform complied with the SFC's regulatory requirements.

On September 13, the SFC directly named the trading platform and clarified that none of the entities under the JPEX Group have been licensed by the SFC, and have not applied to the SFC for a license to operate a virtual asset trading platform in Hong Kong. There are also many suspicious aspects in the operation method of using internet celebrities for promotion, including "claiming to have obtained licenses to operate virtual asset trading platforms from several overseas regulatory agencies", "having entered into a business cooperation with a Hong Kong listed company and obtained investment" and other false propaganda, "providing extremely high returns for some products", and being complained by retail investors that "account balances have been reduced and changed".

In response to this statement, JPEX announced its intention to apply for a license and expressed "extreme disappointment with the CSRC's unfair practices that disrupt market order."

On September 20, the SFC issued another statement reiterating that JPEX had not obtained a license or applied for a license. It also stated that the trading platform had never contacted the SFC regarding a possible license application, and disclosed that "the information subsequently obtained by the SFC made it suspected that the case involved fraud, so it has been referred to the police for handling."

According to Hong Kong media reports, as of September 23, the Hong Kong police have received more than 2,300 JPEX-related reports involving more than HK$1.4 billion. Twelve suspects have been arrested, including internet celebrities Lin Zuo, Chen Yi, and Huang Zhengjie, who attracted traffic to JPEX and operated over-the-counter exchange shops.

As the two sides confronted each other and the incident fermented, JPEX users found that it was difficult to withdraw the virtual assets they stored on the platform. First, they needed to fill out an application form to withdraw money from JPEX. Some users also said that the platform limited the withdrawal amount to 1,000 USDT (equivalent to about 1,000 US dollars), and the withdrawal fee was increased to 999 USDT, which means that users can only withdraw 1 USDT at most.

Users are having difficulty withdrawing their money, but JPEX has detected abnormal large-scale and high-frequency outflows of USDT.

Blockchain data analysis company Bitrace audited two JPEX fund transfer addresses on the TRON network and found that between September 14 and 20, one JPEX transfer address transferred 1.5482 million USDT to 11 addresses after September 14, and then remitted it to multiple trading applications and platforms; during the same period, another transfer address transferred more than 7.21 million USDT to 7 addresses. "This part of the funds was neither user withdrawals nor normal platform business activities, but an abnormal outflow."

Bitrace’s latest on-chain fund audit also pointed out that more than 190 million risky USDT have flowed into JPEX-related addresses in the past 20 months. These risky funds are involved in online gambling, money laundering, and gray and black industries.

Those involved in JPEX who are at the center of the storm may face criminal liability.

According to Hong Kong's Anti-Money Laundering and Counter-Terrorist Financing Ordinance, after June 1, 2023, it is a criminal offence to operate a virtual asset service without a VASP license.

If convicted on indictment, the offender shall be liable to a fine of HK$5 million and to imprisonment for 7 years and, in the case of a continuing offence, to a further fine of HK$100,000 for each day during which the offence continues. If convicted on summary conviction, the offender shall be liable to a fine of HK$5 million and to imprisonment for 2 years and, in the case of a continuing offence, to a further fine of HK$10,000 for each day during which the offence continues.

03 Regulatory Thunder Warns Applicants to Act with Caution

From issuing warnings, naming suspicious platforms to joining forces with the police to launch a heavy-handed crackdown, the SFC has shown a thundering attitude towards virtual asset trading service providers that have crossed the line. This also sends a signal to the outside world: platforms operating virtual asset transactions in Hong Kong must always follow the SFC's regulations, and unlicensed exchanges that are still doing business in Hong Kong will face considerable risks.

"Investor protection" is an important principle for the SFC to implement specific supervision.

On September 18, Hong Kong Legislative Council member Wu Jiezhuang held a separate press conference. In response to the suspected fraud incident of the virtual asset trading platform JPEX, he said that the incident had a great impact on the development of virtual assets in Hong Kong and the government should do more to protect small investors. On September 19, Hong Kong Chief Executive John Lee also said that this incident reflects the importance of supervision, including the need to choose to invest in regulated and licensed trading platforms, and investors must also have some understanding of virtual assets and related risks.

Under the new regulatory system, it is not easy to obtain a VASP license. Virtual asset trading platforms need to meet the conditions of company qualifications, investor protection, anti-money laundering, risk management, internal monitoring, network security, etc. before they can obtain a license. Currently, no exchange has obtained a VASP license, and before obtaining this license, it is necessary to obtain the No. 1 license (securities trading) and No. 7 license (providing automated trading services) issued by the SFC.

According to the SFC’s previous statement, there are currently only two virtual asset trading service providers that have obtained licenses No. 1 and 7, namely OSL Digital Securities Limited and Hash Blockchain Limited.

JPEX's high-profile and well-diversified publicity and traffic-generating strategy hit a snag. The heavy-handed blow from the SFC and the police was somewhat meant to "kill the chicken to scare the monkey". The clear position, attitude and means also sounded the alarm for virtual asset trading platforms that want to operate in Hong Kong.

With the implementation of the "4+1 List" initiative, the information disclosure of virtual asset trading platforms in Hong Kong will become more and more complete. It can be foreseen that with the precedent of JPEX, various virtual asset trading platforms that intend to operate in compliance in Hong Kong will keep a low profile before obtaining a license, and the wild jungle of the crypto world has disappeared.