Anndy Lian weighs in on the recent collapse of JPEX, a cryptocurrency platform that allegedly defrauded thousands of investors of more than HK$1.4 billion (US$180 million).
The collapse of JPEX has exposed the dark side of Hong Kong’s crypto industry and raised serious questions about its regulatory framework.
JPEX, which claimed to be a licensed and regulated platform, lured investors with flashy advertisements, celebrity endorsements, and promises of high returns. It offered its own native token, JPC, which could only be traded on its platform, as well as other popular cryptocurrencies such as Bitcoin and Tether.
However, in September 2023, JPEX suddenly suspended its services and announced that it was under investigation by the Hong Kong police for suspected money laundering and fraud. The platform’s website and social media accounts were taken down, and its customer service hotline was disconnected. Many investors found themselves unable to access their funds or withdraw their assets.
The JPEX scandal is not an isolated incident. In fact, it is the latest in a series of crypto scams that have plagued Hong Kong in recent years. In 2022, another platform called Black Cell Technology was shut down by the Securities and Futures Commission (SFC) for conducting an illegal initial coin offering (ICO) that raised US$30 million from investors. In 2021, a platform called MyCoin disappeared with HK$3 billion (US$387 million) from more than 3,000 investors.
These cases highlight the risks and challenges that Hong Kong faces as it strives to become a global hub for crypto innovation and adoption. While the city has a vibrant and diverse crypto ecosystem, with over 100 platforms operating in the market, it also suffers from a lack of clear and consistent regulation that leaves investors vulnerable to fraud and manipulation.
Hong Kong’s current approach to crypto regulation is based on a principle of “same risk, same regulation”. This means that crypto activities that fall under the existing securities laws are subject to the SFC’s oversight and enforcement, while those that do not are largely unregulated.
For example, the SFC has issued guidelines for platforms that offer trading of security tokens, which are digital tokens that represent ownership or economic rights in an underlying asset or business. These platforms must apply for a license from the SFC and comply with various requirements on anti-money laundering, investor protection, cybersecurity, and auditing.
However, most platforms in Hong Kong do not deal with security tokens, but rather with exchange tokens (such as Bitcoin) or utility tokens (such as JPC). These tokens are not considered securities under Hong Kong law and are therefore outside the SFC’s regulatory scope. As a result, these platforms operate in a legal gray area, where they are not required to obtain a license or follow any specific rules.
This creates a loophole that allows unscrupulous platforms to exploit investors’ ignorance and greed. By claiming to be licensed or regulated, these platforms can create a false sense of security and legitimacy among investors who may not understand the difference between security tokens and other types of tokens. By offering high returns or incentives, these platforms can entice investors to invest in their native tokens or other obscure cryptocurrencies that have no intrinsic value or market liquidity. By using complex and opaque mechanisms, these platforms can manipulate the prices and volumes of their tokens or cryptocurrencies to create artificial demand or supply.
The JPEX scandal is a symptom of a deeper problem in Hong Kong’s pursuit of financial innovation. While the city has been supportive of crypto development and has launched various initiatives to foster fintech growth, such as regulatory sandboxes and cross-border collaborations, it has also been slow and reactive in addressing the emerging risks and challenges posed by crypto activities.
Hong Kong needs to adopt a more proactive and comprehensive approach to crypto regulation that balances innovation with protection. Instead of relying on existing securities laws that may not capture the full spectrum of crypto activities, Hong Kong should consider developing a new regulatory framework that covers all types of crypto assets and service providers.
Such a framework should aim to achieve four main objectives: first, to prevent money laundering and terrorist financing; second, to protect investors from fraud and manipulation; third, to ensure fair competition and market integrity; and fourth, to promote financial inclusion and education.
To achieve these objectives, Hong Kong should consider implementing some of the following measures:
Require all crypto platforms to register or obtain a license from the SFC or another designated authority before operating in Hong Kong or serving Hong Kong investors.
Impose minimum standards on crypto platforms regarding capital adequacy, risk management, governance, disclosure, auditing, and reporting.
Establish a mechanism for monitoring and supervising crypto platforms’ activities and transactions, including their use of stablecoins or other forms of digital currency.
Enforce strict rules on crypto advertising and marketing, especially on social media platforms where influencers may have significant influence over investors’ decisions.
Hold crypto platforms accountable for any losses or damages suffered by investors due to their negligence, misconduct, or breach of contract.
Hold influencers accountable for any false or misleading statements or representations they make about crypto platforms or products.
Educate investors about the risks and benefits of crypto investments, as well as their rights and responsibilities as consumers.
Encourage self-regulation and industry best practices among crypto platforms and service providers, such as adopting codes of conduct, standards of ethics, and dispute resolution mechanisms.
By adopting these measures, Hong Kong can enhance its reputation as a leading crypto hub that fosters innovation and adoption while ensuring protection and stability. Hong Kong can also position itself as a role model for other countries that are grappling with similar issues and challenges in the crypto space.
The JPEX scandal is a wake-up call for Hong Kong to take action and reform its crypto regulation. The city cannot afford to lose its competitive edge or its credibility in the global financial market. The time to act is now.