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  • L Higgins and S Pettigrove

JPEX in hot soup as Hong Kong SFC vows to ladle out justice

In response to the rapidly shifting terrain of 'virtual asset trading platforms' (VATPs), Hong Kong's Securities and Futures Commission (SFC) announced it is taking action to fortify investor protection and enhance information sharing within the ever-evolving 'virtual asset' marketplace.

The timing of this announcement couldn't be more fitting, following the tumultuous JPEX crypto exchange scandal that has sent shockwaves through Hong Kong's financial circles. The SFC's intention is clear: to help the public discern the legitimate from the unregulated VATPs that might be prowling in Hong Kong's bustling crypto jungle to prevent similar events in future.

To address the concerns raised by the JPEX incident, the SFC suggests the implementation of a series of pivotal measures:

  1. Published VATP Lists: The SFC wants to "ensure that information is disseminated in a clear, transparent and timely manner." The SFC intends to publish lists of licensed VATPs, VATPs mandated to close down within a specified period, VATPs deemed licensed as of June 1, 2024, and a list of VATP applicants.

  2. Enhancing the Spotlight on Suspicious VATPs: To assist the public in discerning the reputable from the rogue in Hong Kong's VA landscape, the SFC will elevate and prominently display a dedicated list of 'suspicious' VATPs on its website (no word yet on the SFC's definition of 'suspicious').

  3. A Campaign for Public Vigilance: The SFC, in partnership with the Investor and Financial Education Council (IFEC), is launching a public campaign aimed at elevating awareness about fraud prevention. This campaign will utilise various channels, including mass media, social media platforms, and educational seminars.

  4. Sharpened Intelligence Gathering and Enforcement: The SFC states that is committed to strengthening its intelligence gathering process related to VA-related businesses and encourages the public to report any suspicious activities through the SFC's Online Complaint Form, providing vital intelligence.

The decision to publish the lists of VATPs was in direct response to public demand, according to Julia Leung Fung-yee, the CEO of the SFC. She emphasised, however, that an application for licensing doesn't necessarily translate to full compliance with the SFC's rules and regulations.

Until now, the cryptocurrency trading landscape in Hong Kong had been relatively exclusive, with just two platforms, OSL Digital Securities Limited and Hash Blockchain Limited, securing licenses to serve retail customers following the SFC's new virtual asset rules implemented on 1 June 2023.

The financial fracas of the JPEX incident, which has sent shockwaves through Hong Kong, is believed to be the city's largest-ever financial fraud, affecting over 2,300 victims and an estimated HK$1.43 billion.

The JPEX saga unfolded after the Dubai-based crypto exchange was accused of running without a license in Hong Kong, where it had garnered a substantial customer base. The SFC also alleged out that certain online influencers and over-the-counter virtual asset money changers had disseminated false information, by claiming that JPEX had applied for a VATP license.

In the ensuing panic, investors rushed to withdraw their assets, only to find that they could withdraw a maximum of 1,000 USDT, the dollar-pegged stablecoin issued by Tether. The withdrawal, however, came with an unexpected sting — an administrative fee of 980 USDT. The exchange eventually suspended withdrawals, citing "unfair treatment by relevant institutions in Hong Kong."

The Hong Kong police have since taken action, arresting 11 individuals linked to the JPEX scandal, including social media influencer Joseph Lam Chok. These suspects are facing charges of fraud and operating an unlicensed virtual asset exchange.

With measures ranging from public awareness campaigns to enhanced information dissemination, the SFC's proactive stance signifies a commitment to learning from past mistakes and steering Hong Kong's constantly evolving blockchain industry towards a bright, more secure future. The SFC's actions continue to set the benchmark for other jurisdictions seeking to keep up, offering hope that the lessons of today will shape a more resilient and global crypto ecosystem.

Australia could learn from Hong Kong, right now there is no way for users to check with AUSTRAC whether a digital currency exchange is registered with AUSTRACT, and such a move would help provide at least some indication of standards being met. Once licensing is in place for Australian digital currency exchanges (Australia doesn't use VASP language unlikely much of the rest of the world), then free searches for licence holders will likely be available if the AFSL regime is used (which appears likely).

By M Bacina, S Pettigrove, and L Higgins


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