Hong Kong, a global financial hub and a gateway to China, has been rocked by a massive crypto scandal involving JPEX. This Dubai-based cryptocurrency exchange allegedly defrauded thousands of investors of more than $160 million. The case has exposed the regulatory loopholes, the lack of investor protection in Hong Kong’s nascent crypto industry, and the risks of relying on social media influencers to promote unlicensed platforms.

JPEX, which stands for Japan Exchange, claimed to be the world’s first crypto exchange offering its users dividends. It also boasted of partnering with major institutions such as HSBC, Standard Chartered, and Alibaba. It lured investors with promises of high returns and low fees and used aggressive marketing strategies such as billboards, online ads, and influencer endorsements.

Among the influencers who promoted JPEX were Joseph Lam, a barrister turned insurance salesman who called himself Hong Kong’s “Trolling King”, and Chan Yee, a YouTube personality with 200,000 subscribers. They showed their followers how Bitcoin profits could help them buy houses and cars and encouraged them to sign up for JPEX using their referral codes.

However, things started to unravel in September 2023, when JPEX announced that it was facing a “liquidity shortage” and suspended withdrawals. Many investors could not access their funds or contact the platform’s customer service. Some also discovered that JPEX had been operating without a license from Hong Kong’s Securities and Futures Commission (SFC), which regulates virtual asset trading platforms.

The SFC revealed that it had issued a warning letter to JPEX in June 2023, asking it to cease its activities in Hong Kong or apply for a license. However, JPEX ignored the letter and continued to operate illegally. The SFC also said it had no jurisdiction over JPEX’s operations in Dubai, where it was registered.

The Hong Kong police launched an investigation into JPEX after receiving complaints from more than 2,000 investors claiming to have lost HK$1.3 billion ($166 million). The police arrested 11 people, including Lam and Chan, on suspicion of fraud, money laundering, and conspiracy to defraud. The police also seized computers, mobile phones, bank cards, and documents from the suspects’ premises.

The case has sparked public outrage and raised questions about Hong Kong’s regulatory framework for crypto assets. Hong Kong has been trying to position itself as a global hub for innovation and technology, especially after introducing the national security law in 2020 that eroded its autonomy and freedoms. In November 2020, the SFC announced a new licensing regime for virtual asset trading platforms to enhance investor protection and combat money laundering.

The regime only took effect in June 2023, leaving a gap of more than six months for unregulated platforms like JPEX. Moreover, the regime only covers platforms that trade at least one security token, a type of crypto asset representing ownership or rights in an underlying asset or business. Platforms that trade only non-security tokens, such as Bitcoin or Ethereum, are not required to obtain a license from the SFC.

This means there is still a large segment of the crypto market that is unregulated and unsupervised in Hong Kong. According to CoinMarketCap, more than 11,000 crypto assets are in circulation, with a total market capitalization of over $2 trillion. Many of these assets are highly volatile and speculative; some may be fraudulent or illegal.

The JPEX case also highlights the dangers of trusting social media influencers who endorse crypto products or platforms without proper disclosure or due diligence. Influencers may have ulterior motives or conflicts of interest when they promote certain platforms or tokens. They may also lack the expertise or credibility to provide accurate or reliable information about the risks and rewards of investing in crypto assets.

Investors should be wary of any platform or product that promises unrealistic returns or guarantees without disclosing the risks involved. They should also do their own research and verify the credentials and reputation of any platform or product they intend to use. They should also check whether the platform or product is licensed or regulated by any authority in Hong Kong or elsewhere.

The JPEX case has also drawn attention to the role of Dubai as a crypto haven for shady operators. Dubai, part of the United Arab Emirates (UAE), has been attracting crypto businesses with its low taxes, lax regulations, and friendly attitude.

Dubai has no specific law or authority to regulate crypto assets and does not require crypto platforms to obtain a license or register with any agency. Dubai also does not have an extradition treaty with Hong Kong, making it difficult for the authorities to pursue JPEX or its founders.

However, Dubai’s crypto-friendly stance may come at a cost for its reputation and security. Dubai may become a magnet for scammers, hackers, and terrorists who use crypto assets to evade sanctions, launder money, or finance illicit activities.

Dubai may also face pressure from other countries or international organizations to tighten its crypto industry oversight and compliance. Dubai may have to balance its ambition to become a global leader in innovation and technology with its responsibility to prevent and combat financial crimes and risks.

The JPEX case is not the first nor the last crypto scandal that Hong Kong will face. This is not only a wake-up call for investors but also for regulators and policymakers. As the crypto industry grows and evolves, new challenges and opportunities will emerge for Hong Kong and its stakeholders. Hong Kong needs to learn from the JPEX case and take proactive and preventive measures to safeguard its interests and values.

Hong Kong needs to enhance its regulatory framework, enforcement of the crypto industry, and its education and awareness campaigns for the public. Hong Kong must cooperate and coordinate with other jurisdictions and agencies to combat cross-border crypto crimes and risks.

The JPEX case is a crypto scandal that shakes Hong Kong’s reputation as a global financial hub and a gateway to China. It exposes the regulatory loopholes and the lack of investor protection in Hong Kong’s crypto industry, as well as the risks of relying on social media influencers to promote unlicensed platforms.

Hong Kong needs to strengthen its oversight and enforcement of the crypto industry and its education and awareness campaigns for the public. Hong Kong also needs to balance fostering and regulating the crypto industry and protecting and empowering its investors. Only then can Hong Kong maintain its edge and competitiveness in the global arena.

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