Hong Kong’s financial watchdog has issued a stern warning to investors, urging them to use only licensed and regulated cryptocurrency trading platforms. The caution comes in the wake of a major fraud investigation into an unlicensed virtual asset platform, JPEX, which has allegedly caused around HK$1.2 billion (US$154 million) in losses to over 1,600 investors, marking it the largest fraud case in Hong Kong’s history. This incident casts a shadow on the government’s ongoing efforts to position the city as a global hub for digital assets. 

Former Securities and Futures Commission (SFC) regulator Angelina Kwan, who currently holds the position of chief executive officer at Hong Kong-based regulation consultancy Stratford Finance, said that the city has chosen to permit retail cryptocurrency exchanges, but with stringent protective measures in place. The recent enforcement actions demonstrate Hong Kong’s commitment to penalizing entities with malicious or illicit practices. 

Forkast spoke with Kwan, who helped shape Hong Kong regulations on automated and internet trading services as a director of the SFC’s Supervision of Markets division from 1999 to 2006. The discussion highlighted deficiencies in Hong Kong’s virtual asset trading platform (VATP) licensing system, which were exposed by the alleged fraud case involving JPEX. 

The following Q&A has been edited for clarity and length. 

Forkast: JPEX has been on the Investor Alert List since July 2022. Having worked for the SFC, a very important part of your job was to supervise and monitor the activities of exchanges. Were there any red flags the SFC was monitoring? 

Angelina Kwan: The situation has been unfolding for over the last few weeks. If you look at a number of documents that have been going back and forth, JPEX has actually accused the SFC of being heavy-handed. This has all been in the public domain where they’ve written public letters. I have never seen a so-called ‘regulated firm’ write that way to a regulator. There was just no respect and they were really on the offensive. 

The SFC, very early, on has told the whole industry to get your applications in by a certain time. If not, you need to orderly get yourself out of here. It was a very polite way of saying, ‘Please close down if you’re not going to do this.’

In the JPEX case, they really lied. They said they were regulated and they said that they are applying for the SFC licenses. That’s a blatant lie.

Forkast: How will the new licensing regime protect investors? Do you see more enforcement actions against exchanges in Hong Kong?

Kwan: I definitely see there will be more enforcement actions because just as the sun rises, the sun sets. You have firms that will be applying, you have bad actors that will try to come to Hong Kong and you’ll have some great people coming into Hong Kong bringing innovation. So with the good also comes the bad and it will be up to investors to be wary of what they’re getting into. 

What’s happening in the industry is that there will be mandatory licensing at some point for all virtual asset service providers. Those that are licensed will have licenses online and they will be on SFC’s watch list. From the industry side, we have the Hong Kong Securities and Investment Institute. We will be putting on a whole series of training courses in terms of training employees of digital asset firms and we are also looking at doing public service training.

I was around when the securities industry was just starting to grow in Hong Kong, where we were seeing the same growing pains. We had a huge case called CA Pacific, which also blew up at the time, and questions like why didn’t the regulator see this and why didn’t they warn people were asked. They couldn’t because maybe they didn’t know about it. With the internet and digital assets, everything moves so much faster now. Back then, we had faxes and television. That’s about it when the securities industry came about. 

This time I’ve seen the SFC move very quickly with the police hand in hand, especially in light of the responses from JPEX and the way they treated people. And that announcement of jacking up withdrawal fees was absolutely insane and led to their demise.

Forkast: Angelina, you are an expert in Australian and Hong Kong law. JPEX has Australian origins and is headquartered in Dubai. How will this impact the accountability of the platform’s operators? Is there any knowledge-sharing agreement between different jurisdictions for fraud prevention?

Kwan: VARA, which is the Virtual Asset Regulatory Authority in Dubai, has just worked out a memorandum of understanding with the SFC. They have also taken a very proactive stance in terms of warning firms that are doing funky things quickly. 

In the case of JPEX, they lied. They were not regulated in Dubai. I really do not understand why they would even say that they were licensed because it’s a blatant lie and they were banking on the fact that retail investors wouldn’t check this. That’s the thing. What we need to train investors who wish to go into this industry is that not everybody is regulated and people do lie.

That’s what’s going to start to ratchet up between all regulators in the region as well as around the world. The International Organization of Securities Commissions (IOSCO) just came out with a paper on guidelines for all regulators around the world on what regulation should look like. The SFC follows it, as does VARA, and other regulators. 

IOSCO is the organization that overlooks and promotes the framework for all regulators to work together. And they’re probably going to be looking at this case very carefully, as well as trying to promote communications among regulators.

Forkast: How do you think those in charge of JPEX are brought to justice?

Kwan: IOSCO is actually promulgating more and more calls together. I can’t speak for sure, but Hong Kong and Australia, as well as anywhere else that they’re operating, already have had calls about it to see what assets are in those countries that can be frozen to make sure that at least this HK$1.2 billion or US$124 million can be recovered and aggrieved investors can get their money back.

That’s going to be a bit of an arduous process. I am glad that HK$1.2 billion is the largest amount Hong Kong has had. You have seen what happened with FTX. They were not regulated in Hong Kong. They were regulated in the Bahamas. It’s been very difficult for investors in Hong Kong to actually collect their assets that are in the Bahamas or in FTX.

But at least if they’re regulated, if something goes terribly wrong, Hong Kong regulators can actually close or cease their trading and actually hold on to the assets. That’s why regulation is so important for the digital asset industry to grow and to survive, because only by regulation can we actually grow and truly morph into a proper asset class, which is one of the reasons why we’ve been pushing for licensing and the watershed to happen. 

Forkast: What’s next? What does the process for asset recovery look like?

Kwan: The SFC is going to have to work with what it has so it doesn’t have any information about them. They are going to have to find all of this information and try to freeze what they can working with the police. That’s why they had to alert the police also. The police and probably the Commercial Crime Bureau will have to work together to search for assets, freeze them, and then liquidators will probably be appointed and investigations will occur. Then the whole process of returning assets will have to happen. And that’s going to be the time-consuming part.

That’s why it’s very important for investors. If you’re going to get into any investing, know who you’re investing with, invest with a licensed entity. So the two licensed entities right now in Hong Kong are Hashkey and OSL. 

What about the money changers that are changing Bitcoin for dollars? You can do that with certain coins. What about the machines that you can buy Bitcoin from? What about the shops that are specifically for just buying Bitcoin in Hong Kong?

The Hong Kong government has taken the stance to review this in due course. But the first area that the SFC had to focus on was centralized exchanges because they were the most high profile and they were the most global in nature. That is the mandate that Elizabeth Wong, director of licensing at the SFC, had to start with. 

They don’t have a ton of people with the expertise to do this. And that’s why the Hong Kong government opted to move with this first and get them all licensed first. Then the next phase was the mom-and-pop shops. Now the government will be re-evaluating this whole area and put in licensing for it.

Forkast: Singapore is stricter when it comes to retail marketing of crypto exchanges. Will this incident make Hong Kong follow suit? 

Kwan: Hong Kong has made a decision to allow retail with guardrails. That was a very big decision for Hong Kong. They need to stick to it. There may be tweaks in terms of how things work, but they’ve issued a very comprehensive licensing regime. We need to make sure it works. They’re going to probably be stepping up enforcement in terms of walking the beat more to see what is happening in the market. 

What we should be doing as people in the industry is we should be calling out if there are bad actors. If you’re making our livelihood look bad, then you should be reporting it to the police as well as to the SFC. And if they’re looking like a bank or squawking like a bank, then the Hong Kong Monetary Authority (HKMA) should also be alerted and told these companies are holding themselves out to be banks and selling bank-like products. So please take action and put that letter on record. If we were to go backward, and not allow retail, it would really dampen Hong Kong. 

Jeff Cheung contributed to this article.