After the implementation of the Virtual Asset Service Providers (VASP) regime in Hong Kong, the regulatory authority, the Securities and Futures Commission of Hong Kong (SFC), has begun to govern 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 SFC on September 25, SFC plans to release the "Licensed Virtual Asset Trading Platform List," "Closed Virtual Asset Trading Platform List," "Authorized Virtual Asset Trading Platform List," and "Virtual Asset Trading Platform Applicant List" to optimize regulation during the transitional period of VASP application and ensure transparency of information for investors.
In addition, SFC will also release a dedicated "List of Suspicious Virtual Asset Trading Platforms" to provide early warnings to the public about risks.
JPEX, which operates for Hong Kong investors, has become the first "suspicious virtual asset trading platform" targeted by SFC.
On September 13, SFC stated that JPEX, which relies on celebrities and internet celebrities for promotion, made false and misleading statements such as "licensed" and "entered into business cooperation with Hong Kong listed companies," and its entities had not submitted any license applications for virtual asset trading platforms to SFC. As early as July 2022, the platform was listed in SFC's "List of Unlicensed Companies and Suspicious Websites."
After being named by SFC, JPEX users encountered difficulties in withdrawing funds. According to the Hong Kong police, there have been more than 2,000 reported cases involving a total amount of over 1.4 billion Hong Kong dollars, and 12 suspects have been arrested. This case has also been referred to as the "largest financial fraud case in history" by the Hong Kong media.
The JPEX incident and SFC's latest "4+1" list measures have also sounded the alarm for virtual asset exchanges operating in Hong Kong, indicating that exchanges wishing to apply for a VASP in Hong Kong should abandon "unconventional" promotional methods as soon as possible.
SFC Plans to Release "4+1" List to Increase Transparency
On September 25, SFC held a press conference, emphasizing the need for the public to be vigilant against local unlicensed or suspicious operating platforms. SFC's Chief Executive Officer, Ms. Ashley Alder, also stated that the existing regulation of virtual asset trading will be optimized.
According to the SFC statement, the optimization measures include four lists of virtual asset trading platforms, namely:
Licensed Virtual Asset Trading Platform List;
Closed Virtual Asset Trading Platform List, which includes the names of virtual asset trading platforms that are required by law to close within a specified period;
Authorized Virtual Asset Trading Platform List, which includes the names of virtual asset trading platforms that were authorized until June 1, 2024, and when the license application for a virtual asset trading platform previously recognized as licensed is approved, withdrawn, or rejected, the name of the platform will be transferred to the "Licensed Virtual Asset Trading Platform List" or "Closed Virtual Asset Trading Platform List";
Virtual Asset Trading Platform Applicant List
In addition to these four lists, SFC will also release a list specifically for suspicious virtual asset trading platforms, which will be published on the SFC website for easy access. SFC will also consider providing more information about unregulated virtual asset trading platforms to enable the public to be vigilant early on and ensure that information is published in a clear, transparent, and timely manner.
In fact, this "4+1" list measure is an important supplement to the implementation of the Virtual Asset Service Provider License (VASP) in Hong Kong and the one-year transitional period. SFC has continued to demonstrate its regulatory authority over virtual asset trading after the new policy was introduced.
Since June 1 of this year, Hong Kong has established a new licensing system for centralized virtual asset trading platforms. All virtual asset trading platforms operating in Hong Kong or actively promoting their services to Hong Kong investors are required to apply to SFC for a digital asset license and a Virtual Asset Service Provider License (VASP license).
After the policy was introduced, many virtual asset trading platforms claimed that they "will apply for a VASP license." As a result, the landscape of cryptocurrency exchanges flocking to Hong Kong has become mixed, making it difficult for the public to discern which platforms are truly applying for a license and fulfilling their compliance obligations. SFC has clearly also noticed this and has been issuing risk warnings to the public since August.
SFC Continuously Issues Warning Statements
On September 13, JPEX appeared in SFC's warning statement, becoming the first virtual asset trading platform to be named by SFC as "unregulated" and "suspicious." This platform was almost the catalyst for the introduction of the "4+1" list measures by SFC.
JPEX Has Been Under Surveillance for a Long Time and Was Exposed After Being Named by SFC
The JPEX trading platform may be familiar to Hong Kong citizens. Its advertisements were once widespread in major commercial areas and subway stations in Hong Kong. Hong Kong celebrities such as Cheung Chi-lam and model Angelababy have endorsed the platform, and local internet celebrities such as "Coin Master" Wong Chak-kit and Lin Zuobang have promoted JPEX on social media multiple times.
"Actively promoting the platform's services and products to the Hong Kong public through social media influencers and over-the-counter virtual asset currency exchange shops" became one of the reasons why JPEX was targeted by the SFC. It is worth noting that as early as March 2022, this platform had already come under the scrutiny of SFC and was listed in SFC's "List of Unlicensed Companies and Suspicious Websites" in July of the same year, warning the public that the platform was unregulated.
JPEX Was Listed in SFC's "Blacklist" in July Last Year
Despite being listed in the "blacklist," JPEX did not cease operations in Hong Kong. After SFC obtained regulatory authority over virtual asset trading in June of this year, it began to take action against JPEX.
On August 7 of this year, SFC officially warned the public of the risks, stating that some unlicensed virtual asset trading platforms falsely claimed to have submitted license applications to the SFC, or misled the public into believing that the trading platform complied with SFC's regulatory requirements.
On September 13, SFC directly named the trading platform and clarified that none of the entities under the JPEX Group had obtained a license from the SFC to operate a virtual asset trading platform in Hong Kong, and that its promotional methods, including "claiming to have obtained licenses to operate virtual asset trading platforms from several overseas regulatory authorities" and "entering into business cooperation with a Hong Kong listed company and receiving investment," were suspicious. The platform also provided "extremely high returns for some products," and retail investors complained of "reduced account balances and changes."
In response to this statement, JPEX announced its intention to apply for a license and expressed "extreme disappointment" with SFC's unfair disruption of the market order.
On September 20, SFC reiterated in a statement that JPEX had not obtained a license, had not applied for a license, and further stated that the trading platform had never contacted SFC regarding a possible license application, and disclosed that "subsequent information obtained by SFC raised suspicions of 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 cases, involving an amount exceeding 1.4 billion Hong Kong dollars. Twelve suspects have been arrested, including internet celebrities Lin Zuo, Chen Yi, and Wong Zhejie, who were involved in promoting and operating over-the-counter exchange shops for JPEX.
As the situation escalated, JPEX users found it difficult to withdraw their virtual assets stored on the platform. Initially, users had to fill out an application form to withdraw funds from JPEX. Some users also claimed that the platform limited withdrawal amounts to 1000 USDT (equivalent to about 1000 US dollars), and the withdrawal fee was increased to 999 USDT, meaning that users could only withdraw 1 USDT at most.
Users were trapped in a "withdrawal difficulty," while JPEX was monitored for abnormal large-scale and high-frequency outflows of USDT.
Blockchain data analysis company Bitrace conducted an audit of two JPEX fund transfer addresses on the Tron network and found that between September 14 and 20, one transfer address from JPEX transferred 1.5482 million USDT to 11 addresses, which were then sent to multiple trading applications and platforms. During the same period, another transfer address sent over 7.21 million USDT to 7 addresses, which "was neither user withdrawals nor normal platform business activities, but rather an abnormal outflow."
Bitrace's latest on-chain fund audit also indicated that JPEX-related addresses had received over 190 million risky USDT in the past 20 months, and these risky funds were related to online gambling, money laundering, and gray and black markets.
Individuals involved with JPEX may face criminal liability at the center of the storm.
According to the Hong Kong Anti-Money Laundering and Counter-Terrorist Financing Ordinance, operating and providing virtual asset services without a VASP license after June 1, 2023, is considered a criminal offense.
If convicted through the public prosecution process, a fine of 5 million Hong Kong dollars and 7 years' imprisonment may be imposed. For continuous offenses, an additional fine of 100,000 Hong Kong dollars may be imposed for each day of the offense. If convicted through the summary conviction process, a fine of 5 million Hong Kong dollars and 2 years' imprisonment may be imposed. For continuous offenses, an additional fine of 10,000 Hong Kong dollars may be imposed for each day of the offense.
Regulatory Thunder: Warning for License Applicants to Proceed with Caution
From issuing warnings, naming suspicious platforms, to a joint crackdown with the police, SFC has demonstrated a strong stance against virtual asset service providers that cross the line. This also sends a signal that platforms operating virtual asset trading in Hong Kong must adhere to SFC's regulations at all times, and unlicensed exchanges still operating in Hong Kong will face significant risks.
"Investor protection" is a key principle of SFC's specific regulatory implementation.
On September 18, Hong Kong Legislative Council member Wu Jiezhuang held a press conference, responding to the suspected fraud incident involving the virtual asset trading platform JPEX, stating that the incident has had a significant 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 Carrie Lam also stated that this incident reflects the importance of regulation, including the need to choose regulated and licensed trading platforms for investment, and investors should also have an understanding of virtual assets and related risks.
Under the new regulatory system, obtaining a VASP license is not easy. Virtual asset trading platforms need to meet various conditions in terms of company qualifications, investor protection, anti-money laundering, risk management, internal controls, and network security to obtain a license. Currently, no exchange has obtained a VASP license, and before obtaining this license, they also need to obtain the 1st (securities trading) and 7th (provision of automated trading services) licenses issued by SFC.
According to a previous statement by SFC, only two virtual asset service providers have obtained both the 1st and 7th licenses. These two are OSL Digital Securities Limited and Hash Blockchain Limited.
JPEX's high-profile and divisive promotional strategies have collided with the "gunpoint" of SFC, and the joint crackdown with the police carries a sense of "killing the chicken to warn the monkey." The clear stance, attitude, and methods have also sounded the alarm for virtual asset trading platforms intending to operate in Hong Kong.
With the implementation of the "4+1 list" measures, the disclosure of information for virtual asset trading platforms in Hong Kong will become more comprehensive. It can be foreseen that following the precedent set by JPEX, various virtual asset trading platforms intending to operate compliantly in Hong Kong will maintain a low profile before obtaining a license, and a corner of the cryptocurrency world's wilderness will disappear.
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