Uncovering the Exchange JPEX: Pyramid Schemes, Fraud, the First Case of Hong Kong's New Cryptocurrency Regulations Woven by Influencers

Author: Yin Ning, Tuo Luo Finance

The fire of cryptocurrency in Hong Kong is still in its infancy, but it has already been doused with a bucket of cold water.

On September 13, the Hong Kong Securities and Futures Commission (SFC) rarely named a virtual asset platform, JPEX, marking the first virtual asset exchange to receive a red flag warning since the new regulations on cryptocurrency in Hong Kong.

According to the SFC's official website, JPEX actively promoted its services and products to the public in Hong Kong through social media influencers and over-the-counter virtual asset currency exchange merchants. None of the entities under the JPEX Group have been licensed by the SFC, nor have they applied for a license to operate a virtual asset trading platform in Hong Kong.

In response to the naming, JPEX claimed on its official website that it was "unfairly suppressed by the SFC, leading us to consider withdrawing our license application in Hong Kong and adjusting our future policy development accordingly. The SFC should bear full responsibility for undermining the development prospects of cryptocurrency in Hong Kong." From this attitude, it is clear that JPEX expressed its discontent, believing that there are countless institutions claiming to have applied for exchange licenses, and that the announcement only proves the SFC's discrimination. The last sentence is a blatant insult.

Even more amusingly, despite its tough response, JPEX's booth at the Token2049 event that day was deserted, indicating a hasty retreat. A booth typically costs at least 10,000 USDT, and their willingness to abandon the booth and flee speaks volumes.

JPEX hurriedly fleeing at Tokens2049, source JOY @ joyxspacelatte

Subsequently, the developments of the incident became increasingly bizarre.

On September 14, a screenshot of a withdrawal went viral in multiple crypto communities. A certain KOL withdrew 1,000 USDT from JPEX but only received 1 USDT, with a fee as high as 999 USDT, leading to an angry outburst on Twitter, calling it a "sham exchange." JPEX responded again, attributing the issue to the SFC's criticism, claiming that due to the statement, they "had no choice" but to adjust the USDT withdrawal fee in the early hours of the 14th. This statement undoubtedly sparked heated discussions on Twitter, with ongoing industry insults and debates.

Withdrawal screenshot, source Shapolang @ killthewolf.eth

After the subsequent withdrawal address provided in their statement, the amount received increased to 20 USDT, showcasing a shameless attitude of "clearly can be snatched, but insist on taking it reasonably." Currently, the exchange can no longer process withdrawals, and the police have intervened in the investigation. Influencers involved have also been affected. According to police reports, as of 10 PM on the 18th, a total of 1,641 people had reported related incidents, with the total amount involved reaching approximately 1.2 billion HKD, and the largest investor having invested 40 million HKD.

Thus, this campaign against JPEX has affected the entire cryptocurrency industry in Hong Kong and Taiwan.

01 Is there not a single truthful statement on JPEX's official website?

What kind of exchange can be so shameless and stubborn? With this question in mind, I gathered information from various sources to investigate JPEX, which revealed even more astonishing scams.

In fact, the people of Hong Kong are not unfamiliar with JPEX, as its promotional posters are ubiquitous in major mainstream districts of Hong Kong. From the promotional page on the official website, JPEX claims that its operational headquarters is in Dubai, focusing on serving the Asia-Pacific region for 20 years, and asserts that it has obtained the Canadian MSB Fintrac license, Australian ASIC license, and the MSB financial license issued by the US FinCEN.

However, the reality is vastly different from the introduction. JPEX was renamed JPEX Greenstone Exchange this year and officially entered Hong Kong in 2021, primarily promoting itself through influencers and over-the-counter methods. At the beginning of its entry into Hong Kong, it intended to ride on the coattails of the Japanese cryptocurrency exchange JPX, widely advertising itself as a famous Japanese exchange, forcing JPX to clarify on February 8, 2022, that there is no relation between the similar names and entities. After the clarification, JPEX continued to respond that the company has no relationship with JPX, but even now, searching for the exchange on Baidu still associates it with terms like Japanese exchange and Singapore headquarters.

JPX clarifying its non-relationship with JPEX, source JPX official website

Maliciously riding on others' coattails is clearly not a one-time occurrence. In early 2022, JPEX established a partnership with Simplex and announced the launch of a VISA card in the fourth quarter. JPEX was unwilling to miss the opportunity for hype, promoting heavily under the guise of a partnership with VISA. Naturally, VISA was displeased, and after issuing a notice of negotiation, JPEX immediately apologized and made excuses, claiming that it was a plan to cooperate with a card-issuing institution under VISA, not a direct partnership with VISA, shifting the blame to advertising contractors for misrepresentation. However, the JPEX website still features promotional material about its partnership with VISA, showcasing an attitude of admitting fault but continuing with the same practices.

The licenses it claims to have obtained appear even more dubious. According to a report by Hong Kong 01, investigations into company registries in multiple countries revealed that JPEX's registrations seem to be "front" registrations. The platform was registered in 2020 and began operations in 2021, yet the actual responsible persons and office locations for its registrations in various countries have never been disclosed. From the registered companies, aside from the director of JPEX Technical Support, Guo Haolin, no further clues about the founder have been uncovered. It is rumored that the founder is "Coin Young Master" Huang Zhengjie, but there is no evidence. JPEX has also cooperated with two listed companies, Tiangong Holdings (0428) and hmvod Video (8103), raising suspicions about potential backing from listed companies. However, in April of this year, both listed companies announced the termination of their memorandum of understanding with the exchange.

JPEX registration status in various locations, source Hong Kong 01

The only offline location that can be verified has also turned out to be empty. According to Hefeng Logistics, JPEX rented floors 2-6 and the 10th floor of the Asia Blockchain Building, as well as exterior wall advertisements, but all personnel have maliciously relocated. The registered location has not even been disclosed, and the licenses obtained can only be deemed nonsensical. Unsurprisingly, when I searched for JPEX on the official website of the Financial Crimes Enforcement Network (FinCEN) in the US, no results were found. Interestingly, after the company's departure, a beverage company, Chunbai, accused it of owing 1,000 cups of drinks, making one lament the depth of JPEX's deceit, as it has not spared retail investors, landlords, or even neighbors.

Source: MichaelTurtle @shawnchen_eth, Steward @ZStewardZ

02 Why is JPEX so popular?

How can such a deceitful exchange continue to operate and even appear as "the largest exchange in Hong Kong" in various streets and alleys?

From the perspective of current regulations in Hong Kong, although the SFC has been monitoring unlicensed operations, it must gather evidence to prove that the platform is conducting business before intervening, which means that the platform's marketing promotions have not been prohibited.

On the other hand, JPEX has employed a large number of influencers and entertainment stars to promote itself through substantial dividends and promotional expenses. Celebrities who have endorsed or promoted JPEX include Hong Kong actor Zhang Zhilin, Taiwanese singer Chen Lingjiu, Hong Kong model Zhuang Simin, Hong Kong influencer "Coin Young Master" Huang Zhengjie, Hong Kong rich second generation Lin Zuo, Toyz, Feima, Chen Dingbang, and others.

Former JPEX spokesperson Chen Lingjiu, source: Hong Kong Wen Wei Po

After the incident, several artists publicly distanced themselves from JPEX on their official channels. Zhang Zhilin's team stated that they had already notified JPEX in writing in May that their likeness should not be used for promotion until a license was obtained. Spokesperson Chen Lingjiu claimed that he had ended his endorsement in July of this year, but insiders revealed that he visited the Asia Blockchain Building where JPEX is located with his pet on August 20.

To quickly attract traffic, JPEX also launched a partner system, recruiting partners with high commissions. The terms state that if a partner invites 1,000 people to become JPEX customers, and the average assets of those invited reach 10 million USDT within 30 days, the partner will receive a reward of 6,000 USDT per month, equivalent to 47,000 HKD. In April of this year, JPEX upgraded the system again, stating that "rebate rewards can reach up to 100,000 USDT," equivalent to 780,000 HKD. Insiders revealed that one of JPEX's partners was a known figure in the crypto space who had previously been caught selling KYC information of exchanges.

The known figure was one of JPEX's partners, source Raysky @ rayskyinvest

By creating profits out of thin air through inviting people, it is clear that the exchange exhibits the basic elements of a pyramid scheme. Moreover, looking at the products offered by the exchange, it can be described as openly illegal. Not only does it offer rebates for inviting others through nodes, but the annualized return rate is an outrageous 13 times, and the exchange's interest-bearing financial products even reach 20%, comparable to the previously collapsed Luna.

JPEX's suspected pyramid scheme practices, source Beike Complaints

Tracking the performance of its platform token JPC, it shows a 24-hour trading volume of 189 million USD on the JPEX platform, while Coinmarketcap reports only 230,000 USD, making the manipulation evident. On the other hand, JPEX has not set a funding rate for perpetual contracts, and such a trading platform that defies trading common sense has surprisingly managed to survive and grow to such a scale, leaving many veterans in the crypto space astonished.

Comparison of JPC data on Coinmarketcap (front) and JPEX exchange (back)

Despite numerous doubts, under the visible promotion and high-interest temptations, many retail investors still invested their money, making them the main victims of the incident. As early as June, JPEX had a prior incident. A revealing article indicated that during the "The Cage: Final Battle of 2023" event held by JPEX in June, details about the smart contract for distributing fight rewards showed that it misappropriated customer assets amounting to 390,000 USDT. Netizens harshly commented, "Taking from the household, using it for the people."

Previous reports of JPEX misappropriating customer funds, source Raysky @ rayskyinvest

On September 18, Hong Kong Legislative Council member Wu Jiezhuang revealed that they had received about 30 requests for help from victims, with varying amounts of losses, some in six figures and others in seven figures, estimating the total amount involved to exceed 100 million HKD. Influencers who previously promoted JPEX were not spared either; Zhuang Simin, who promoted it on YouTube, revealed that she lost about 500,000 HKD in the incident; Toyz, who had received sponsorship fees from JPEX, also lost over 100,000 USD, stating in a program that the trading volume of JPC was questionable, interest rates were excessively high, and NFTs had not been put on the blockchain.

03 What is the impact of the JPEX incident?

From the overall perspective of the incident, the events triggered by JPEX are not surprising to industry veterans who have experienced the ups and downs of the crypto world, but the real victims are the cryptocurrency community in Hong Kong, which is still in its infancy.

Since the announcement of new regulations in June, Hong Kong has been taking frequent actions, with the Chief Executive, legislators, and grassroots officials all expressing support for Web3, and legislators publicly declaring support for compliant exchanges to develop in Hong Kong. It is in this seemingly bright environment that dark corners have emerged, with JPEX taking advantage of the policy windfall to promote itself, blinding many investors.

According to Hong Kong Wen Wei Po, both in Hong Kong and the mainland, there are groups of people who have invested due to its widespread promotion and belief in Hong Kong's regulatory policies. Some mainland investors even stated that they initially trusted Hong Kong's financial regulations and did not believe that the regulatory authorities would allow unlicensed trading platforms to exist. Additionally, after successfully "withdrawing" cash from the platform for the first time without issues, they felt secure investing over one million HKD. With the collapse of the situation, this incident will undoubtedly affect mainland investors' confidence in investing in Hong Kong.

The local response in Hong Kong is evidently serious. On September 18, Hong Kong Legislative Council member Wu Jiezhuang held a press conference to respond to the suspected fraud incident involving the virtual asset trading platform JPEX, stating that the incident has 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 John Lee stated that this incident reflects the importance of regulation, including the necessity to invest in regulated and licensed trading platforms, and the importance of individuals understanding virtual assets and associated risks. He emphasized that the current licensing system is designed to protect investors, and the SFC will monitor market changes to ensure that investors' interests are fully protected, while the authorities will also vigorously promote investor education.

Although the new regulations have tightened the supervision of virtual currencies, only OSL and Hashkey are licensed exchanges regulated by the SFC, ensuring that even in the event of closure, customer funds can be compensated up to 500,000 HKD. JPEX is not on the licensed list and is not regulated by the SFC, thus the investigation can only be conducted by the Hong Kong police as a fraud case. From a civil compensation perspective, due to the difficulty in identifying JPEX's legal entity and users being unsecured creditors, in the event of liquidation, the priority order for asset distribution ranks behind secured creditors, liquidation costs, priority payments, and floating mortgage creditors. Based on this reasoning, it seems difficult for customers to recover their capital. According to the police's latest disclosure, the case involves assets amounting to 1.2 billion HKD.

In response, another involved partner, Lin Zuo, seemed to have foreseen the situation. On the 17th, he repeatedly advised users in his fan group against reporting the case, stating that there would be no results and indicating that users should not harbor illusions about recovering their funds. Currently, according to the latest news from the Hong Kong Commercial Crime Bureau's Acting Superintendent Mike Wai-Kwong, Lin Zuo and seven others involved have been arrested by the police, with 8 million HKD in cash seized during the crackdown, and over 12 million HKD in bank deposits and 44 million HKD in properties frozen.

Involved person Lin Zuo arrested, source Hong Kong Wen Wei Po

Even so, JPEX remains unrepentant. In a recent response, JPEX reiterated its claims of unfair treatment by relevant Hong Kong institutions, pointing out that this has led to malicious freezing of funds by market makers, and stated that it is "determined to continue operations." To evade regulation, it has removed trading products related to financial management on the 18th.

JPEX issued another announcement on September 18, source JPEX official website

Such a shameless exchange poses a significant threat to Hong Kong, which is in the process of establishing a cryptocurrency ecosystem. It not only re-labels virtual currencies with a criminal tag but also exposes the loopholes in Hong Kong's control over virtual assets, severely undermining the confidence of both the political sphere and investors in cryptocurrency. The subsequent handling of this matter will be crucial; whether it serves as a warning or remains difficult to trace will determine whether this incident becomes a thorn in investors' hearts or a sword hanging over their heads. Truly, a single rat dropping can spoil a whole pot of soup.

References:

Hong Kong Wen Wei Po: Virtual currencies lack regulation, victims accuse influencers of risking total loss of investment;

Hong Kong Afternoon Tea: Over 1,400 people reported JPEX case involving 1 billion HKD! Hong Kong rich second generation Lin Zuo and others arrested!……

Beike Complaints: Taiwan's crypto circle's billion-dollar scam JPEX, defrauding millions, exposed by Hong Kong SFC!

Consultation Index: A clear look at the background of JPEX's founder, is JPEX safe?

Twitter, external news, and other sources.