Hong Kong's first criminal case in the cryptocurrency circle: Which criminal is JPEX?

Source: Xiao Za lawyer

I believe many friends in the crypto community still remember the article published by Sister Za's team not long ago, which analyzed the recent "Warning: Improperly Operated Virtual Asset Trading Platforms" issued by the Hong Kong Securities and Futures Commission to the virtual asset market and Web3 practitioners (Xiao Za Team | Crypto Asset "Hiding Behind a Tiger Skin" Trading, Have You Really Considered the Consequences?). At that time, this warning left many people confused; who exactly was the Hong Kong Securities and Futures Commission warning?

Now we have the answer: JPEX Exchange. On September 13, 2023, the Hong Kong Securities and Futures Commission revealed the mystery through the "Warning Statement on Unregulated Virtual Asset Trading Platforms."

Subsequently, on September 18, 2023, Hong Kong judicial authorities officially took action against JPEX, initially targeting Hong Kong influencer Lin, who had vigorously promoted JPEX and claimed to "have applied to become a JPEX partner." Lin was arrested, and his office in Central was searched. According to media reports, judicial personnel took away a large amount of materials and cash. Later, some investors found that JPEX could no longer fulfill normal withdrawal requests, with a request for 1000u only able to withdraw 1u, leaving the case's development shrouded in uncertainty.

Today, Sister Za's team will delve into the past and present of JPEX Exchange, as well as its various violations, illegal activities, and even suspected criminal operations, detailing the "crimes of JPEX."

The Past and Present of JPEX

As a virtual asset trading platform known for its flashy promotions and unique methods, Sister Za's team had actually been paying attention to it since last year: even during the peak of Web3 and virtual asset hype in Hong Kong in 2022, when advertisements for various virtual currency platforms flooded the streets, JPEX managed to break through in marketing due to its significant promotional efforts.

It was precisely because JPEX invested heavily in marketing, combined with its attractively high investment returns and gameplay, that countless investors from various regions (mainly from mainland China, Hong Kong, and Macau) flocked to it.
However, beneath this apparent prosperity, JPEX harbored numerous high-risk "reefs." (1) JPEX has never conducted effective information disclosure and has not disclosed its actual controllers and registered location.

According to currently available public information, JPEX has been operating since its registration in 2020, with actual teams operating in multiple countries and regions worldwide (at least including Hong Kong, Japan, Australia, the United States, Canada, Lithuania, and others). However, apart from Guo, who appears as a director of JPEX and handles relevant affairs, JPEX has never publicly disclosed its founding team or registered location, nor has it revealed the actual responsible persons or office locations in relevant regions. Sister Za's team has conducted background investigations through conventional means but found no additional effective information.

According to Hong Kong 01, JPEX has registered in several countries worldwide, and the registration information is suspected to be "front" registrations. There are rumors that its founder is a well-known figure in the crypto community, "Huang," but there is currently no concrete evidence to confirm this rumor.

Friends familiar with the crypto community and various "projects" know that the basic information of the founding team, operational guidelines, and business models are key to verifying a project's credibility. Today's crypto space is no longer the mysterious realm it once was; mystery does not bring profit to platforms but rather deters investors. JPEX is precisely such a mysterious platform that lacks a sense of security. (2) JPEX has repeatedly attracted investors through "scam-like" and "fraudulent" marketing tactics.

Since JPEX began extensive external marketing in 2022, it established two basic principles: (1) celebrity marketing; and (2) scam-like/fraudulent marketing. Everything was aimed at quickly gaining recognition to attract investors.

Celebrity marketing is easy to understand; the recently arrested influencer Lin and certain male and female stars from Hong Kong have all stood on stage for JPEX under its numerous sugar-coated bullets, triggering the "traffic" nerve. As for scam-like and fraudulent marketing, one of the most notorious incidents involving JPEX was the "minor conflict" with VISA in early 2022.

At the beginning of 2022, JPEX publicly announced a partnership with Simplex (a card issuer under VISA) and announced the launch of a VISA card in the fourth quarter. JPEX then began aggressively promoting itself by claiming to be associated with VISA. Soon, VISA discovered JPEX's false advertising and quickly sent a warning letter. JPEX promptly apologized and shifted the blame to the advertisers: "Sorry, the advertisers printed the promotional materials incorrectly."

JPEX's Wild Gameplay

After attracting a large amount of traffic, JPEX quickly launched a series of "wild" gameplay options, which were extremely risky but promised enticing returns. (1) High Return Recruitment The first was a recruitment campaign under the name of "partners" with an extremely high return rate. JPEX promised high commissions for recruiting partners (which is why the arrested influencer Lin previously claimed to have applied to become a JPEX partner). The "partner" terms clearly state: if you invite 1000 people to become JPEX customers, and the average assets of those invited reach 10 million U within 30 days, the partner will receive a dynamic reward of 6000 U per month. In April 2023, JPEX directly raised this dynamic income for recruitment to as high as 1,000,000 U, clearly establishing a dynamic income system based on the number of new recruits.

(2) 45-Second Contract Battle

Secondly, there is a so-called new gameplay created by JPEX. According to JPEX's official website, users will see a green line moving up and a red line moving down on their screens, which represents market price trends. After 45 seconds, users input their betting amount and press "PUMP" or "DUMP" to predict whether the line will rise or fall after 45 seconds. If they guess correctly, they can profit; otherwise, they lose their betting funds, which can be bet using virtual currencies like Bitcoin or Ethereum.

(3) Platform Token JPC Only Rises, Never Falls, with a Huge Volume but Extremely Poor Liquidity

Furthermore, the platform's own virtual currency is suspected of serious data fraud. Through third-party data detection platforms, it can be observed that JPEX's platform token is quite interesting; despite the severe global economic downturn and the generally poor crypto market, it has surged against the trend and only rises. From its listing at 0.001 U on August 8, 2022, to 0.04 U in June 2023, it has increased 40 times, with a peak total market value reaching 1.88 trillion RMB.

Although JPEX's total market value appears to be 1.88 trillion, strangely, the 24-hour trading volume of this token is less than 10 million. Considering JPEX's almost complete lack of information disclosure, the possibility of data fraud is extremely high, and there may even be a large number of wash trading transactions in historical data, posing significant investment risks.

Note: This image is from the internet and is for learning and communication purposes only.

What Crimes Might JPEX Be Suspected of in Mainland China?

From the facts that Sister Za's team has seen from public channels, JPEX is likely a large-scale Ponzi scheme. If it operates under Chinese law, its methods and practices may involve multiple crimes. Sister Za's team needs to remind everyone that since there are numerous victims of JPEX who are residents of mainland China, without considering other circumstances, the judicial authorities in mainland China are likely to have jurisdiction over this case, but whether they will actually exercise jurisdiction is a complex issue.

(1) Organizing and Leading Pyramid Selling Activities

JPEX's high return recruitment activities under the name of "partners" are suspected of organizing and leading pyramid selling activities.

According to Article 224-1 of China's Criminal Law, "Organizing and Leading Pyramid Selling Activities" states: "Those who organize or lead activities under the guise of selling goods or providing services, requiring participants to pay fees or purchase goods or services to obtain membership, and forming levels in a certain order, directly or indirectly using the number of people developed as the basis for remuneration or rebates, enticing or coercing participants to continue developing others, defrauding property and disrupting the economic and social order, shall be sentenced to fixed-term imprisonment of less than five years or criminal detention, and shall be fined; if the circumstances are serious, they shall be sentenced to fixed-term imprisonment of five years or more and fined."

In practice, the most important aspect of determining the crime of organizing and leading pyramid selling activities is to establish the organization's business model, profit method, and personnel structure. According to the opinions issued by the Supreme Court, Supreme Procuratorate, and Ministry of Public Security in 2013 regarding the handling of criminal cases involving organizing and leading pyramid selling activities, it is clearly stated that "if there are more than thirty participants in the internal pyramid selling activities and the levels exceed three, criminal responsibility should be pursued against the organizers and leaders."

Among the many cases of organizing and leading pyramid selling activities that Sister Za's team has encountered, the coexistence of static and dynamic income is one of the typical characteristics. It has been relatively clear that JPEX has facts of recruiting people and funds to generate income, with the number of new recruits reaching 1000 and the amount reaching 10 million U (if each "partner" can only apply according to the promotional rules). The key now is to examine whether the recruiters and the recruited have formed an up-and-down relationship, and whether the number of lower-level recruits is used as the basis for calculating and paying upper-level rewards.

(2) Opening a Casino

The so-called "45-Second Contract Battle" is a very clear online gambling behavior, and as the dealer, JPEX is suspected of opening a casino under Chinese law.

The Supreme People's Court and the Supreme People's Procuratorate of China have further refined the judgment of behaviors involving online casinos in their interpretation of several issues regarding the application of laws in gambling criminal cases. They define "establishing gambling websites on computer networks for profit or acting as agents for gambling websites and accepting bets" as opening a casino. The "45-Second Contract Battle" carries a high risk of being classified as opening a casino.

In the case of He and others opening a casino【(2020) Ji 0622 Criminal Initial 73号】, the defendants He and Wang acted as agents for an overseas virtual currency website through online contacts, established an operational team, and used the internet and mobile terminals to send profit screenshots and website links to attract players to participate in a "guess the rise and fall game." The specific model of this game was: the website set a leverage trading multiple of 50 times, and players could use USDT to bet on the rise and fall of other types of virtual currencies. The website would take 0.2% of the player's betting amount as a fee. The first-instance court in this case held that: the defendant He, for profit, acted as an agent for a gambling website and accepted bets, constituting the crime of opening a casino. The defendant Wang, for profit, assisted He in building the website and participated in the distribution of gambling profits, constituting the crime of opening a casino.

Sister Za's team reminds: this type of gameplay carries extremely high risks and directly violates criminal law red lines; friends should remember to avoid it.

(3) Fundraising Fraud

In the case of JPEX's issuance of tokens and the data fraud of its own virtual currency, it may likely constitute fundraising fraud.

According to Article 192 of China's Criminal Law, fundraising fraud refers to the act of illegally raising funds using fraudulent methods for the purpose of illegal possession. Under Chinese law, fundraising fraud can be seen as an advanced crime of illegally absorbing public deposits. Without holding the relevant administrative permits from administrative authorities, promising capital preservation and interest payments, and publicly soliciting deposits from the general public, followed by actions such as fabricating data, restricting withdrawals, and creating obstacles for transactions, is the most typical form of fundraising fraud.

In practice, there are two typical behavioral patterns of using fraudulent methods: one is fabricating facts, and the other is concealing the truth. Using wash trading and self-buying and selling to cause the price of the virtual currency to deviate significantly from its original price is a typical act of fabricating facts.

Final Thoughts

As of today, Hong Kong judicial authorities have detained individuals related to JPEX, including but not limited to those who promoted and supported JPEX, those who held JPEX virtual currency and actively promoted it, and those who provided support for JPEX's operations in Hong Kong. The next steps will involve actions against the actual controllers and beneficiaries of JPEX. There are reports that at the Web3 cryptocurrency summit "Token2049" held in Singapore, all staff at JPEX's booth have withdrawn, and the platform has begun to impose various restrictions on user withdrawals. Sister Za's team will closely monitor the progress of this case and welcomes victims from mainland China to consult with Sister Za's team regarding their rights protection; we are always here!