JPEX collapsed, Hong Kong SFC plans to issue a "blacklist" for virtual asset exchanges

Written by: Mu Mu

Edited by: Wen Dao

After the implementation of the licensing system for virtual asset trading platforms (VASP) in Hong Kong, the regulatory authority, the Securities and Futures Commission (SFC), began to manage the risks associated with unregulated and suspicious platforms based on the "Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance," which took effect on June 1.

According to the latest news from the SFC on September 25, the SFC plans to publish a "List of Licensed Virtual Asset Trading Platforms," a "List of Closed Virtual Asset Trading Platforms," an "Authorized Virtual Asset Trading Platforms List," and a "List of Virtual Asset Trading Platform Applicants" to optimize regulation during the transition period for VASP applications and ensure transparency of information for investors.

In addition, the SFC will also release a dedicated "List of Suspicious Virtual Asset Trading Platforms" to alert the public to risks early.

JPEX, which operates for investors in Hong Kong, has become the first "suspicious virtual asset trading platform" to be targeted by the SFC.

On September 13, the SFC stated that JPEX, which relies on celebrities and influencers for traffic, made false and misleading statements such as "licensed" and "business cooperation with Hong Kong listed companies," and that its entities had not submitted any license applications for virtual asset trading platforms to the SFC. As early as July 2022, the platform was included in the SFC's "List of Unlicensed Companies and Suspicious Websites."

After being named by the SFC, JPEX users encountered difficulties in withdrawing funds. According to the Hong Kong police, more than 2,000 reports have been filed, involving amounts exceeding HKD 1.4 billion, and 12 suspects have been arrested. This case has also been referred to by Hong Kong media as "the largest financial fraud case in history."

The JPEX incident and the 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 Hong Kong VASP should abandon "wild" traffic acquisition methods as soon as possible.

01 SFC Plans to Release "4+1" List to Enhance Transparency

On September 25, the SFC held a press conference to emphasize that the public should be more vigilant regarding local unlicensed or suspicious operating platforms. SFC Chief Executive Officer Ashley Alder also stated that there will be optimization of existing virtual asset trading regulations.

According to the SFC's statement, the optimization measures include four lists of virtual asset trading platforms, namely:

• List of Licensed Virtual Asset Trading Platforms;
• List of Closed Virtual Asset Trading Platforms, which must adjust the names of closed virtual asset trading platforms within a specified period according to the law;
• List of Authorized Virtual Asset Trading Platforms, which includes the names of virtual asset trading platforms authorized by June 1, 2024, and if the license application of a previously recognized licensed virtual asset trading platform is approved, withdrawn, or rejected, the name of that platform will be transferred to the "List of Licensed Virtual Asset Trading Platforms" or "List of Closed Virtual Asset Trading Platforms";
• List of Virtual Asset Trading Platform Applicants.

In addition to these four lists, the SFC will also publish a dedicated list of suspicious virtual asset trading platforms, which will be posted on the SFC's website for easy access. The SFC will also consider providing more information about unregulated virtual asset trading platforms to alert the public early and ensure that information is released in a clear, transparent, and timely manner.

In fact, this "4+1" list initiative is also an important supplement to the implementation of the licensing system for virtual asset service providers (VASP) in Hong Kong and the one-year transition period for applications. The SFC has continuously demonstrated its regulatory authority over virtual asset trading since the new policy was introduced.

Starting from June 1 of this year, Hong Kong 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 must apply to the SFC for and obtain a digital asset license and a virtual asset service provider license (VASP license).

After the policy was introduced, several virtual asset trading platforms claimed they would "apply for a VASP license," leading to a mix of cryptocurrency exchanges flocking to Hong Kong, making it difficult for the public to discern which platforms were genuinely applying for licenses and fulfilling compliance review obligations. The SFC has clearly noticed this and has been continuously issuing risk warnings to the public since August.

SFC Issues Warning Statements

On September 13, JPEX appeared in the SFC's warning statement, becoming the first platform named by the SFC as "unregulated" and "suspicious." This trading platform was almost the catalyst for the SFC's introduction of the "4+1" list measures.

02 JPEX Under Scrutiny for a Long Time, Explodes After Being Named by SFC

Hong Kong citizens may not be unfamiliar with the JPEX trading platform. Its advertisements were widespread in major districts and subways in Hong Kong, with local stars like Julian Cheung and model Zhuang Simin endorsing it, while local influencers like "Coin Young Master" Huang Zhengjie and Lin Zuo frequently promoted JPEX on social media.

JPEX Advertisements Seen on the Streets of Hong Kong

"Actively promoting the platform's services and products to the Hong Kong public through social media influencers and over-the-counter virtual asset exchange merchants" became one of the reasons JPEX was targeted by the SFC. Notably, as early as March 2022, this platform had already come under the SFC's radar and was listed in the SFC's "List of Unlicensed Companies and Suspicious Websites" in July of that year, warning the public that the platform was unregulated.

JPEX Was Listed in the SFC's "Blacklist" as Early as July Last Year

Despite being placed on the "blacklist," JPEX did not cease operations in Hong Kong. After the SFC legally obtained regulatory authority over virtual asset trading in June of this year, actions against JPEX began.

On August 7, the SFC officially warned the public that certain unlicensed virtual asset trading platforms falsely claimed to have submitted license applications to the SFC, which could mislead the public into believing that the trading platform complied with the SFC's regulatory requirements.

On September 13, the SFC directly named the trading platform and clarified that no entities under the JPEX group had been licensed by the SFC and had not applied for a license to operate a virtual asset trading platform in Hong Kong. The promotional methods relying on influencers raised many suspicions, including false claims of "having obtained licenses to operate virtual asset trading platforms from several overseas regulatory agencies" and "having established business cooperation with a Hong Kong listed company and received investment," as well as claims of "providing extremely high returns for certain products," leading to complaints from retail investors about "reduced and altered account balances."

In response to this statement, JPEX announced its intention to apply for a license, expressing "extreme disappointment at the SFC's unfair practices that disrupt market order."

On September 20, the SFC reiterated in a statement that JPEX was unlicensed and had not applied for a license, adding that the trading platform had never contacted the SFC regarding a possible license application, and disclosed that "information subsequently obtained by the SFC raised suspicions that this case involved fraudulent activities, and thus it has been referred to the police for handling."

According to reports from Hong Kong media, as of September 23, the Hong Kong police had received over 2,300 reports related to JPEX, involving amounts exceeding HKD 1.4 billion, and 12 suspects had been arrested, including influencers Lin Zuo, Chen Yi, and Huang Zhengjie, who were involved in driving traffic to JPEX and operating over-the-counter exchange shops.

As the situation escalated, JPEX users found it increasingly difficult to withdraw their virtual assets stored on the platform. Initially, users were required to fill out an application form to withdraw funds, with some reporting that the platform limited withdrawal amounts to 1,000 USDT (approximately 1,000 USD), while the withdrawal fee was raised to 999 USDT, meaning users could only withdraw a maximum of 1 USDT.

Users faced "withdrawal difficulties," but JPEX was monitored for abnormal large and frequent outflows of USDT.

Blockchain data analysis company Bitrace audited two JPEX fund transfer addresses on the TRON network and found that between September 14 and 20, one transfer address transferred 1,548,200 USDT to 11 addresses after September 14, which was subsequently sent to multiple trading applications and platforms; during the same period, another transfer address sent over 7,210,000 USDT to 7 addresses, indicating that "these funds were neither user withdrawals nor normal business activities of the platform, but rather abnormal outflows."

Bitrace's latest on-chain fund audit also pointed out that JPEX-related addresses had received over 190 million risky USDT in the past 20 months, with these risky funds involving online gambling, money laundering, and gray and black industries.

Individuals involved with JPEX at the center of the storm may face criminal liability.

According to Hong Kong's "Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance," operating virtual asset services without a VASP license after June 1, 2023, constitutes a criminal offense.

If convicted through public prosecution, penalties can include a fine of HKD 5 million and 7 years of imprisonment. If it is a continuing offense, an additional fine of HKD 100,000 can be imposed for each day the offense continues. If convicted through summary proceedings, penalties can include a fine of HKD 5 million and 2 years of imprisonment, with an additional fine of HKD 10,000 for each day the offense continues.

03 Regulatory Thunder: A Warning for Applicants to Proceed with Caution

From issuing warnings and naming suspicious platforms to collaborating with the police for a crackdown, the SFC has shown a strong attitude towards virtual asset trading service providers that cross the line, sending a clear signal: platforms operating virtual asset trading in Hong Kong must comply with SFC regulations, and unlicensed exchanges still operating in Hong Kong will face significant risks.

"Investor protection" is an important principle for the SFC's regulatory implementation.

On September 18, Hong Kong Legislative Council member Wu Jiezhuang held a press conference in response to the suspected fraud incident involving the virtual asset trading platform JPEX, stating that this 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 also stated that this incident reflects the importance of regulation, including the necessity of choosing regulated and licensed trading platforms for investment, and that investors should be aware of virtual assets and associated risks.

Under the new regulatory system, obtaining a VASP license is not easy; virtual asset trading platforms must meet various conditions related to company qualifications, investor protection, anti-money laundering, risk management, internal controls, and cybersecurity to obtain a license. Currently, no exchange has obtained a VASP license, and before holding this license, they must also obtain the SFC-issued Type 1 license (securities trading) and Type 7 license (providing automated trading services).

According to previous statements from the SFC, only two virtual asset trading service providers have obtained both Type 1 and Type 7 licenses, namely OSL Digital Securities Limited and Hash Blockchain Limited.

JPEX's high-profile and aggressive promotional strategies have collided with the "gunpoint" of the SFC, and the joint crackdown by the SFC and the police carries a sense of "killing the chicken to scare the monkey," clearly signaling the stance, attitude, and methods that will alert virtual asset trading platforms wishing to operate in Hong Kong.

With the implementation of the "4+1 list" initiative, the information disclosure of virtual asset trading platforms in Hong Kong will become increasingly comprehensive. It can be anticipated that, following the precedent set by JPEX, virtual asset trading platforms intending to operate compliantly in Hong Kong will maintain a low profile before obtaining licenses, while a corner of the chaotic jungle of the crypto world disappears.