19th September 2023 – (Hong Kong) The recent JPEX controversy in Hong Kong has highlighted the prevalence of cryptocurrency scams and the lack of consumer protections for victims. JPEX, an unlicensed crypto exchange platform, is at the centre of a major alleged fraud case after the Securities and Futures Commission (SFC) issued a warning about its suspicious activities. This triggered an investigation by the Commercial Crime Bureau, leading to multiple arrests of JPEX promoters. The latest reports indicate that a total of 4 men and 2 women have been arrested in connection with the JPEX case, and Hong Kong law enforcement officials have received approximately 1,408 reports, involving around HK$1 billion in funds.
The Securities and Futures Commission’s (SFC) stern warning about JPEX in September 2022 stated it was unlicensed and had made false claims. The SFC urged extreme caution regarding opportunities that seem too good to be true, highlighting the risks of unregulated platforms, including potential loss of funds. It also requested all parties immediately cease promoting JPEX. Beyond licensing issues, the SFC outlined suspicious aspects of JPEX’s operations. These included unbelievably high promised returns, client withdrawal issues, and JPEX issuing its own token with minimal functionality beyond trading on its platform.
Most concerning was JPEX abruptly hiking withdrawal fees that same evening from 0.1% to 99.9%, effectively freezing user assets. JPEX claimed this was a “transitional measure” while integrating elsewhere, though details were vague.
The SFC stated it would penalise any regulatory violations, with potential HK$10 million fines and 10 years imprisonment. The matter was also referred to local law enforcement for investigation. Before this warning, JPEX had benefited tremendously from promotion by influential social media crypto personalities and over-the-counter crypto dealers in Hong Kong. Multiple dealers strongly endorsed JPEX to clients while facilitating onboarding.
After the SFC notice, most promoters severed ties with JPEX or went silent. Many over-the-counter shops paused operations, some citing JPEX withdrawal issues. JPEX also deserted its major conference booth in Singapore.
Police report over 1,400 complaints against JPEX, involving around HK$1 billion in losses. JPEX is headquartered in Dubai according to its website. The exchange recently halted some trading amidst the ongoing police investigation, stating market makers had frozen funds following probes by Hong Kong authorities.
The JPEX saga offers cautionary lessons regarding celebrity cryptocurrency endorsements. In the U.S., Kim Kardashian was fined US$1.26 million by the Securities and Exchange Commission (SEC) for failing to disclose her $250,000 promotion fee from crypto firm EthereumMax. The SEC said crypto assets can be securities requiring disclosure of paid promotions.
While Kardashian settled without admission, the SEC said the case reminds celebrities that disclosing payments for endorsing investments is a legal requirement. SEC Chair Gary Gensler warned investors not to make decisions based solely on celebrity crypto recommendations.
So far in the JPEX case, Julian Cheung’s team emphasised they prohibited using his image in Hong Kong without proper licensing. Jacqueline Ch’ng claimed ignorance given her work focus overseas. Nine Chen promised to cooperate with authorities if required. Derek Cheung and Clement Chan are so far silent.
Ultimately, paid social media endorsements can be highly effective yet risky when products unravel. Robust regulation is crucial, but finding the right balance of celebrity accountability and consumer protection remains complex. For now, JPEX exemplifies how unwise crypto bets can dramatically backfire.
Meanwhile, the annual internet crime report published by the FBI earlier in 2023 reveals a staggering US$10.6 billion in losses resulting from online scams and frauds in 2022, marking a significant 46 per cent increase from the US$6.9 billion recorded in 2021. Interestingly, despite the surge in losses, the number of complaints made by scam victims to the FBI’s Internet Crime Complaint Center (IC3) actually decreased compared to the previous year.
The primary factor contributing to the substantial US$3.5 billion leap from 2021 to 2022 was the emergence of cryptocurrency. The report identifies investment fraud as the most costly scheme, with losses stemming from investment fraud surging from US$1.45 billion in 2021 to US$3.31 billion in the past year, based on IC3 complaints.
However, within the realm of investment fraud, the report highlights a remarkable 183 per cent growth specifically in fraud involving cryptocurrency. Losses from crypto scams skyrocketed from US$907 million in 2021 to an astounding US$2.57 billion in 2022. The report emphasizes that “crypto-investment scams saw unprecedented increases in the number of victims and the dollar losses to these investors.” It further reveals that victims, particularly those aged 30 to 49, often accumulate significant debt while attempting to recover from these fraudulent investments.
Various types of crypto-related scams were identified, including the theft of cryptocurrencies through hacked social media accounts, celebrity impersonations, real estate fraud, and liquidity mining. The latter involves deceiving individuals into connecting their crypto wallets to an application that falsely promises profits but instead drains the user’s account of funds.
Although younger individuals are frequently targeted by crypto scammers, the largest group of victims, accounting for US$3.1 billion in losses in 2022, falls within the less tech-savvy demographic of individuals aged 60 and older, according to the report.
The JPEX saga exemplifies how crypto scams fall through regulatory cracks, leaving victims like Hong Kong resident Lili with little recourse. Lili, who requested anonymity, lost six figures in a fake cryptocurrency investment scam by fraudsters posing as friends.
Crypto scams often operate outside regulated financial systems and legal protections for consumers. The anonymity and irreversibility of crypto transactions assist scammers in evading authorities across multiple jurisdictions. Investigators also lack resources to properly follow up on the rising cases of fraud, especially those involving small individual sums like Lili’s losses.
Lili’s supposed ‘friends’ spent months earning her trust through online chats during pandemic lockdowns. They encouraged her to invest more after showing images of luxury cars and designer bags, signalling their wealth.
“Inevitably, due to the nature of cryptocurrency — that it’s irreversible, anonymous and global — it’s obviously attractive to fraudsters,” says Rich Drury, ombudsman manager at the U.K.’s Financial Ombudsman Service (FOS).
The cross-border scale enables scams flying under the radar. Says Carmel King, a director at consultancy Grant Thornton, “Around the world, you are under the radar for all authorities because it doesn’t reach that level where it’s worth significant resources to investigate.” She adds that it’s often futile to spend £300,000 to recover £100,000.
Yet lawyers and police have achieved some high-profile wins, establishing tactics to recover stolen crypto. U.K. courts now readily issue global orders to freeze illicit funds at exchanges and disclose scammers’ identities. But these legal precedents usually require losses above £1 million to be economically worthwhile.
In Hong Kong, the Securities and Futures Commission (SFC) was similarly slow to regulate crypto despite public pressure. It only introduced a licensing regime in June 2022. The SFC had flagged JPEX as suspicious in July 2021 but didn’t act for 14 months. Earlier intervention may have reduced victims.
Crypto exchanges hold promise to fill regulatory gaps, being closest to banks in the sector. But co-operation tracking scams is reportedly mixed, with lax customer identification checks. Lawyers say crypto exchanges often provide fake user documents, unlike banks.
Tighter know-your-customer (KYC) requirements for exchanges are proposed under upcoming EU crypto regulations. But progress is slower in the U.K.. MP Lisa Cameron is lobbying for a crypto fraud compensation scheme as part of future U.K. regulations. Barrister Racheal Muldoon argues “old dusty judges are getting their heads around it far quicker than young bright things at the FCA, Revenue and in government.”
For Lili, the quest for restitution has lasted as long as the actual scam, with little hope of conclusion. As cases sit unresolved, moving on is difficult. Lili says the fraud made her feel “horrible” and she needs justice. The JPEX saga proves how citizens require better protection in the crypto sphere. Until regulatory progress accelerates, scams will continue to proliferate amidst an environment of consumer vulnerability.
