SFC rolls out measures to boost scrutiny of unregulated crypto platforms after JPEX scandal

Insert picture: Julia Leung, Chief Executive Officer (CEO) of the Securities and Futures Commission

26th September 2023 – (Hong Kong) In the wake of the JPEX fraud scandal that cost investors nearly HK$15 billion, Hong Kong’s securities regulator has unveiled several steps to enhance oversight of unregulated crypto trading platforms.

The Securities and Futures Commission (SFC) will publish various lists to boost transparency, including licensed platforms, those ordered to close, and licence applicants. A new “suspicious platforms” list aims to help the public identify illegal operations.

The moves aim to address criticisms that the SFC’s monitoring has been inadequate, after it initially refused last week to release applicant names, citing concerns about misleading markets.

So far, over 2,360 JPEX victims have come forward, with losses totalling HK$14.9 billion. Various celebrities like Julian Cheung and Jacqueline Ch’ng have been questioned by police, while 11 people including influencers were arrested.

The SFC’s four measures are:

  1. Publication of four crypto platform lists: Licensed, closed, deemed licensed by mid-2024, and licence applicants. Applicants include HKBitEx, Hong Kong BGE, HKVAX and Victory.
  2. A suspicious platforms list to warn about unlicensed entities with dubious practices.
  3. Enhanced investor education via media campaigns, social media and talks.
  4. Strengthened intelligence gathering and referrals of illegal platforms to police.

SFC CEO Julia Leung reminded investors to be vigilant of platforms promising unusually high returns, which may signal Ponzi schemes. She advised dealing only on SFC-regulated platforms. Lawmaker Jeffrey Lam welcomed the “belated springtime” measures as boosting transparency and confidence. But he said the SFC should undertake more diverse public promotions to raise awareness, particularly improving crisis communications during incidents.

The SFC emphasised platforms on the applicants list are not yet licensed. It warned investors to carefully check spellings, as names may differ by one character.

Earlier refusals to release applicant names prompted accusations that the SFC was handcuffing the public and media from scrutinising regulatory oversight. But it reversed course within a week, explaining that recent events necessitated enhancing information flow.

Meanwhile, the Securities and Futures Commission (SFC) is taking steps to address concerns regarding unregulated virtual asset trading platforms (VATPs) by implementing a range of measures aimed at enhancing information dissemination and investor education.

Recognising the potential benefits of digital finance and virtual asset activities, as well as the associated risks such as decentralisation, money laundering, and investor protection issues, the SFC has been at the forefront of regulating VA-related activities since 2017. These risks align with international consensus among financial regulators, prompting many to review their local regimes to address these concerns.

With the full implementation of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) on 1st June, 2023, the SFC has closed the gap in its licensing and supervision powers over VATPs through a new licensing regime for centralised platforms. SFC-licensed VATPs are now subject to robust governance measures, including asset custody, prevention of market manipulation, avoidance of conflicts of interest, and more, all aimed at safeguarding investors’ interests.

To ensure the protection of retail investors, the SFC has imposed stringent requirements for SFC-licensed VATPs, including suitability assessments during the onboarding process, enhanced token due diligence, admission criteria, and disclosures.

The SFC maintains a close watch on VA activities in Hong Kong, gathering information from various sources such as market news, media reports, industry dialogues, complaints, and social media. It actively assesses the need to include entities on the Alert List and refers cases to the Police when necessary.

Working in collaboration with the Investor and Financial Education Council (IFEC), the SFC has been actively educating and warning investors about the risks associated with trading on unregulated platforms.

The recent JPEX incident highlights the importance of proper regulation to maintain market confidence and the need for improved dissemination of information to the public regarding suspicious websites and VATPs. In response, the SFC is implementing the following measures:

  1. Publication of VATP lists to ensure clear, transparent, and timely information dissemination. This includes lists of licensed VATPs, closing-down VATPs required to cease operations within a specified period, deemed licensed VATPs as of June 1, 2024, and, in response to public demand, a list of VATP applicants.
  2. Enhancing and issuing a dedicated list of suspicious VATPs on the SFC’s website, making it easily accessible to the public. The SFC will consider providing more information about these VATPs to alert investors at an earlier stage.
  3. Launching a public campaign in collaboration with the IFEC to raise awareness and educate the public about guarding against fraud. This will involve various channels such as mass media, social media, and education talks.
  4. Strengthening its intelligence gathering process related to VA businesses within its statutory powers. The SFC will continue to take enforcement actions against suspicious VATPs that may have violated the law and will collaborate with the Police to investigate the JPEX incident and hold wrongdoers accountable.
  5. Exploring the establishment of a dedicated channel with the Police to share information on suspicious activities and breaches by VATPs.
  6. Regularly reviewing the regulatory regime in Hong Kong in collaboration with the HKSAR Government, other regulators, and stakeholders. The SFC will consider timely measures in response to new market developments and may extend regulation to other VA-related businesses beyond VATPs, following the principle of “same business, same risks, same rules.”