The company, which touted itself as “Hong Kong’s first cryptocurrency academy”, was also an over-the-counter virtual asset money changer – or OTC shop – providing cryptocurrency trading without using an exchange.

In March, it posted a video on its Instagram page promoting JPEX, a prominent cryptocurrency platform that promised investors high returns.

JPEX had an army of celebrities, influencers and OTC shops to push its charm offensive, on top of splashing on advertisements in MTR stations, on buses, billboards and in the media.

Kitty said Chan promoted JPEX actively, offering promo codes for free gifts and discounts for investing with the platform.

He pushed JPEX on his YouTube channel, gushing that the interest on cryptocurrency investments could reach “ridiculous levels” of up to 100 per cent.

Kitty said that like many others, she was persuaded by Chan and the CryptoPARD staff to invest in JPC, a native token issued by JPEX which could be traded only on the platform.

Defiant JPEX touts new plan to woo users, barks back at regulators

“I hardly knew anything about cryptocurrency. I only trusted master Chan, who had a very upbeat outlook about JPEX and claimed his followers would get rich easily if they invested in its products,” she said.

She eventually put her life savings into buying JPC and the stablecoin Tether (USDT), the largest stablecoin by market capitalisation.

Reality sank in for her this week, when JPEX was accused of being behind Hong Kong’s biggest-ever alleged financial fraud involving HK$1.43 billion.

Police arrested 11 people involved in promoting the platform, froze HK$15 million in bank accounts and seized three properties valued at HK$44 million.

Among those arrested were influencer Joseph Lam-chok, facing charges of “conspiracy to defraud,” and internet personality Chan Yee, accused of running a cryptocurrency exchange shop.

Among the celebrities involved were actor and singer Julian Cheung Chi-lam and Malaysian actress Jacquelin Ch’ng Se Min, who were questioned by police on Thursday. Feng shui master Chan was questioned by police on Friday.

As of Saturday, Kitty was among 2,305 JPEX investors who had complained to police and might be victims of fraud.

“I am afraid my life savings will all go down the drain,” she said. “I finally realise that one cannot be too greedy.”

JPEX scandal shows need for virtual assets regulation, Hong Kong leader says

Nine alerts before JPEX was named

The case is being viewed as a major test of Hong Kong’s ability to balance investor protection with the city’s ambition to serve as a fintech hub, and keep up with the fast-growing world of cryptocurrency.

The alleged scam came to light on September 13, when the Hong Kong Securities and Futures Commission (SFC) warned investors against using JPEX, which it said was an unlicensed cryptocurrency exchange that had “suspicious features” and had spread misleading information about its licensing.

It was the first time SFC named JPEX specifically, after issuing nine alerts reminding investors to stay on guard against unlicensed victual asset trading platforms engaging in improper practices.

It also said that online influencers and OTC shops had been making false or misleading statements that JPEX had applied for a virtual asset trading platform (VATP) licence in Hong Kong.

JPEX fallout: Hong Kong leader warns trade should only be on licensed platforms

Over the following days, desperate investors rushed to withdraw their virtual assets, only to realise that they could withdraw a maximum of 1,000 Tether tokens, or USDT, but would have to pay an administrative fee of 999 USDT, making withdrawals practically impossible.

Lawmaker and tech entrepreneur Johnny Ng Kit-chong said he received more than 200 complaints from investors claiming to be victims and seeking help to claw back JPEX investments totalling about HK$200 million.

Most were sophisticated investors in their 20s and 30s, men and women.

“They are not some ignorant people but professional investors, and many are super knowledgeable,” he said. “Some put their life savings in JPEX with one losing more than HK$10 million.”

Ng said investors were recruited mainly through seminars run by OTC shops that were connected, supported by influencers and key opinion leaders, known locally as KOLs.

“A lot of victims fell prey after attending courses where influencers and KOLs were hired to blow the trumpet for JPEX,” he said.

He added that the alleged scammers took advantage of the potential investors’ “herd mentality and greed to make quick money”.

“Like all scams, the firm controlled the price of its JPC token and let investors collect some profit before persuading them to increase their stakes,” he said.

But Ng felt savvy investors should have spotted signs of something fishy.

“We don’t know who is the boss of JPEX or the management. Another thing is that the platform did not have a cryptocurrency licence,” he said.

“The investors should have done background checks themselves and not just relied on the word of some KOLs.”

Flamboyant storefronts, big-spending ways

Despite its prominence on social media and in advertisements, little is known about JPEX, which was set up in 2020.

Its operating entity in Hong Kong, Web3.0 Technical Support Limited, has a single director, Kwok Ho-lun, who is also director of Coinledge Limited, an online blockchain media company that has been driving flattering coverage of JPEX.

JPEX has attracted coverage from mainstream and trade media, and paid US$70,000 to be a platinum sponsor of this year’s Token2049 in Singapore, one of the world’s largest cryptocurrency conferences.

Sing Tao Daily, a major Hong Kong Chinese news outlet, had a content collaboration arrangement with the media company Coinledge, which was ongoing as of Thursday.

JPEX’s rise coincided with the emergence of OTCs at prime locations in the city. CryptoPARD, for example, set up a flamboyant storefront earlier this year at a Tsim Sha Tsui shop space previously occupied by watch brand Swatch.

A few blocks away, the shopping centre The One housed an “NFT art gallery” of Coiner, an OTC which opened last November in a lavish ceremony hosted by TV entertainer Bob Lam Shing-bun.

Coiner was among the OTCs raided by police this week. Many of these shops were owned by influencers who have been part of the JPEX chorus, including Chan Wing-yee and Joseph Lam.

The splashy spending by high-profile OTCs was a red flag, said veteran cryptocurrency investor Louis Li Sze-chung, who co-founded NFT solution provider Fraktiq and is adviser to a local tech start-up association 852Web3.

“OTCs, like money changers, are a business of razor-thin margins. But these OTCs were paying very high shop rents, spending big money on over-the-top advertising and promotions,” he said. “We knew something was wrong with them once we noticed them.”

While some OTC owners were among those arrested this week for conspiracy in fraud, police have not yet revealed how the scam played out.

According to the SFC, another “suspicious feature” of JPEX was the “very high returns” it promised.

Hong Kong arrests 6 people in fraud investigations linked to JPEX

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Street attacks linked to scandal?

Various dark allegations have also surfaced in recent years about JPEX.

On September 15, blockchain analysis firm Bitrace said that the audit of a wallet associated with JPEX indicated that over a fifth of the tokens held had been “contaminated” by ties to money-laundering and black market dealings.

There were also news reports that a Shenzhen-based JPEX investor was beaten up by a mob in Hong Kong while on the way to meet the platform’s customer service agents about difficulty he faced withdrawing tokens.

A Hong Kong cryptocurrency YouTuber, who identified himself as Leo, claimed in a video on Tuesday that he was beaten up by a gang on the street after attending an OTC opening event on September 5, 2020.

The attack occurred about two weeks after he called JPEX a scam in a video. He was treated in hospital for two days.

“The back of my head hit the ground and there was blood everywhere,” he recalled. “Knowing that some strange forces or individuals were behind this, I avoided answering questions about this exchange after that.”

Other warnings about JPEX continued to circulate online, including a post on the online forum LIHKG last December 6 where user “CryptoWizard” called JPEX “an absolute scam” offering return rates “no other platform in the world can offer”.

Did Hong Kong’s regulator do enough?

A week later, on December 13, the SFC warned investors of significant risks associated with “virtual asset arrangements claiming to offer returns”.

It said some “could amount to a collective investment scheme”, or CIS, defined under Hong Kong’s Securities and Futures Ordinance as arrangements where property is being managed as a whole with participants receiving returns as a result of that management.

SFC has a track record of pre-emptively blocking unauthorised collective investment schemes – including multiple instances of initial offerings of cryptocurrencies.

The SFC put out eight other alerts before and after that, but did not name JPEX until this month.

What went largely unnoticed was that SFC’s official website had included JPEX on an alert list since July 8 last year, alongside hundreds of other entities related to fraudulent websites and unlicensed brokers.

It was placed on the list after nearly four months of correspondence between the regulator and the platform. This week, the SFC said the platform had been “uncooperative”.

JPEX cryptocurrency exchange named in 83 complaints to Hong Kong police

It was only in December last year that the Legislative Council passed a bill to regulate the volatile cryptocurrency sector through a mandatory licensing regime for centralised exchanges.

A new regulatory framework that came into effect in June gives a one-year grace period to exchanges with a large presence in the city to make changes to comply with the rules and apply for a licence to offer their services legally to local retail investors.

The companies said last month that their licences had been upgraded to include serving retail investors.

Elizabeth Wong, SFC director of licensing and head of its fintech unit, told a press conference on Tuesday that the watchdog had “no power at all to regulate JPEX” before the new statutory framework came into effect on June 1.

But lawyer Jason Chan, a partner of law firm Howse Williams focusing on financial regulatory advice and virtual assets, said the SFC could have intervened earlier by exercising its authority over collective investment schemes.

“When a centralised platform operates a staking pooling arrangement [of tokens], there’s quite a big likelihood that these arrangements would fall into the scope of CIS,” he said.

He suggested the regulator might not have received enough complaints to warrant acting against JPEX earlier.

He felt that providing a one-year grace period was reasonable to allow unqualified platforms to wind up their Hong Kong operations.

Neha Parmar, managing director of FTI Consulting’s Financial Crime Compliance practice in Hong Kong, thought there was still some regulatory ambiguity during the transitional period and called for vigilance from investors.

JPEX bosses anonymous but defiant

Through the turmoil and barrage of allegations in recent days, JPEX has put up a defiant front, hitting back at the regulator and announcing a new dividend plan for investors on Wednesday night.

Proclaiming that the regulator had subjected it to a series of “unfair suppressive actions”, the platform said its team did not have a fixed location with members in various regions worldwide.

It also insisted that its practice of issuing its own digital token was in line with other established virtual asset exchanges such as Binance and Huobi.

One investor called the new dividend plan a sham as investors had no choice but to press “agree” to it.

Lawyer Chan said regulators should consider expanding the oversight to OTCs given the developing landscape of the cryptocurrency market, especially the JPEX episode.

“A lot has changed. At first people used centralised exchanges, then they switched to decentralised finance. Many people also used OTCs to circumvent existing legal requirements,” he said.

Professor Douglas Arner, from the University of Hong Kong’s law faculty, expected the JPEX saga would result in authorities speeding up the licensing of cryptocurrency firms and ramping up investigations into unlicensed platforms.

“I expect the focus will be on eliminating unlicensed activities. This would be very much in line with the direction we are seeing internationally,” he said.

* Name changed at interviewee’s request.

Additional reporting by Dylan Butts