Will JPEX Scandal Shake Up Hong Kong's VASP Licensing System?

Hong Kong, as an international financial hub, naturally stays at the forefront of the crypto business. Fazzaco has published several articles discussing the launch of Hong Kong's VASP (Virtual Asset Service Provider) licensing system by Hong Kong Securities and Futures Commission (SFC): A Guide to HK SFC's Latest Consultation on Virtual Assets Regulation​; and The Race for Hong Kong VASP License Begins, Which Exchanges Will Make the Cut?​ However, the late-September allegations against the JPEX for suspected fraud has cast a shadow over Hong Kong's VASP licensing system.

Background and Current Developments Regarding JPEX

First and foremost, JPEX might sound like Japanese Exchange, but it is, in fact, a cryptocurrency exchange committed to digital asset trading, established in 2020. JPEX claims to have obtained financial licenses in the United States, Canada, and Australia, with operations in Hong Kong and Taiwan.

The rapid escalation of this crisis is eye-catching. In September 2023, the Hong Kong Securities and Futures Commission (SFC) first issued a statement expressing doubts about JPEX, followed by reports from users of failed withdrawals. Hong Kong Police swiftly carried a crackdown op, resulting in the arrest of multiple suspects. As of October 5, 2023, the number of the arrested stands at 27, with 2,523 reported victims and an estimated involvement of approximately HKD 1.55 billion, marking it as one of the largest financial fraud cases in the city's history.

In terms of both scale and impact, JPEX has been a prominent headline in the Hong Kong and even the global financial industry in recent times. However, the timing of this event couldn't be worse for the VASP licensing system of the city, which has yet to reach its first anniversary.

Since its establishment in 2020, JPEX has been one of the most high-profile crypto platforms in the city. Its marketing campaign has been visible everywhere, from subway stations to buses. Even celebrities like Julian Cheung came out and endorsed them. In early 2023, JPEX announced that it had obtained a license. Consequently, after the initial warning from the SFC, the platform launched a counteroffensive against the regulator, accusing them of baseless allegations.

Under Public Pressure, SFC Releases List of VASP Licensees

Faced with accusations from the Hong Kong SFC, JPEX had once stated on its official website: "Since Sept. 13, 2023, the SFC has suddenly made a series of accusations against our platform's operating model and promotional methods, which we vehemently resent as they were made without investigation or review."

Under mounting public pressure, the regulator publicly disclosed the list of virtual asset trading platforms that currently hold the license on September 25. This list also included those in the application process, as a response to JPEX's unfounded claims. Interestingly, there are currently only four platforms in the application process for the license: HKVAX, HKBitEx, Hong Kong BGE, and Victory. Notably, OKX and Huobi, who claimed to apply for the license, were conspicuously absent from the list.

Lennix Lai, Head of Global Institutional Business at OKX, subsequently stated that OKX HK plans to submit its application by the end of October, while Huobi has yet to provide a response.

Conclusion

The JPEX crisis, which has resulted in numerous customers encountering difficulties in withdrawing their funds, undeniably serves as a cautionary tale for crypto platforms intending to operate in Hong Kong. In response, the SFC emphasizes its commitment to enhancing the regulation of virtual asset trading and plans to introduce the "4+1" list to increase regulatory transparency.

The "4+1" list includes the VASP license holder list, the list of virtual asset platforms designated for a limited time to make adjustments, the list of virtual asset trading platforms authorized until June 1, 2024, the VASP application list, and an extra list of suspicious virtual asset trading platforms. This measure aims to further safeguard market stability and investor confidence.