Licence to Shill
What the JPEX scandal could mean for APAC crypto adoption
Unquestionably, the proverbial “talk of the town” in APAC capital markets at the moment concerns fraudulent activity by digital asset trading platforms.
In particular Hong Kong, which is increasingly consolidating its status as a crypto stronghold, is experiencing misbehaviour by platform operators first hand, which is threatening to undermine the region’s adoption of crypto trading
In August 2023, the Hong Kong Securities and Futures Commission (SFC) issued a stern warning against the use of crypto exchange JPEX, which exhibited “suspicious features” and promoted misleading information about its licensing status. The SFC clarified that no entity within JPEX is licensed by the regulator, nor has it applied for one to operate in Hong Kong. This is despite JPEX claiming on its Web site that its platform is “licensed and recognised” to facilitate the trading of digital assets, while being subject to promotions on several social media platforms. So far, the SFC has received more than 1,000 complaints regarding JPEX, which has defrauded customers out of $128 million through withdrawal freezes and wallet handling. 11 people, including JPEX personnel have been taken into custody.
SFC’s new crypto licensing regime first came into force on June 1, 2023, under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO). Prior to this new regime, exchanges could opt into SFC licensing, but they were also allowed to operate without a permit. Digital asset trading platforms offering services in Hong Kong prior to June 1, 2023 can continue providing such services there until May 31, 2024, without being in breach of the AMLO’s licensing requirements.
The AMLO regulations state that any breaches of the law could result in fines up to $1.3 million and seven years imprisonment for responsible individuals. In light of JPEX’s activities, the SFC announced on September 25 that it would publish a list of all licensed, deemed licensed, closing down, and application-pending digital asset platforms in Hong Kong.
Although the licensing terms are in the best interests of retail investor protections, it will come at a cost for digital asset platforms in Hong Kong and arguably stifle regional growth in the sector.
According to Coin Geek, digital asset platforms may have to fork out anywhere between $12 million-20 million to meet licensing costs in Hong Kong. This is higher than in other jurisdictions with crypto regulatory frameworks; for example, according to the European Policy Information Center, compliance costs under the terms of the Markets in Crypto Asset (MiCA) regulation will range between €2.8 million-€16.5 million ($3 million - $17.7 million).
One could argue, then, that an overly expensive regulatory environment could lead to an exodus of crypto platforms in one of APACs most important crypto markets to more friendly shores. An example of this was the relocation of the collapsed crypto exchange FTX, which switched to the Bahamas from Hong Kong in 2021.
However, as GreySpark noted in its recent article, the SFC now is seeking to combat the flight of firms to offshore locations by prohibiting digital asset service providers that are located outside of its jurisdiction from engaging with retail investors under its jurisdiction. In step with Hong Kong, Singapore regulators put measures in place to prevent foreign digital asset service providers from soliciting Singapore-based users.
So, it appears that crypto platforms in APAC will have no choice but to face the regulatory music, especially if they do not want to add fines on top of their already costly compliance makeovers. Nevertheless, the tightening restrictions should go a long way in cutting out fraudulent activities from exchanges such as JPEX, weed out the bad actors and ultimately create a more robust crypto ecosystem.
As London-based law firm Shearman noted:
Business gravitates to where the most sophisticated regulators and regulations are.
Right now, Hong Kong and — arguably — APAC in general meet this basic criteria, which bodes well for the region’s crypto credentials. However, after the JPEX scandal, it may take some time before confidence toward crypto in Hong Kong, specifically, is rebuilt. Regulators such as the SFC will have a key part to play in this narrative.