Hong Kong’s monetary watchdog has issued a stern warning to traders, urging them to make use of solely licensed and controlled cryptocurrency buying and selling platforms. The warning comes within the wake of a serious fraud investigation into an unlicensed digital asset platform, JPEX, which has allegedly induced round HK$1.2 billion (US$154 million) in losses to over 1,600 traders, marking it the most important fraud case in Hong Kong’s historical past. This incident casts a shadow on the federal government’s ongoing efforts to place the town as a worldwide hub for digital property.
Former Securities and Futures Fee (SFC) regulator Angelina Kwan, who at the moment holds the place of chief govt officer at Hong Kong-based regulation consultancy Stratford Finance, stated that the town has chosen to allow retail cryptocurrency exchanges, however with stringent protecting measures in place. The latest enforcement actions display Hong Kong’s dedication to penalizing entities with malicious or illicit practices.
Forkast spoke with Kwan, who helped form Hong Kong laws on automated and web buying and selling providers as a director of the SFC’s Supervision of Markets division from 1999 to 2006. The dialogue highlighted deficiencies in Hong Kong’s digital asset buying and selling platform (VATP) licensing system, which had been uncovered by the alleged fraud case involving JPEX.
The next Q&A has been edited for readability and size.
Forkast: JPEX has been on the Investor Alert Listing since July 2022. Having labored for the SFC, a vital a part of your job was to oversee and monitor the actions of exchanges. Had been there any crimson flags the SFC was monitoring?
Angelina Kwan: The state of affairs has been unfolding for over the previous few weeks. In case you have a look at various paperwork which have been going forwards and backwards, JPEX has really accused the SFC of being heavy-handed. This has all been within the public area the place they’ve written public letters. I’ve by no means seen a so-called ‘regulated agency’ write that strategy to a regulator. There was simply no respect they usually had been actually on the offensive.
The SFC, very early, on has informed the entire trade to get your functions in by a sure time. If not, it’s worthwhile to orderly get your self out of right here. It was a really well mannered manner of claiming, ‘Please shut down in case you’re not going to do that.’
Within the JPEX case, they actually lied. They stated they had been regulated they usually stated that they’re making use of for the SFC licenses. That’s a blatant lie.
Forkast: How will the brand new licensing regime shield traders? Do you see extra enforcement actions in opposition to exchanges in Hong Kong?
Kwan: I undoubtedly see there will probably be extra enforcement actions as a result of simply because the solar rises, the solar units. You’ve got corporations that will probably be making use of, you will have unhealthy actors that may attempt to come to Hong Kong and also you’ll have some nice folks coming into Hong Kong bringing innovation. So with the great additionally comes the unhealthy and it will likely be as much as traders to be cautious of what they’re stepping into.
What’s occurring within the trade is that there will probably be obligatory licensing sooner or later for all digital asset service suppliers. These which are licensed can have licenses on-line and they are going to be on SFC’s watch record. From the trade facet, we have now the Hong Kong Securities and Funding Institute. We will probably be placing on a complete collection of coaching programs when it comes to coaching staff of digital asset corporations and we’re additionally taking a look at doing public service coaching.
I used to be round when the securities trade was simply beginning to develop in Hong Kong, the place we had been seeing the identical rising pains. We had an enormous case known as CA Pacific, which additionally blew up on the time, and questions like why didn’t the regulator see this and why didn’t they warn folks had been requested. They couldn’t as a result of perhaps they didn’t find out about it. With the web and digital property, the whole lot strikes a lot sooner now. Again then, we had faxes and tv. That’s about it when the securities trade happened.
This time I’ve seen the SFC transfer in a short time with the police hand in hand, particularly in mild of the responses from JPEX and the best way they handled folks. And that announcement of jacking up withdrawal charges was completely insane and led to their demise.
Forkast: Angelina, you might be an skilled in Australian and Hong Kong regulation. JPEX has Australian origins and is headquartered in Dubai. How will this affect the accountability of the platform’s operators? Is there any knowledge-sharing settlement between completely different jurisdictions for fraud prevention?
Kwan: VARA, which is the Digital Asset Regulatory Authority in Dubai, has simply labored out a memorandum of understanding with the SFC. They’ve additionally taken a really proactive stance when it comes to warning corporations which are doing funky issues rapidly.
Within the case of JPEX, they lied. They weren’t regulated in Dubai. I actually don’t perceive why they might even say that they had been licensed as a result of it’s a blatant lie they usually had been banking on the truth that retail traders wouldn’t examine this. That’s the factor. What we have to prepare traders who want to go into this trade is that not all people is regulated and folks do lie.
That’s what’s going to begin to ratchet up between all regulators within the area in addition to world wide. The Worldwide Group of Securities Commissions (IOSCO) simply got here out with a paper on pointers for all regulators world wide on what regulation ought to appear like. The SFC follows it, as does VARA, and different regulators.
IOSCO is the group that overlooks and promotes the framework for all regulators to work collectively. They usually’re most likely going to be taking a look at this case very fastidiously, in addition to attempting to advertise communications amongst regulators.
Forkast: How do you suppose these answerable for JPEX are dropped at justice?
Kwan: IOSCO is definitely promulgating an increasing number of calls collectively. I can’t communicate for certain, however Hong Kong and Australia, in addition to anyplace else that they’re working, have already got had calls about it to see what property are in these international locations that may be frozen to be sure that at the very least this HK$1.2 billion or US$124 million will be recovered and aggrieved traders can get their a reimbursement.
That’s going to be a little bit of an arduous course of. I’m glad that HK$1.2 billion is the most important quantity Hong Kong has had. You’ve got seen what occurred with FTX. They weren’t regulated in Hong Kong. They had been regulated within the Bahamas. It’s been very troublesome for traders in Hong Kong to really accumulate their property which are within the Bahamas or in FTX.
However at the very least in the event that they’re regulated, if one thing goes terribly incorrect, Hong Kong regulators can really shut or stop their buying and selling and truly maintain on to the property. That’s why regulation is so essential for the digital asset trade to develop and to outlive, as a result of solely by regulation can we really develop and really morph into a correct asset class, which is likely one of the the explanation why we’ve been pushing for licensing and the watershed to occur.
Forkast: What’s subsequent? What does the method for asset restoration appear like?
Kwan: The SFC goes to need to work with what it has so it doesn’t have any details about them. They will have to search out all of this data and attempt to freeze what they will working with the police. That’s why they needed to alert the police additionally. The police and possibly the Industrial Crime Bureau must work collectively to seek for property, freeze them, after which liquidators will most likely be appointed and investigations will happen. Then the entire strategy of returning property must occur. And that’s going to be the time-consuming half.
That’s why it’s essential for traders. In case you’re going to get into any investing, know who you’re investing with, make investments with a licensed entity. So the 2 licensed entities proper now in Hong Kong are Hashkey and OSL.
What concerning the cash changers which are altering Bitcoin for {dollars}? You are able to do that with sure cash. What concerning the machines which you could purchase Bitcoin from? What concerning the outlets which are particularly for simply shopping for Bitcoin in Hong Kong?
The Hong Kong authorities has taken the stance to evaluation this sooner or later. However the first space that the SFC needed to give attention to was centralized exchanges as a result of they had been probably the most excessive profile they usually had been probably the most international in nature. That’s the mandate that Elizabeth Wong, director of licensing on the SFC, needed to begin with.
They don’t have a ton of individuals with the experience to do that. And that’s why the Hong Kong authorities opted to maneuver with this primary and get all of them licensed first. Then the following part was the mom-and-pop outlets. Now the federal government will probably be re-evaluating this entire space and put in licensing for it.
Forkast: Singapore is stricter relating to retail advertising and marketing of crypto exchanges. Will this incident make Hong Kong comply with swimsuit?
Kwan: Hong Kong has decided to permit retail with guardrails. That was a really large choice for Hong Kong. They should persist with it. There could also be tweaks when it comes to how issues work, however they’ve issued a really complete licensing regime. We want to ensure it really works. They’re going to most likely be stepping up enforcement when it comes to strolling the beat extra to see what is going on out there.
What we must be doing as folks within the trade is we must be calling out if there are unhealthy actors. In case you’re making our livelihood look unhealthy, then you have to be reporting it to the police in addition to to the SFC. And in the event that they’re trying like a financial institution or squawking like a financial institution, then the Hong Kong Financial Authority (HKMA) must also be alerted and informed these firms are holding themselves out to be banks and promoting bank-like merchandise. So please take motion and put that letter on file. If we had been to go backward, and never enable retail, it could actually dampen Hong Kong.
Jeff Cheung contributed to this text.