JPEX incident has eroded public faith in crypto and hampered Hong Kong's virtual asset hub ambitions

The JPEX scandal, suspected to involve at least 2,305 victims with about HK$1.43 billion (US$182 million) in investments, has significantly eroded public trust in cryptocurrencies, casting a shadow over Hong Kong's aspirations to become a global virtual asset hub. The collapse of JPEX, potentially the city's largest financial fraud ever, has raised concerns among local retail investors and posed short-term challenges for virtual asset companies relying on government-backed sector expansion, according to industry insiders and analysts.

Cyrus Ip, a crypto venture investor and Chief Business Officer at the artificial intelligence startup DreamWld Technology, remarked, “At a time when people still don't completely understand what Web3 is, the JPEX case has created a negative impression for people in Hong Kong on digital assets and the broader Web3 industry.”

JPEX, established in 2021, aggressively targeted retail investors with extensive advertising campaigns across the city, claiming to be a licensed

cryptocurrency

exchange and promising returns as high as 20 percent. Following the suspension of trading and the imposition of hefty processing fees for fund withdrawals, a Telegram chat group for self-claimed JPEX victims amassed over 12,600 members.

Carlton Lai, head of blockchain and cryptocurrency research at Daiwa Capital Markets, noted, “I think this scandal will have a pretty sizeable negative impact on retail sentiment, given its significant local presence and the various celebrities involved.” This could add a layer of difficulty in convincing retail investors to embrace digital assets and might increase resistance to government-led Web3 initiatives.

Hong Kong's regulatory crackdown on JPEX marks a notable law enforcement action in the cryptocurrency sector. The Securities and Futures Commission (SFC) issued a warning on September 13, accusing JPEX of suspicious activities and misleading claims about its licensing status. Subsequently, police arrested 11 individuals, including JPEX employees and associated influencers. Notably, local actor and singer Julian Cheung Chi-lam and Malaysian actress Jacquelin Chng Se Min, who featured in JPEX promotional materials, were questioned by the police.

Hong Kong Chief Executive John Lee Ka-chiu expressed deep concern about the case, emphasizing the financial sector's responsibility in explaining new products to customers and urging the public to invest only on licensed platforms. The Financial Services and the Treasury Bureau pledged to take firm action against unlawful activities regardless of a company's origin.

JPEX countered the SFC's allegations, accusing the regulator of ambiguous guidelines and unfounded charges while alleging that telecoms providers were instructed to block the platform. A more cautious approach towards cryptocurrency may weigh on the sector, which is already grappling with an extended bear market.

However, long-term prospects for the sector appear brighter. Recent actions against JPEX signal Hong Kong's commitment to building an institutional digital asset economy with robust retail investor protections, according to Donald Day, Chief Operating Officer at VDX, a digital asset service provider.

Daiwa's Lai suggested that retail interest and confidence in cryptocurrencies tend to recover over time, especially during a bull market. In the interim, the Hong Kong government must prioritize educating the public about its regulatory framework and investor protection measures.

The SFC has repeatedly cautioned against trading on unlicensed platforms since first alerting the public about JPEX in July 2022. Nevertheless, the regulator cannot disclose which companies have applied for licenses or been denied, leading to calls for more information sharing and investor education in navigating the cryptocurrency space amid uncertainty and ambiguity.