The JPEX scandal, which is suspected to have ensnared at least 2,305 victims and involving around HK$1.43 billion (US$182 million) in investments, has dealt a severe blow to public trust in cryptocurrencies, overshadowing Hong Kong's ambitions to become a virtual global. asset center.
The implosion of JPEX, which could become the largest financial fraud in the city's history, has raised alarm bells among local retail investors, creating near-term challenges for virtual asset companies relying on the government's push to expand the sector, according to industry actors and analysts.
JPEX, founded in 2021, has targeted retail investors with large advertisements in the city's shopping and transportation hubs, claiming to be a licensed cryptocurrency exchange and offering returns of up to 20 percent.
A chat group on the Telegram messaging app for people who claim to be victims of JPEX has garnered more than 12,600 signups, after the cryptocurrency exchange suspended trading on Monday and set high processing fees for fund withdrawals.
“I think this scandal will have a fairly significant negative impact on retail sentiment, given its significant local presence and the various celebrities involved,” said Carlton Lai, head of blockchain and cryptocurrency research at Daiwa Capital Markets.
That could mean "an extra layer of difficulty" in convincing retail investors to accept digital assets, and a higher level of resistance toward any Web3 efforts the government tries to push through, DreamWld's Ip said.
"I wouldn't be surprised if the government slows down the current Web3 push," he added.
Hong Kong's regulatory crackdown on JPEX represents one of the city's highest-profile law enforcement actions in the cryptocurrency sector.
Police have since arrested 11 people, including JPEX employees and influencers suspected of being associated with the company. Separately, local actor and singer Julian Cheung Chi-lam and Malaysian actress Jacquelin Ch'ng Se Min, both of whom appeared in JPEX publicity materials, were questioned by police on Thursday.
The Treasury and Financial Services Office said relevant law enforcement agencies would "take decisive action against illegal activities, regardless of whether the company is a foreign or local entity."
A more cautious approach to cryptocurrencies could hurt the sector, which is already struggling in a prolonged bear market. In the second quarter, trading volume on centralized cryptocurrency exchanges fell to its lowest level since the fourth quarter of 2019, according to a report published in June by statistics provider CCData.
The long-term prospects for the sector may be more promising.
The recent law enforcement actions against JPEX show that Hong Kong "is really taking concrete steps to build an institutional digital asset economy, with strong protection for retail investors," said Donald Day, chief operating officer of VDX, a Digital asset service provider in Hong Kong focusing on the institutional market.
The legal crackdown will "increase the trust" that the retail investing public can place in licensed and regulated trading platforms, he said.
Daiwa's Lai said retail interest and confidence in cryptocurrencies "tend to return over time, particularly when a bull market forms." Until then, the Hong Kong government “would need to do much more to educate the public about its new regulatory framework and measures surrounding investor protection,” she said.
The SFC has repeatedly warned the public not to trade on unlicensed platforms after it first issued an alert on JPEX in July 2022. However, the regulator also said it could not reveal which companies have applied for or been denied a license. a.
"I agree that it is very difficult for the SFC to tell people what they can and cannot invest in," said Kai Lung Hui, senior associate dean of business and management at the Hong Kong University of Science and Technology. "On the other hand, I think greater information sharing and education could have helped investors navigate the cryptocurrency space."
"When there is a lot of uncertainty and ambiguity, it is always better to have more information," Hui said.
