Only a few months since the new dual licensing regime for virtual asset (“VA“) trading platform (“VATP“) operators came into effect on 1 June 2023 (see our previous article), the Securities and Futures Commission (the “SFC“) has issued two statements (see Warning statement on unregulated virtual asset trading platform and Statement on JPEX) expressly warning the public about certain suspicious features of JPEX (the “Warning Statements“), a VATP which has been placed on the SFC’s Alert List since July 2022, and stepped up its information dissemination and investor education.

In the meantime, upon receiving complaints about failure to withdraw assets from JPEX, the Hong Kong Police has arrested a total of 36 suspects, some of which are social media influencers, on suspicion of conspiracy to defraud.

What are the relevant offences?

As of 1 June 2023, a person commits an offence under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (the “AMLO“) if the person:

• carries on a business of providing any VA service, or holds itself out as carrying on a business of providing any VA service, without a licence under the AMLO;
• actively markets to the Hong Kong public, whether by itself or another person on its behalf and whether in Hong Kong or from a place outside Hong Kong, any services which it provides or purports to provide, and the provision of such services, if done in Hong Kong, would constitute providing a VA service without a licence under the AMLO;
• issues, or has in its possession for the purpose of issue, to its knowledge (a) an advertisement in which the advertised person holds itself out as being prepared to provide a VA service, or a document that contains such advertisement; and (b) the advertised person is not licensed under the AMLO;
• directly or indirectly, in a transaction involving any VA (a) employs any device, scheme or artifice with intent to defraud or deceive; or (b) engages in any act, practice or course of business that is fraudulent or deceptive, or would operate as a fraud or deception; or
• makes any fraudulent misrepresentation or reckless misrepresentation for the purpose of inducing another person to enter into, or offer to enter into, an agreement to acquire, dispose of, subscribe for or underwrite any VA.

The SFC indicates that it is empowered by section 53ZTH of the AMLO to take action against any persons who are knowingly or unknowingly involved in contravention-related conduct under the AMLO.

What seems to be wrong with JPEX?

In its Warning Statements, noting that JPEX has been actively promoting its products and services to the Hong Kong public through key opinion leaders (“KOLs“) and over-the-counter VA money changers (“OTC Shops“), the SFC warned the public about, among other things, certain suspicious features about JPEX and the persons actively promoting it to the Hong Kong public:

• JPEX falsely states on its website that it is “a licensed and recognised platform to facilitate the trading of digital asset and virtual currency” and claims on its website and local advertorials to have obtained licences from certain overseas regulators to operate VATP. In fact, there are currently only two SFC-licensed VATPs, namely OSL Digital Securities Limited and Hash Blockchain Limited, both of which are licensed VATPs under the Securities and Futures Ordinance (Cap. 571) (the “SFO“) regime only;
• JPEX offers very high returns for some of its products, which the SFC describes as “investment opportunities that seem too good to be true”;
• the SFC has received complaints from (and notes media reports of) retail investors who were unable to withdraw VAs from their accounts with JPEX, or found their account balances having been reduced and altered;
• JPEX appears to offer products involving VA “deposits”, “savings” or “earnings” which are not allowed under the SFC’s regulatory regime for VATPs; and
• KOLs and OTC Shops have made false or misleading statements on social media to suggest that JPEX has applied for a VATP licence in Hong Kong, in respect of which the SFC clarifies that no entity in the JPEX group has submitted any VATP licence application to the SFC.

The SFC began making enquiries into the suspected false and misleading representations and unlicensed activities in March 2022, and deeply regretted that JPEX has publicised confidential correspondence between the SFC’s Enforcement Division and JPEX in breach of the secrecy/confidentiality obligations under section 378 of the SFO and section 76B of the AMLO.

The SFC to step up information dissemination and investor education

In light of the JPEX incident, the SFC stated in its news article that it is putting in place the following measures to disseminate information in a clear, transparent and timely manner, and to educate and warn investors about the risks of trading on unregulated VATPs:

• publishing VATP lists on its website to inform the public of the regulatory status of VATP operators which are operating in Hong Kong or actively marketing their services to Hong Kong investors. The VATP lists were launched on 29 September 2023, being (a) a list of licensed VATPs; (b) a list of VATP applicants (accompanied by a list of applicants whose licence applications have been returned, refused or withdrawn); (c) a list of closing-down VATPs; and (d) a list of VATPs which are deemed to be licensed;
• enhancing and issuing a dedicated list of suspicious VATPs on its website;
• launching a public campaign, in partnership with the Investor and Financial Education Council, to raise awareness in guarding against fraud; and
• strengthening the SFC’s intelligence gathering process towards VA-related businesses and continuing its efforts to take follow-up and enforcement actions against suspicious VATPs.

The SFC also encourages the public to file complaints via its Online Complaint Form regarding any suspicious VA-related activities they may encounter.

On 4 October 2023, the SFC announced that it has established a dedicated working group with the Hong Kong Police Force to enhance collaboration in monitoring and investigating illegal activities related to VATPs.  The working group is set up to (a) facilitate the sharing of information on suspicious activities of and breaches of VATPs; (b) implement a mechanism to assess the risks of suspicious VATPs; and (c) enhance coordination and collaboration in related investigations.