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Crypto fraud an emerging threat

By Arthur Chan

Hong Kong, 13 October 2023: Crypto crime is on the rise in Hong Kong as rogue operators take advantage of investors’ inexperience in this complex and fast-evolving finance sector. While regulators crack down on fraudulent behaviour and police make arrests, for many citizens it is too late – tracing and recovery of virtual assets is highly specialised work and can be difficult and costly.

Police reported 2,336 cryptocurrency-related complaints last year – a 67% increase on the number in 2021. The cases involved about HK$1.7 billion in funds, more than double the value of the previous year.

The 2023 figures can be expected to show another sharp increase given that Hong Kong is presently embroiled in its biggest-ever alleged case of financial fraud – involving more than 2,300 victims who are suspected of losing assets worth almost HK$1.5 billion – surrounding the JPEX cryptocurrency exchange.

At least 28 people have been arrested in connection with the case, including JPEX staff, minor celebrities and so-called influencers on social media who wrote glowingly about JPEX and helped persuade individuals to invest their savings in a sector they knew little about. There have even been claims of intimidation tactics against crypto experts who voiced their concerns about the platform.

The scandal has dealt a significant blow to Hong Kong’s efforts to establish a crypto-friendly regulatory regime and become a global trading hub for digital assets. Four months ago, the city implemented legislation under which cryptocurrency exchanges can obtain a licence from the Securities and Futures Commission (SFC) for retail trading. There is a one-year grace period for pre-existing exchanges to comply with the requirement. Only two platforms, HashKey and OSL, have done so to date, while applications have been submitted by four others.

The SFC had named JPEX as unlicensed platform last month and accused it of “suspicious activities” but has since come under fire for not doing more, or acting quickly enough, to warn investors. Senior finance executives have also warned of the dangers of trading on unlicensed platforms and called for more regulation and education.

The JPEX scandal follows the spectacular collapse of cryptocurrency trading giant FTX in November last year in another financial meltdown with links to Hong Kong. It was discovered that FTX – which just months earlier had been valued at US$32 billion – had been diverting customer funds to Alameda Research, a cryptocurrency trading firm headquartered in this city. Customers all over the world lost billions of dollars as the two companies went bust. FTX founder Sam Bankman-Fried has just gone on trial in New York where he has pleaded not guilty to multiple fraud charges.

Hong Kong’s burgeoning cryptocurrency sector suffered another blow this week as police confirmed scammers were using phishing text messages purportedly sent by the world’s largest cryptocurrency exchange, Binance, to get details of its clients and their passwords before stealing virtual assets from their accounts. The force said 11 citizens had reported virtual assets with an estimated value of HK$3.5 million had been stolen.

A direct result of the JPEX scandal is that the SFC and police have formed a joint unit to monitor and investigate cryptocurrency-related crimes. The team will follow up on suspect virtual asset trading platforms, report suspicious activities, assess exchange risks and aid related investigations.

Signs point to further enforcement activities in the months and years ahead. The government remains committed its goal of becoming a global fintech centre of excellence with a digital asset ecosystem that is subject to robust but business-friendly regulation. Financial Secretary Paul Chan has signalled the administration is pursuing business development related to Web3 – the next generation of the internet – and will build a proper regulatory framework.

In the meantime, investors – especially those unfamiliar with the market – should trade only on licensed cryptocurrency platforms and exercise an abundance of caution regarding dealings in virtual assets. If investors have any concerns or doubts, they should seek guidance from their own financial advisors or experts before making any investment decisions.

Arthur Chan is a Senior Associate with BC&C. He specialises in Criminal Litigation and cyber fraud recovery claim and also develops a broad range of civil and commercial litigation such as immigration, personal injuries and employment issues. He has successfully dealt with cases involving account freezing and recovery, in one notable instance retrieving more than US$1 million that was stolen in an email scam. He can be contacted at Arthur@boasecohencollins.com.

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