JPEX Fraud Case Sparks Calls for Increased Cryptocurrency Regulation in Hong Kong

The Hong Kong government has taken a significant step in regulating the cryptocurrency market, with officials announcing that they will not allow retail stablecoins trading until a comprehensive policy on stablecoins is introduced, possibly next year. In addition, new cryptocurrencies for retail trading will require the approval of the Securities Regulatory Commission, as concerns over fraud and the lack of regulatory oversight continue to mount.

The announcement comes in the wake of the recent controversy surrounding the JPEX virtual asset trading platform, which has been accused of conspiracy to commit fraud. The case has raised considerable public concern and highlighted the need for stronger regulatory measures in the cryptocurrency space.

Figure 1-1: Mr. Hui Ching-yu, Financial Secretary and Treasury Bureau Chief (center), and Ms. Angel Wong Lok-yin, Director of the Intermediaries Division and Head of Fintech at the Securities and Futures Commission (left) | Source: news.mingpao.com

Financial Secretary and Treasury Bureau Chief, Hui Ching-yu, addressed these issues during a live online broadcast with the Investment and Financial Education Committee. He expressed his belief that citizens are increasingly aware of the serious fraud case involving an unlicensed virtual asset trading platform, emphasizing that unregulated platforms pose significant risks and underline the importance of regulation.

Hui pointed out that investing in unregulated platforms carries a higher risk due to their lack of transparency and potentially unstable operations. Investors engaging with such platforms may find themselves without recourse in case of disputes or if the platform ceases operations, engages in fraudulent activities, defaults, or suffers a security breach. He cited the example of the FTX platform’s closure overseas last year and the recent JPEX case in Hong Kong as cautionary tales.

In the past, numerous virtual asset trading platforms have used stablecoins like USDT as a means of exchange. Hui noted that these stablecoins are typically pegged to assets like the US dollar or gold to stabilize their value. However, history has shown that even stablecoins can experience price fluctuations or crashes. Hui explained that the reserve management of stablecoin issuers plays a crucial role in price stability and the rights of investors to redeem fiat currency. Given these considerations, Hong Kong has decided not to permit retail trading in stablecoins until formal regulations are in place.

Regarding the introduction of various investment products on some trading platforms, including offerings that resemble “staking” to allow investors to earn interest, as well as yield farming, savings, and derivatives trading services, the Hong Kong Securities and Futures Commission’s Intermediaries Division Director and Head of Fintech, Angel Wong Lok-yin, stated that licensed virtual asset trading platforms must maintain a “more neutral” stance to prevent conflicts of interest. As a result, the offering of such trading services is currently not permitted under the licensing requirements.

Furthermore, Hong Kong currently permits retail trading of only Bitcoin (BTC) and Ethereum (ETH) on licensed platforms. Any additions to the list of tradable cryptocurrencies will require approval from the Securities and Futures Commission after the submission of a report detailing the proposed cryptocurrency’s merits and risks.

The Hong Kong government’s move to tighten cryptocurrency regulations reflects a growing global trend of authorities seeking to protect investors and maintain the stability of financial markets in the face of the expanding cryptocurrency market. With the anticipation of comprehensive regulations for stablecoins and greater oversight on cryptocurrency trading, Hong Kong aims to create a safer and more transparent environment for cryptocurrency investors and participants.

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