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As losses to the JPEX fraud climb to more than $180m, questions continue to be asked of Hong Kong regulators and how they failed to stop the crypto scandal before it happened.

Last month, following the JPEX collapse, the Hong Kong Securities and Future Commission (SFC) published a  saying that the exchange had “been on its radar” as potentially fraudulent since March 2022.

In the intervening period, however, the Dubai-based exchange was able to continue offering its services in Hong Kong, and continued to grow its user base through an aggressive marketing strategy.

The event that triggered the exposure of the JPEX fraud would not take place until September 12, 2023, when the SFC issued a  advising investors not to use the exchange.

The SFC said that JPEX was marketing itself in Hong Kong as a “licensed” platform for digital asset trading, when in fact JPEX did not hold a licence in any jurisdiction.

In a footnote, the regulator explained that JPEX had registered itself as a business entity in certain overseas jurisdictions, but its claim that it holds a virtual asset licence in Dubai was not true.

Despite its misrepresentations, JPEX had invested heavily in expensive ad campaigns in Hong Kong, including one that saw its logo emblazoned on the island's iconic .

JPEX also invested heavily in social media influencers, who it paid to amplify the false claims highlighted by the SFC.

The most prominent among these was Joseph Lam, 33, an Oxford-educated lawyer-turned-crypto enthusiast, who promoted JPEX to his 150,000 followers on Instagram.

Elsewhere in the warning, the SFC also said it had received complaints from JPEX customers who were unable to withdraw their funds or who had seen their balances altered or reduced.

The next day, JPEX  by telling the regulator that, in February 2023, it had publicly  its “plans” to obtain a licence in Hong Kong, but had not yet submitted its application.

JPEX ignored the other points raised by the SFC, including the references to withdrawal and balance issues.

Red flags multiply after withdrawal fees imposed

Two days after the SFC warning, JPEX  plans to impose a new fee on withdrawals. It did not specify the exact fee, but users reported being asked to pay fees of up to $999 to withdraw $1,000.

As complaints multiplied, JPEX then  that its third-party market makers had begun to "maliciously" restrict liquidity to the exchange due to “negative news” reports, leading to further restrictions on withdrawals.

The following week, the Hong Kong Police Force stepped in, arresting Lam and five other JPEX influencers on charges of conspiracy to defraud.

The SFC then ordered Hong Kong telecom providers to  JPEX’s website and mobile app, but by that point JPEX user funds had already vanished.

In total, more than 2,200 JPEX users have reported losses of $180m to date.

An ‘embarrassing’ setback for Hong Kong

In June, Hong Kong distinguished itself by becoming one of the first jurisdictions in the world to introduce a for virtual asset trading platforms (VATPs).

The two-tier framework consists of anti-money laundering and operational requirements that VATPs must fulfil in order to obtain a licence in Hong Kong.

As per the new rules, it is now a criminal offence to conduct VATP activities in Hong Kong without a licence. However, VATPs that already had a “” presence in Hong Kong prior to June 1 have been granted a 12-month grace period to obtain a licence.

Although JPEX claimed it was planning to apply for such a licence, the SFC has since said that it “never” contacted the regulator in relation to any planned application.

Kelvin Low, law professor at National University of Singapore (NUS), said that for a scandal like JPEX to emerge in 2023 is “deeply embarrassing” for Hong Kong regulators.

“Hong Kong’s crypto-asset framework is clearly deficient, especially in light of the FTX collapse and other events we have seen in 2022,” he told ����žž.

“While it is true that some people cannot be protected from their own worst instincts, the fact that JPEX could advertise so publicly for so long raises questions about the regulations.”

In Low’s view, JPEX’s behaviour was typical of a fraudulent crypto exchange, where an ever-increasing marketing budget is used to attract more users and deposits right up until its collapse.

FTX, once the world’s second-largest crypto exchange, engaged in similar practices before filing for bankruptcy in November 2022.

In 2021 it spent a reported $135m on a stadium naming rights deal in Miami, and in 2022 it spent a reported $35m on a Super Bowl commercial featuring actor Larry Davidson.

Commercial interests vs regulatory integrity

Prior to the JPEX scandal, Low said the Hong Kong media had heavily promoted the idea of a “pivot to crypto” for the city’s capital markets, putting pressure on regulators not to upset the industry.

At the same time, he said, regulators have taken on the crypto industry’s claims that tough regulation would suffocate “innovation”.

The result has been a halfway house whereby crypto-assets — minus Bitcoin and Ethereum — have been brought into the purview of the securities regulator, but with lower standards than that applied to traditional securities.

“My worry for Hong Kong is that in pursuing the crypto hub status, it is sacrificing its hard-earned reputation in traditional capital markets,” Low said.

“It may be the case that a particular territory’s laws are drafted too narrowly today to capture crypto-assets as securities, but the remedy to that is quite simple: amend your laws.”

Lessons learned for APAC regulators?

The impact of the JPEX fraud is expected to spread over the coming months, with each jurisdiction affected differently.

Although JPEX promoters in Hong Kong have been arrested, for example, the beneficial owners of the platform are believed to be in Dubai and are still at large.

For bad actors in the crypto industry, Low said that Dubai's lack of enforcement will continue to attract non-compliant activity targeting offshore jurisdictions.

In the rest of APAC, Low said the JPEX fraud should serve as a warning to regulators to ensure that future legislation does not produce similar loopholes.

“I hope I am wrong, but I fear that regulators will take a long time to learn that we have our securities regulations for a reason, and lowering standards for the crypto industry simply allows it to exploit loopholes,” he said.

“These loopholes will eventually be closed, but on a piecemeal basis after successive scandals.

“APAC regulators should consider carefully whether it is worthwhile to mollycoddle the crypto industry.”