Defiant JPEX takes swipe at Hong Kong financial regulator as crypto exchange touts new plan to woo users

DAO stands for decentralised autonomous organisation, which is defined as an entity in which members collectively make decisions. JPEX is run by an anonymous DAO, according to the company’s website.

JPEX advertisements seen at an MTR Station in 2023. Photo: Handout

JPEX’s new plan flies in the face of a crackdown that has already seen at least eleven people arrested for charges connected to aiding and abetting misleading information about the exchange. It underscores the difficulties in policing financial activities in the open internet, where companies offer their services across borders.

The plan is “very suspicious”, because it essentially “asks users to become equity owners, rather than paying them back the assets they own”, said Jason Ho, EY Financial Services’ technology risk consulting leader.

JPEX, by restricting users from withdrawing their funds, showed that it lacked proper safeguards for client assets, he added.

According to authorities, over 2,000 investors had submitted complaints about not being able to access assets worth more than HK$1.3 billion on JPEX.

A dividend distribution plan is only economically viable if there were prospects that the entity would deliver on its covenant, said Jack Poon, a fintech and entrepreneurship professor at Hong Kong Polytechnic University.

“Based on JPEX’s existing situation, there is high uncertainty about the future of the company,” he said, adding that the counterparty risk was too high to engage in, regardless of its supposed payout.

While announcing the derivative plan, JPEX doubled down on its previous stance that the Securities and Futures Commission (SFC) caused the freeze of user funds when it released a statement warning about the platform’s “suspicious features” and misleading advertising about its licensing.

The move by the SFC led to “third-party market makers maliciously locking up funds”, JPEX said. However, according to Justin d’Anethan, head of business development at cryptocurrency market maker Keyrock, a cryptocurrency exchange should have “the ultimate operational control” over user deposits and withdrawals.

Police officers and financial regulators hosted a press conference on the investigation into JPEX on Tuesday. Photo: SCMP / Sam Tsang

JPEX released another statement on Thursday, saying that the SFC had subjected it to “ambiguous guidelines and trumped-up charges” and “instructed telecoms providers to block the platform outright”.

It added that the SFC disregarded the platform’s “voice of reasoned negotiation and communication”. It also suggested that investors should access the cryptocurrency platform with a virtual private network.

The statement comes in direct defiance of a warning from the SFC on Wednesday, in which officials also took issue with JPEX publicising screenshots of email exchanges between its staff and the regulator, with one dating back to April 2022.

JPEX said the emails showed that it had been seeking guidance from the SFC, contrary to the regulator’s claim that the firm has never made contact.

SFC said on Wednesday night that it started making inquiries into JPEX’s activities in March 2022, and that by publishing the email exchanges, the company breached its obligations to preserve confidentiality in an investigation, based on the Securities and Futures Ordinance and the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.

The regulator also reiterated that JPEX had never approached the regulator regarding a potential licence application.

SFC finalises rules for retail cryptocurrency trading in Hong Kong from June 1

A new cryptocurrency licensing regime in Hong Kong that took effect in June gives a one-year grace period for centralised exchanges that already had a substantial presence in the city before June to continue operating.

But those eligible for the transitional period were expected to be in the process of making compliance changes in preparation of getting licensed, lawyers previously told the Post.

However, during this grace period, there still remains a level of regulatory ambiguity, said Neha Parmar, managing director in FTI Consulting’s financial crime compliance practice in Hong Kong.

“It is imperative for investors to exercise caution and understand the inherent risks associated with investing in unlicensed crypto exchanges within Hong Kong,” she said.

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