HONG KONG – The footage was beamed out to television viewers across Hong Kong early last week: A young man dressed in a black polo shirt, navy blazer and grey trousers being led out by police from an office tower in the Central business district in handcuffs in front of waiting photographers. 

Oxford-educated barrister-turned-social media influencer Joseph Lam, who has amassed some 150,000 Instagram followers, was among at least 11 people arrested as part of a sweeping investigation into Jpex, the unlicensed crypto platform Hong Kong police allege defrauded investors of HK$1.5 billion (S$263 million).

Hong Kong’s muscular response was meant to demonstrate that the authorities, who introduced a new regulatory regime for cryptocurrencies four months ago, will deal harshly with any wrongdoers.

Police swooped in just days after the city’s securities regulator publicly warned investors in mid-September that Jpex lacked a permit and that some users had been unable to withdraw funds.

Telecommunications carriers were ordered to block its website and app locally.  

But the event is also an uncomfortable reminder of the perils governments worldwide must navigate as they move to regulate an industry that has been prone to scams, hacks and extreme volatility since its inception.

And it has provided fresh ammunition to those who argue that digital tokens should be kept out of reach for individual investors altogether.

“This unfortunately shows that allowing retail trading in this space which is known to be fraud-prone, when investor education is sorely lacking, is a mistake,” said Insead business school professor of finance and dean of research Lily Fang. 

Jpex started operating long before Hong Kong adopted its new framework, which prohibits crypto firms without a licence from marketing to the public.

Before that, the authorities let companies themselves decide whether they wanted to be regulated in what is known as an “opt-in” regime.

Only two crypto exchanges obtained licences. 

Hong Kong has not gone as far in setting crypto guardrails as rival financial hub Singapore, which bars marketing to consumers even by licensed outfits.

Both allow retail trading in the biggest tokens, like Bitcoin and Ether. 

Jpex offers an illustration of how easily small-time savers can be drawn in by ads offering eye-watering crypto returns – even when they defy logic.

Starting in October 2021, the company took out billboards across Hong Kong’s subway system featuring local celebrities and touting yields of up to 19 per cent.

Even as other digital-asset outfits around the world that had promised such returns crashed in 2022, Jpex stuck to its guns. 

Hong Kong’s Securities and Futures Commission (SFC) started looking into the Dubai-based platform in March 2022.

Four months later, it put Jpex on its alert list, where it names thousands of boiler-room operations and other suspected scams.

Jpex stopped advertising in subway stations in June 2022, but it kept marketing through other channels and even stepped up promotions in the past few months, the regulator has said. 

The SFC’s first alert did not stop thousands of people in Hong Kong from flocking to Jpex.

After the regulator warned the public about the exchange on Sept 13, almost 2,400 investors were left with money trapped as it made withdrawals effectively impossible.  

On a Telegram forum with more than 12,000 participants where Jpex customers discussed legal proceedings and possible ways to recover their funds, several people have posted about being aware that it was not licensed – but that the returns offered were just too good to pass up. 

SFC chief executive Julia Leung on Monday suggested the platform is “possibly a Ponzi scheme”, without identifying it by name.

“I call on the public to be wary of these high-return traps,” she said at a press conference.

Jpex did not respond to an e-mailed request for comment.

The exchange earlier adopted a combative stance, expressing “extreme disappointment” with the clampdown in one statement.

The crypto watchdog in Dubai, where Jpex says it is based, on Tuesday said the exchange is not registered or regulated there, adding that it may take unspecified enforcement actions against the firm. 

Hong Kong’s previous system left crypto companies to weigh the benefits of an official imprimatur against the added costs of maintaining compliance.

Then in 2022, just as digital-asset markets lurched through a series of scandals, the SFC ramped up preparations for a new framework where licences would be obligatory. 

For Hong Kong Chief Executive John Lee, embracing cryptocurrencies was a key part of efforts to restore Hong Kong’s image as a financial centre following often-violent protests in 2019 and years of restrictive Covid-19 policies after that.

It was also a way to push back against the narrative that the territory no longer enjoyed any autonomy from China, which banned all crypto trading in 2021.

The new system took effect on June 1, 2023.

Singapore’s central bank chief Ravi Menon has repeatedly defended the city-state’s retail marketing ban as a necessary safeguard to protect small-time savers from suffering financially devastating losses.

The Singapore Government even went so far as to order all Bitcoin ATMs removed in early 2022.

The Republic has not experienced any large-scale crypto scams since a framework for cryptocurrencies was proposed a year ago. 

That is not to say Hong Kong’s crypto opening comes without caveats.

Besides limiting trading to the biggest tokens, other safeguards include knowledge tests and limits on exposure.

And the SFC made it clear that once the new regime started on June 1, any exchange marketing to Hong Kong investors without a permit would be breaking the law.  

“We will be closely monitoring,” Mr Keith Choy, a senior official at the regulator, said at a briefing in late May.  

Ms Leung said on Monday that under the current framework, the SFC was given a mandate to investigate any marketing by unlicensed crypto firms, which it did with Jpex before referring the case to the police. 

Mr Vince Turcotte, a consultant at Cognitive GRC, which advises firms applying for crypto licences, said Hong Kong’s response shows regulators are successfully threading the needle of clamping down on wrongdoing without resorting to heavy-handed policies like banning all retail marketing.

“I don’t think that the answer to such incidences is to ban promotion,” he said.

“I think that the answer is really to go after bad actors who violate existing rules, make false claims and misrepresent, irrespective of the asset class.” BLOOMBERG