How The JPEX Collapse Shifts The Hong Kong Crypto Landscape And Makes The Rest Of The World Wonder
Hong Kong's JPEX exchange has been hitting media headlines recently as local police have launched an investigation into a major fraud. The situation has caught the attention of the public from around the world for several reasons, the main one being how fast the cryptocurrency landscape in the region is changing. And this aspect raises a lot of questions.
Hong Kong is a global hub for cryptocurrencies
With the rapid growth of the crypto space, some parts of the world have expressed their desire to become a global center for cryptocurrencies. Hong Kong is no exception. Over the past year, the region has moved forward with legislation aimed at introducing and developing crypto innovation. Hong Kong, being one of the largest economies in the world, has become an established data center of various fields and cryptocurrencies have proved to be yet another addition. While China has taken a tough stance on cryptocurrencies, Hong Kong has seen boundless opportunities along these lines.
In early 2023, Hong Kong Financial Secretary Paul Chan revealed the government's ambitious plans to create a crypto ecosystem in the region. That's despite the fact that the global crypto industry was feeling the brunt of the FTX collapse. In January, tech giant Samsung announced the launch of a Bitcoin ETF on the Hong Kong Stock Exchange. And by March, more than 80 cryptocurrency companies had entered the local market. A month later, the Hong Kong Monetary Authority urged banks to start providing services to crypto firms. And in early May, the local regulator began issuing licenses to cryptocurrency companies to carry out their activities.
It might seem that in the government's ambitious crypto plans, control in the form of only licenses from the regulator has become a small spoonful of tar. And that's for obvious reasons: progressive Hong Kong saw heavy regulation as a huge obstacle to the development of the crypto industry in the region. But ironically, it was this decision that led to plans to turn Hong Kong into a crypto hub on the verge of failure.
The high-profile JPEX investigation: forgotten issues that are hard to ignore
On September 12, the Hong Kong Securities and Futures Commission (SFC) found that cryptocurrency exchange JPEX was operating illegally in Hong Kong. In other words, the company did not obtain a license from the SFC. Also, it turned out that the regulator began to receive numerous complaints from the exchange's clients about the inability to withdraw funds. JPEX in turn recognized the fact of the problem with the withdrawal of funds, but stated that it complied with the law. On September 14, the exchange increased withdrawal fees, and on September 15, it blocked some services. On September 17, JPEX accused third-party market makers of liquidity problems on its platform.
On September 18, Hong Kong police began raids on the company's offices. Suspects were arrested. A couple of days later, the exchange accused local telecom operators of not being able to access the site and the app. On September 21, JPEX said it had converted to a DAO to avoid the regulator's restrictions. On September 23, it is revealed that the number of affected users exceeded 2,200 and the damage amounted to $178 million. The same day, 11 people were arrested. On September 29, police announced 18 arrested suspects in the case.
While the investigation into JPEX is in full swing, local regulators have been vocal about the global risks that could emerge from the situation surrounding JPEX. This event has raised concerns about the effectiveness of the existing regulatory framework. The SFC and the Hong Kong police have formed a coalition. The new unit will strengthen monitoring of crypto space to combat illegal activity. The issue of establishing restrictions on trading in certain virtual assets was also raised. In addition, the SFC published a list of all licensed, presumably licensed, closing and application pending exchanges.
The story threatens to complicate Hong Kong's efforts to create a global hub for the crypto industry in an attempt to rebuild its reputation as an innovative financial center.
The rhetorical question of crypto industry regulation
The current situation with JPEX once again demonstrates the need for immediate changes in oversight in the context of the rapidly evolving cryptocurrency landscape. We, as market participants, have to observe from the outside how countries around the world balance innovation and regulation. Does that balance exist between advancing the industry and protection from unscrupulous market participants? When some are blinded by the decentralized nature of technology, others refuse to look forward and apply outdated rules instead. And as long as both camps are engaged in tug-of-war, their problems will not be solved: the crypto industry will not grow (and in the worst case scenario will decline) and market participants will not get their protection.
Will there be a way out in the form of new rules for a relatively new direction in the financial system, or is this a matter of utopian world?