Even as Hong Kong’s crypto communities move on from the demise of global crypto exchange FTX, those dealing in digital assets are grappling with a crisis of confidence closer to home.
In late September 2023, the Securities and Futures Commission (SFC) accused crypto exchange JPEX of suspicious activity, having initially flagged the company in July 2022. With over HK$1 billion ($120 million) reported missing and thousands of police reports filed, crypto advocates and regulators are working to rebuild trust towards the digital asset industry.
Just like FTX, JPEX leveraged its public image by launching extensive advertising campaigns across Hong Kong’s mass transit networks and commercial buildings. In addition, the company’s digital presence was magnified through the involvement of influential traditional and social media figures, further expanding its profile.
In response, industry supervisors are advocating for stronger investor education and market vigilance. During the Bloomberg Global Regulatory Forum which preceded Hong Kong Fintech Week (October 30 to November 5), Julia Leung, CEO of the SFC, highlighted the JPEX incident as a reminder of discerning the sources of information. She specifically mentioned the role of KOLs (key opinion leaders), who carry substantial influence due to their large following base but noted that many are not adequately vetted to give investment advice.
Her warning is echoed by investors. “There is a potential conflict of interest, since KOL’s are likely to be compensated to promote certain investment products and therefore may not have the investor’s best intentions at hand,” said Dick Lo, CEO of TDX Strategies in Hong Kong, talking to FinanceAsia.
“It is paramount for investors to exercise a high degree of caution when it comes to financial advice given most KOLs likely do not possess the necessary qualifications or technical expertise to be in a position to provide sound investment advice,” Lo added.
That public image matters, as this sets a pretext in Hong Kong’s response and inevitably defines the type of crypto hub Hong Kong strives for, according to Leung. The SFC CEO emphasised that the city’s regulatory body has been working closely with police to facilitate a coordinated investigation on JPEX, underscoring its commitment to protecting the public.
That collaboration between different agencies appears promising, as fact gathering assesses the right course of action, said Vivien Khoo, chair and co-founder of the Asia Crypto Alliance, speaking to FA.
“Prompting the public to be aware of potential bad actors is a first step. What the SFC has now introduced is an additional step that improves transparency by providing a list of licensed and unlicensed VATPs (virtual asset trading platforms) as well as a suspicious list of VATPs,” Khoo said.
The SFC response to heightened protections follows similar actions elsewhere. In New York, the Securities and Exchange Commission (SEC) charged former FTX chief executive Sam Bankman-Fried (SBF) with defrauding investors at the end of last year, leading to those that had endorsed FTX to begin distancing themselves with the exchange – a similar reaction to local celebrities that advertised for JPEX. From New York to Hong Kong, these cases serve as a reminder to be vigilant of where information is coming from.
A new dawn at Hong Kong Fintech Week
Hong Kong’s 2023 Fintech conference concluded with notable differences from its previous gathering. A year ago, Financial Secretary Paul Chan gave his opening remarks virtually, unable to attend after testing positive for the coronavirus. However, his in-person speech last week to a room packed with maskless attendees carried symbolic meaning, as indeed did his lunchtime speech at the Global Financial Leaders’ Investment Summit in Hong Kong on November 7.
Speaking to cramped delegates sitting shoulder to shoulder marked a shift from when the city still practiced social distancing measures. Though Hong Kong reopened from the pandemic, not everything has moved on. Just 12 months earlier at that very same conference SBF shared his 'visionary' perspectives on digital assets and decentralised finance.
Communicating, often virtually, from his office in the Bahamas, the founder of crypto exchange FTX was hailed as the industry’s poster child, effortlessly contrasting his trademark curly hair, t-shirt, and cargo shorts amidst renowned politicians and celebrities adorned in bespoke designer clothing.
During the Fintech Week interview, the moderator raised concerns surrounding the volatility of cryptocurrencies, highlighting Bitcoin’s significant loss in 2022. SBF responded with a calm demeanour, noting the market’s summer stability demonstrated the asset classes’ inherent resilience. In a more upbeat tone, he envisioned growing blockchain adaptation as crypto investors sought potential hubs in Asia, like Hong Kong, where regulators were positioning the industry for virtual currencies.
Crypto was tested again in the weeks that followed. Liquidity rumours spurred heavy customer withdrawals on FTX, instigating a negative feedback loop that succumbed the exchange into bankruptcy, later exposing the group’s opaque ownership structure. As the calendar turned, SBF returned to the US where his trial exposed the company’s financial mismanagement. But it also coincided with a recovery in Bitcoin’s market value, vindicating its resistance that SBF mentioned in Hong Kong.
With the conclusion of Hong Kong’s Fintech Week, delegates are now pondering the way forward for the industry. Balancing supervisory oversight that protects against systemic risk but also incubates new investments is the test all policymakers endure. But while attendees believe Hong Kong can inevitably become a financial hub for the crypto industry, one never knows where the next crisis will arise – a daunting thought for those attending last week’s packed summit.
