Author: 21st Century Business Herald trainee reporter Zhang Weize and intern Duan Nengyan
As an international financial center, Hong Kong is becoming an important hub for virtual asset trading. Since the Hong Kong SAR government issued the “Policy Declaration on the Development of Virtual Assets in Hong Kong” in 2022, the development of Web3 in Hong Kong has become increasingly fierce. However, taking advantage of the development of Web3, Web3 scams that promise to provide high-return products have also begun to emerge.
On September 13, the Hong Kong Securities and Futures Commission named JPEX, pointing out that the platform was suspected of making false and misleading statements and unlicensed activities. This is also the first virtual asset exchange to receive a red card warning since Hong Kong issued new encryption regulations, kicking off what is known as “the largest financial fraud case in Hong Kong history.”
According to statistics, as of September 27, 2,407 victims have reported the crime, and 15 suspects have been arrested, involving a total amount of HK$1.5 billion. It is understood that many stars, celebrities or KOLs are involved in the case, including Hong Kong artist Julian Cheung. , Zhuang Simin, YouTuber Chen Yi, etc.
The Secretary for Security of the Hong Kong Special Administrative Region Government, Tang Bingqiang, stated at a press conference on September 27 that the Hong Kong police have contacted more than 300 people who reported the crime, searched 16 off-site currency exchange shops, seized 8 million Hong Kong dollars in cash, and frozen more than 70 million Hong Kong dollars. Hong Kong dollar assets, including some properties and cryptocurrencies. He pointed out that the Hong Kong police are fully investigating this case, including tracing the operators behind it, the flow of assets, and studying how to prevent such incidents from happening again.
At the same time, on September 25, Mixin Network, a Hong Kong decentralized wallet service provider, stated on the social media platform that the network cloud service provider database was hacked, resulting in some asset losses. After preliminary verification, the funds involved were approximately 200 million. US dollars (approximately HK$1.56 billion).
In response to the explosion of virtual asset platforms, the Hong Kong Securities and Futures Commission stated on September 25 that four lists of virtual asset platforms will be published online, including the list of licensed platforms, the list of completed platforms, the list of platforms deemed to be licensed, and the list of applicants. List. In addition, the China Securities Regulatory Commission will publish a list specifically targeting suspicious virtual asset trading platforms to help the public become more alert to local unlicensed or suspicious operating practices.
In addition, the Hong Kong Securities Regulatory Commission will launch a series of publicity activities in conjunction with the Hong Kong Investor and Financial Education Council to raise public awareness of fraud prevention and strengthen investor education; it will also strengthen intelligence collection and follow up on suspected illegal platforms to take legal action and Referral to police.
For the booming virtual asset market in Hong Kong, the JPEX trading platform fraud incident has undoubtedly cast a shadow on the market and dealt a blow to investor confidence. However, a cryptocurrency industry insider told reporters that despite the JPEX fraud incident, he believed that the Hong Kong SAR government would still remain open to the virtual asset industry, but would be relatively cautious. The JPEX fraud incident may be the only way for the encryption industry to become compliant and embrace supervision. As the problems in the cryptocurrency industry are exposed, regulatory details will become clearer.
Comprehensive regulatory transition period
Hong Kong’s attitude towards virtual asset exchanges is currently in a transitional period from loose to comprehensive supervision.
Hong Kong does not have corresponding regulations on virtual asset trading platforms. The Hong Kong Securities and Futures Commission will implement the “Guidelines Applicable to Virtual Asset Trading Platform Operators” (hereinafter referred to as the “Guidelines”) on June 1, 2023 to provide virtual assets in Hong Kong. Platform operators providing transaction-related services must apply for a license from the Securities and Futures Commission of Hong Kong.
Under the new system, centralized virtual asset trading platforms operating in Hong Kong will be required to apply for a license from the Securities and Futures Commission (SFC) under the Securities and Futures Ordinance and/or the Anti-Money Laundering Ordinance (dual licensing arrangement) .
Currently, only Hashkey and OSL have obtained license upgrades to No. 1 and No. 7 under the Securities and Futures Ordinance and are allowed to provide services to retail investors.
According to the arrangements of the Anti-Money Laundering Ordinance, non-security token trading platforms that have “operated genuine business and established a genuine business base” in Hong Kong before June 1 can operate during the non-contravention period (i.e. 2023). It will continue to operate in Hong Kong from June 1, 2024 to May 31, 2024. During this non-violation period, original platforms that intend to apply for a license should apply for a license within nine months after June 1, 2023, in order to continue to enjoy the deemed licensing arrangement and continue to operate their existing businesses until the SFC Make decisions to issue/deny licenses. Exchanges that start operating in Hong Kong after June 1 will need to obtain a Securities and Futures Commission license before they can operate, and there is no transition period.
A lawyer engaged in the blockchain business told reporters that the interpretation of the transition period of virtual asset trading platforms will give some virtual asset trading platforms room to mislead the public. These trading platforms will mislead the public by claiming that they are already compliant. The China Securities Regulatory Commission’s announcement of relevant application lists and suspicious lists at this time can give investors more guidance.
According to the requirements of the Securities and Futures Commission, applicants for virtual asset trading licenses need to hire external evaluation experts to evaluate the policies, procedures, systems and control measures of the trading platform, and submit a first-stage report to the Securities and Futures Commission when submitting the license application. , providing a second-stage report after obtaining in-principle approval from the China Securities Regulatory Commission.
Among them, the first phase report covers the design effectiveness of the proposed structure, governance, operations, systems and control measures for the virtual asset trading platform. The second stage report is the evaluation results of the evaluation experts on the implementation arrangements and actual adoption effectiveness of the planned policies, procedures, systems and control measures. The SFC will only grant final approval if it trusts the results of the second stage report.
The above-mentioned lawyer said that despite the related thunderstorm incidents, the setting of the transition period is still in line with objective laws. The cost of building a virtual asset platform is high, and the threshold of the newly introduced regulatory system is relatively high. It will take time for virtual asset trading platforms to adapt to regulatory requirements. At the same time, judicial practice also requires more judicial cases to clarify the boundaries of relevant regulations. Regulators and virtual asset trading platforms both need to make relevant adjustments during the transition period.
Accelerate licensing
From FTX to JPEX, multiple thunderstorm incidents have shown that the “decentralization” of the Web3 industry is not “degovernmentalization”, and strict supervision is the guarantee for the healthy development of the Web3 industry.
Weng Xiaoqi, COO of Hong Kong’s licensed exchange Hashkey Exchange, said at a press conference on the JPEX incident that Hong Kong’s unlicensed exchanges are not an exception in the world, and it also shows that the Hong Kong Securities Regulatory Commission has previously carried out licensing reforms in the industry. Construction is necessary and timely. The top priority is to speed up the licensing process and innovate mechanisms to make licensed exchanges competitive and prevent bad money from driving out good money in the market, so as to return the market order to a healthy one.
The Securities and Futures Commission of Hong Kong emphasizes at the beginning of the Guidelines that if there is any inconsistency with the requirements of these Guidelines, the more stringent requirements will prevail. In the report that the Hong Kong Securities and Futures Commission requires virtual asset trading platforms to provide, it puts forward requirements for virtual asset trading platforms from eight aspects, including governance and staffing, inclusion of tokens, custody of virtual assets, and know-your-customer procedures (KYC). , anti-money laundering and terrorist financing procedures, market surveillance, risk management and network security and other major areas.
In a previous exclusive interview with reporters, Weng Xiaoqi revealed that companies have made great efforts in the process of compliance upgrades and need to maintain communication with regulatory authorities to establish a relationship of mutual trust. At present, HashKey still maintains communication frequency with the Hong Kong Securities Regulatory Commission at least 1-2 times a week in order to respond to the requirements of the Hong Kong Securities Regulatory Commission in a timely manner.
There are frequent cases of asset theft from virtual asset exchanges. In response to this phenomenon, the Hong Kong Securities and Futures Commission requires virtual asset exchanges to properly keep encryption seeds and private keys, and requires virtual asset exchanges to establish effective monitoring measures to ensure that 98% of customers’ virtual assets are stolen. Assets are stored offline, which is the so-called “cold wallet”, and corresponding requirements are also put forward for relevant internal monitoring measures and control procedures. Compared with “hot wallets” that store virtual assets online, cold wallet operations and costs are relatively high, but the security factor is also relatively high and can effectively avoid online network attacks.
In order to prevent some cryptocurrencies from being manipulated or donations escaped, the Hong Kong Securities and Futures Commission has also put forward relevant requirements for virtual assets included in transactions, including requiring cryptocurrency exchanges to establish regular reporting and monitoring mechanisms. It is understood that Hashkey and OSL, the two cryptocurrency exchanges that have been upgraded to No. 1 and No. 7 licenses from the Hong Kong Securities Regulatory Commission, currently only provide trading services for mainstream cryptocurrencies such as BTC, ETH and USD, as well as fiat currencies, and do not include derivatives and pledges. and virtual asset lending and other services.
Ye Shiwei, chairman of United Enterprise Capital Group, believes that in addition to the regulation of virtual asset trading platforms, the next regulatory focus should be on strengthening investor protection and investor education. He told reporters that regulatory agencies need to help investors understand the characteristics and risks of investment products and can strengthen investor education through social media, advertising, lectures, etc. In addition to amending the licensing system and providing clearer regulatory guidelines, the Hong Kong Securities and Futures Commission also needs to listen more to the opinions of the industry and enhance communication and transparency so that retail investors can receive more protection.
Chen Baihui, president of the Asian Academy of Digital Economy, told reporters that in the short term, the JPEX incident can calm down the impetuous market and pour cold water on speculators who ignore the regulatory functions of the Hong Kong SAR government. The Hong Kong SAR government’s use of JPEX this time is to consolidate its roots and clear its roots and send a clear signal to the outside world: the Hong Kong SAR government encourages the development of web3 and will not sacrifice Hong Kong’s strict laws and regulations.
