Scandal gives more crypto clarity

By Melissa Tan

While the fallout from Hong Kong’s HK$1.5 billion cryptocurrency scandal continues, it is worth remembering that the city does have a reasonable degree of clarity regarding regulation of this relatively new field of finance. Further, such certainty assists firms like Headland Intelligence as we conduct due diligence and background searches on behalf of clients.

The furore surrounding controversial cryptocurrency platform JPEX began last month when, amid an avalanche of complaints from investors, the Securities and Futures Commission (SFC) named it as an unlicensed platform and accused it of suspicious activities. So far, police have arrested at least 20 people – including JPEX employees, staff at crypto stores and online influencers – on suspicion of conspiracy to commit fraud. In a recent development, the SFC has set up a working group with police to allow closer collaboration on sharing information related to virtual asset trading platforms

The investigation is an early test of Hong Kong’s new licensing regime which allows retail trading of digital assets as part of the city’s drive to become a global crypto hub. Since 1 June, cryptocurrency exchanges are required to obtain a licence from the SFC to trade and market to consumers in Hong Kong. As the SFC reviews applications, pre-existing exchanges have a one-year grace period during which they can either decide to comply with the regulations or withdraw from the market. Thus far, only two platforms, HashKey and OSL, have secured a licence.

Naturally, the government has put a positive spin on the scandal, saying it vindicates the new regime by demonstrating the city’s ability to take enforcement action against businesses and individuals who fail to comply. “The incident regarding JPEX actually reflects the necessity for a proper regulatory system for virtual assets trading,” insists Chief Executive John Lee.

Further, it seems the authorities will continue their push to regulate business ventures tied to the next generation of the internet. Financial Secretary Paul Chan observes: “The government notices the prevailing trend of blockchain technology. But at the same time, we must incorporate business operations related to Web3 into a proper regulatory framework and crack down on any illegal activities.”

Hong Kong is, indeed, among the pioneers in such matters. The EU has just approved a comprehensive set of regulations, the Markets in Crypto Assets (MiCA), that will take effect early next year. The rules call for crypto firms that intend to issue, trade and safeguard crypto assets in the 27-member bloc to secure a licence. There is pressure on other jurisdictions such as the UK and US to follow suit.

The US appears to be taking its first steps. The country’s Financial Accounting Standards Board (FASB) has just voted unanimously to adopt a new standard that requires businesses to use fair-value accounting for bitcoin and certain other crypto assets. Companies and accountants have repeatedly called for this change as it allows them to view digital assets as they would some financial assets.

But even before Hong Kong’s legislation came into force, we saw in March a landmark judgment from the High Court that recognised cryptocurrency assets as property which could be put into a trust. The ruling, by Madam Justice Linda Chan in a liquidation case involving now-defunct Hong Kong crypto exchange Gatecoin, places cryptocurrency on par with other intangible assets like stocks and bonds.

This is important. One of the many services we offer at Headland Intelligence is asset and location trace investigations. Typically, we uncover information about real estate, business ventures, possession of transport such as planes, yachts or cars, ownership of high-value items such antiques, plus shareholdings. Now, cryptocurrencies are included in the search.

Hong Kong’s growing certainty over digital asset regulation is, admittedly, of little comfort to those investors – many of them new to the crypto sector – who have been burned in the JPEX scandal. Moving forward, we trust everyone is a little wiser.

Melissa Tan is Managing Director of Headland Intelligence, having founded the company in 2021. She takes pride in being the first port of call for many business owners, not-for-profits and professional parties when problems arise.