Crypto crime rates in Hong Kong have surged dramatically over the past three years, according to local reports. In 2023 alone, documented cases involving cryptocurrency amounted to nearly 4.4 billion yuan (approximately $611 million).

Hong Kong's Struggle Against Rising Number of Crypto Crimes

Hong Kong's Financial Services and Treasury Minister Hui Ching-yu disclosed that the city's Securities and Futures Commission (SFC) handled a staggering 1,397 and 2,336 cases of crypto-related crimes in 2021 and 2022 respectively. However, this figure soared to 3,415 cases in 2023, indicating a worrying trend of increasing criminal activity within the cryptocurrency space.

SFC's Involvement and Strategies

In response to the escalating issue, the Securities and Futures Commission (SFC) has taken action by listing 14 suspected virtual asset trading platforms on its radar as of 14 February. Notably, MEXC, a prominent cryptocurrency exchange, has been identified as the latest addition to this list. This move underscores the regulatory body's commitment to curbing illicit activities within the cryptocurrency sector and safeguarding investors from potential fraud and scams.

On top of that, SFC has issued a strict ultimatum to cryptocurrency exchanges, mandating them to apply for VASP licences by the end of February or face forced closure by 31 May. This regulatory crackdown aims to bring the previously unregulated crypto sector under oversight, aligning with Hong Kong's goal to become a regional digital assets hub. However, despite the introduction of a licensing framework last June, only two exchanges, HashKey and OSL, have obtained VASP licences so far, leaving the market with limited diversity.

Who has Applied for the VASP License?

According to the regulator's website, the SFC is currently conducting official reviews of applications from 18 cryptocurrency firms, which include Crypto.com, OKX and Bybit. HKVAEX, a crypto platform allegedly associated with Binance, submitted its licence application on 4 January and Huobi HK being the latest addition on 20 February, as indicated by the SFC's list of applicants. As the deadline approaches, exchanges are scrambling to meet regulatory requirements, with uncertainty looming over the future of crypto trading in Hong Kong.

The list of cryptocurrency entities that have submitted applications for an operational licence with the Hong Kong SFC. (Source: jinse.cn)

A Soaring Concern

Apart from cryptocurrency-related crimes, the Hong Kong police have also witnessed a significant rise in online investment fraud cases. According to the South China Morning Post (SCMP), the police handled 5,105 cases of online investment fraud in the past year, marking a staggering 170% increase compared to the previous year.

Woman Loses Millions to Crypto Scam

Illustrating the severity of the situation, a 57-year-old financial manager in Hong Kong fell victim to a sophisticated scam, losing over HK$17 million (US$2,173,500) while investing in gold and cryptocurrency through a fraudulent trading platform. The scam initially baited her with a HK$2.6 million "profit," which was deposited into her bank account in more than 10 transactions, creating an illusion of legitimacy. However, when she attempted to withdraw the funds, she discovered the platform was fake and reported the incident to the police on Valentine's Day. The scam unfolded after she received an Instagram message from someone claiming to be her former business partner, leading to communication through the messaging app "Line" and eventually persuading her to invest substantial sums.

The victim was coerced into transferring HK$12.5 million into various bank accounts in Hong Kong over 45 transactions between May last year and February this year. She also transferred HK$7.9 million into virtual currency wallets as instructed by the scammers. Despite receiving HK$2.6 million in supposed profits initially, she encountered further demands for financial assistance and administrative fees for fund withdrawals, culminating in her inability to access the trading platform. Regrettably, the victim's losses amounted to HK$17.8 million. The police noted that nine of the bank accounts involved had been flagged in their anti-fraud database, highlighting the importance of using tools like the Scameter search engine to verify transactions and avoid falling prey to scams.

JPEX Scam Incident

In September 2023, Hong Kong witnessed a major cryptocurrency scam involving the unlicensed platform JPEX. The platform allegedly lured over 2,600 victims into investing through misleading tactics. Once invested, users faced restrictions on withdrawing their funds, effectively trapping their money. This resulted in estimated losses of around HK$1.6 billion (US$203 million).

Authorities responded swiftly, arresting 66 individuals linked to the scam, including social media influencers, Joseph Lam and Chan Yee, who promoted JPEX. However, as of November 2023, no charges have been filed, and the investigation remains ongoing. The JPEX platform is currently inactive.

Another Cryptocurrency Exchange Scam

While the JPEX scandal dominated headlines in September 2023, another cryptocurrency exchange scam was brewing in Hong Kong. Hounax, another unlicensed platform, targeted over 145 users, leading to losses exceeding HK$148 million (US$18.9 million). This incident, though separate from JPEX, serves as a stark reminder of the inherent risks associated with unregulated crypto exchanges.

Victims of the Hounax scam reported tactics eerily similar to those employed by JPEX. Deceptive advertising lured users in, promises of high returns fueled their investments, and withdrawal restrictions along with inflated fees ultimately trapped their funds. Fortunately, Hong Kong authorities, including SFC, had already flagged Hounax as a suspicious platform before the scam unfolded.

Strengthening Regulatory Measures Imperative to Combat Crypto Crime

Hong Kong's battle against the surge in crypto crimes, including investment fraud and exchange scams, emphasises the urgent need for robust regulatory measures and heightened awareness among investors. The alarming increase in reported cases, coupled with significant financial losses suffered by victims, highlights the risks inherent in the largely unregulated cryptocurrency market. With authorities intensifying efforts to crack down on illicit activities and enforce licensing requirements, the future of crypto trading in Hong Kong hangs in a delicate balance, teetering between regulatory scrutiny and the promise of a safer, more transparent digital asset landscape.

The Future of Crypto Exchanges in Hong Kong

With the looming closure deadline for unlicensed crypto exchanges in Hong Kong fast approaching, speculation intensifies as to which company will secure approval to operate legally in the region. While HashKey and OSL currently hold the coveted licences, the closure of unregulated platforms presents an opportunity for other industry giants to step into the spotlight. Amidst this backdrop, it's plausible that exchanges like Bybit or OKX, renowned for their commitment to regulatory compliance and investor protection, could emerge as frontrunners in the race for licensing approval.

As the crypto landscape in Hong Kong undergoes a seismic shift towards increased oversight and accountability, the eventual approval of a reputable exchange could herald a new era of legitimacy and trust in the region's digital asset ecosystem, positioning Hong Kong as a beacon of regulatory clarity amidst global uncertainty.