Analysts Believe JPEX Scandal Will Have Significant Negative Impact on Retail Sentiment

The JPEX scandal, regarded as potentially the largest financial fraud in Hong Kong‘s history, has not only harmed thousands of victims but has dealt a significant blow to retail trust in cryptocurrencies in the jurisdiction. 

Analysts and industry experts have voiced concern that the fallout from the JPEX debacle will present significant challenges for virtual asset companies and hinder the government’s efforts to expand the sector.

“At a time when people still don’t completely understand what Web3 is, the JPEX case has created a negative impression for people in Hong Kong on digital assets and the broader Web3 industry,” Cyrus Ip, a crypto venture investor and chief business officer at artificial intelligence start-up DreamWld Technology, told the South China Morning Post.

JPEX, established in 2021, targeted retail investors through extensive advertising campaigns in prominent business and transportation hubs. 

The exchange claimed to be a licensed cryptocurrency exchange and enticed investors with promises of high returns, reaching up to 20 percent. 

However, last week, the company raised withdrawal fees and paused the operations of the Earn program on its platform citing an ongoing liquidity crisis.

At the time, some users have claimed that the platform is charging a 999 USDT fee for a withdrawal, with the withdrawal maximum set at 1,000 USDT.

Following the suspension, a Telegram chat group for self-proclaimed JPEX victims gained over 12,600 members.

It is suspected that the exchange has left at least 2,305 victims involving about HK$1.43 billion (US$182 million) of investments.

JPEX Scandal Will Have Negative Impact on Retail Sentiment

“I think this scandal will have a pretty sizeable negative impact on retail sentiment, given its significant local presence and the various celebrities involved,” said Carlton Lai, head of blockchain and cryptocurrency research at Daiwa Capital Markets.

This could make it even more challenging to convince retail investors to embrace digital assets and create resistance towards any Web3 initiatives the government may pursue, DreamWld’s Ip said. 

He added that the government might slow down its current Web3 push in response to these mounting challenges.

Hong Kong authorities have already launched a regulatory crackdown on the exchange.

On September 13, the Securities and Futures Commission (SFC) issued a warning regarding suspicious features and misleading claims about JPEX’s licensing status. 

Subsequently, the police arrested several individuals, including JPEX employees and influencers associated with the company. 

Even local celebrities, such as actor Julian Cheung Chi-lam and actress Jacquelin Ch’ng Se Min, who appeared in JPEX publicity materials, were questioned by the police.

JPEX Hits Back Against SFC

JPEX has slammed the SFC, accusing the regulator of providing ambiguous guidelines and trumped-up charges while instructing telecom providers to block their platform. 

The company claimed that the SFC disregarded their efforts to engage in reasoned negotiation and communication.

Despite the JPEX saga, analysts believe that the long-term prospects for the industry may still be promising. 

The recent enforcement actions against JPEX demonstrate Hong Kong’s commitment to building an institutional digital asset economy with strong protection for retail investors, Donald Day, the chief operating officer at VDX, a digital asset service provider in Hong Kong, said. 

Day added that retail interest and confidence in cryptocurrencies tend to return over time, especially during bull markets.

In the meantime, the Hong Kong government would “need to do much more on educating the public about its new regulatory framework and the measures surrounding investor protection.”