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    The cryptocurrency business has taken a beating, leaving scores of novice investors out of pocket. Although Hong Kong is at pains to allay concerns about the battered virtual space, industry experts have called for tighter rules and effective mechanisms to restore public confidence. Liu Yifan reports from Hong Kong.

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    Chasing rainbows is unrealistic.

    It's particularly true for Summer Wang, who shelled out a fortune for virtual assets, betting on the "world of tomorrow". Her experience in investing in cyberspace was like having fallen into an abyss.

    The 29-year-old, who teaches English at a school on the Chinese mainland, took the plunge into the crypto game in March last year. In a matter of months, she had lost all her savings, plus hundreds of thousands of yuan she had borrowed from all available sources, and is still struggling to repay her debts.

    Wang's nightmare began months after a huge bull run in the digital assets market awash with cash poured into hyped tokens like Dogecoin, which was hailed as the "people's cryptocurrency" online.

    "Prices of token coins appeared to be fair after a steep dive. A friend I met online invited me to a Telegram group with more than 2,000 members trying their luck in investing in virtual assets and new coin offerings," she recalls.

    Messages about investment projects offering eye-watering yields popped up frequently during the group chat. Determined not to miss out on a "crypto windfall", Wang decided to give it a shot.

    "There were real returns initially. The first time, I bought a coin for 2,000 yuan ($273). The price soared fourfold the next day. I sold it right away and made a net profit of 6,000 yuan. The gain was so tempting you could get more and more hooked into it," she says.

    Wang felt she was on the path to great fortune, and wanted more. But, the bubble burst equally hard and fast. "It was like the end of the world when I logged into my accounts and saw the value of all my assets wiped out. I then realized I had been tricked into the crypto market. And, even the 'exchange' itself could be a fake," she bemoans.

    Wang finally came to her senses. She had no idea what virtual assets were all about and had not bothered to check the background of the "exchange" at all. "I only knew the cryptocurrency market had fluctuated wildly, like the stock market, on occasions. Looking back, it wasn't of much real value. One can never make money beyond what one really understands."

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    Police present pieces of evidence confiscated in the investigation into the unlicensed virtual asset trading platform JPEX at Hong Kong Police Headquarters in Wan Chai on Sept 19, 2023. (CALVIN NG / CHINA DAILY)

    JPEX scandal

    Similar distressful investment stories abound in Hong Kong, where the special administrative region government has been attempting to make the city a trading hub for virtual assets. More than 2,300 investors recently filed complaints with police against JPEX - an unlicensed crypto exchange that had allegedly defrauded investors of HK$1.56 billion. So far, 28 people, including prominent influencers, have been detained for alleged fraud.

    JPEX's operations were hardly sophisticated. It launched a charm offensive by tapping celebrities and online influencers, on top of indiscriminate advertising across the city, with huge billboards put up on walls of buildings and in the Mass Transit Railway subway system. Police say many of the victims were greenhorn investors who had been promised yields of up to 19 percent.

    The SAR enacted a new licensing regime in June, legalizing retail trading in large crypto tokens, including bitcoin and ether. Following a litany of high-profile debacles in the virtual asset community, including the fall from grace of exchange FTX, the JPEX scandal fueled talk that the industry was not only rife with fraud and Ponzi schemes, Hong Kong's pro-crypto stance was weak, with investor education sorely lacking.

    "Despite a developing legal framework, crypto scams are still common, creating a detrimental effect by shaking investor confidence and creating a negative perception among the public," says Tony Petrov, chief legal officer at identity verification platform Sumsub. "The JPEX incident shows the risks associated with unregulated virtual asset trading platforms and the vulnerability of investors in the crypto business."

    According to police, scams involving crypto tokens have ballooned with 2,336 crypto-related rackets reported in Hong Kong in 2022 - up 67 percent from 2021. The swindles involved funds worth HK$1.7 billion - a surge of 106 percent from that of the previous year. The JPEX case is possibly the largest financial fraud in Hong Kong's history.

    The SAR government has drawn a swathe of criticism for its virtual asset-friendly regime. Joseph Yam Chi-kwong, former chief executive of the Hong Kong Monetary Authority - the city's de facto central bank - had cast doubts on the intrinsic value of digital assets and how their development could help support the economy. In the case of traditional assets, investors at least have a relatively effective tool kit to analyze everything from the macroeconomy to the financial performance of industry players when making decisions. "Virtual assets don't even have a balance sheet to look at," he says, likening their trading to gambling in casinos.

    Other critics include Hong Kong-based activist investor David Webb. Several months before the probe into JPEX began, he called the government's new licensing regime that opens crypto trading to retail investors a "mistake", as it endorsed trading in crypto tokens which, in most cases, "have no underlying value to which anybody can lay claim to".

    "With rules now in place, members of the public can expect the government to protect them, and hold the authorities to account next time a crypto exchange fails. The government should have focused on the on/off ramp for money laundering, ransomware and criminal payments," Webb says.

    Webb, himself a veteran investor, recalled Hong Kong's failed bid to become an Islamic finance hub in 2007, saying it "always jumps on financial bandwagons just as the wheels are about to come off".

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    This photo taken on May 27, 2023 shows customers in a cryptocurrency exchange office in Hong Kong. (PHOTO / AFP)

    Underlying potential

    Industry proponents like Robert Lui - a Hong Kong digital asset leader at Deloitte - argued that virtual assets are more than scams and speculation - they're an integral part of the growing Web3 ecosystem - a new version of the internet that's based on blockchain.

    Blockchains, or the shared ledger systems that secure virtual asset ownership by using cryptographic signatures, are considered a checkbook built on a network of computers around the world, guaranteeing the transparency of data records and, in theory, maintaining trust among strangers without the need for a third party. The promise is that technological applications could revolutionize conventional finance, which requires expensive infrastructure and is often captured by insiders who take a cut.

    "Although most virtual assets today may not seem to be backed by anything, there's no reason they shouldn't be. For example, digital assets may be tied to ownership of physical assets, simply allowing ownership and values backed by physical assets more convenient transfers," says Ben Charoenwong, assistant professor in finance at the National University of Singapore's Business School.

    "But, even those not backed by any physical asset can still have genuine use cases. For example, some tokens are used for some service or governance mechanism, such as running a smart contract. In that case, there may also be some use beyond serving as a means of payment," he says.

    Hong Kong authorities see building up the virtual-asset sector as a key strategy for the city to steal a march in the stiff financial competition. In the latest Global Financial Centers Index published in September, Singapore held on to third place that it snatched from pandemic-battered Hong Kong last year. The city state's jurisdiction has increased scrutiny over the sector with measures that include banning consumer marketing, and removing all bitcoin ATMs.

    Ren Yunan, chairman and CEO of OKG Technology Holdings, however, says he believes there's a tremendous opportunity for Hong Kong to drive demand and attract investments by developing the Web3 economy, which includes trading in virtual assets.

    According to Ren, revenues in Asia's digital-asset markets could see an annual growth rate of 16.11 percent over the next five years. "We can expect to see the expansion of real-world applications of digital assets, such as tokenized real-estate and supply-chain management, as well as increased investment in regulatory technology."

    Hong Kong is trying its best to allay myriad concerns about the beleaguered virtual space. The Securities and Futures Commission plans to launch a public campaign soon to raise public awareness in guarding against fraud, and will enhance investor education through means, such as mass media, social media and education talks. A list targeting suspicious virtual-asset trading platforms will be issued.

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    In this file photo dated May 11, 2018, a man uses an Ethereum ATM next to a bitcoin ATM, in Hong Kong. (KIN CHEUNG / FILE / AP)

    Arduous task

    But, there shouldn't be any illusion of smooth sailing in an industry that's still in its infancy. To help Hong Kong realize its good intentions, a lot more things need to be done.

    In Petrov's view, marketing and advertising rules should be considered, as taking a responsible approach to marketing and advertising is an important aspect in the provision of any high-risk financial instruments or products. "Fair positioning of crypto assets and the risks of investing could reduce potential harm and financial losses for customers, while improving the public's perception of the industry."

    Improving law enforcement mechanisms is equally important. "But, the remedies could be a problem in case a platform doesn't have any presence in a particular country. Thus, the authorities should step up collaboration and information sharing with regulators in foreign jurisdictions to ensure that the regulations and enforcement are effective and can promote a secure and reliable crypto business."

    At the same time, regulators should be able to adapt to new evidence, research and technological innovations as the sector evolves rapidly, or else they would be hard-pressed in keeping themselves up to date with developments, suggests Charoenwong. One way to stay ahead of the game is to implement and provide a regulatory sandbox to test new technologies before trying to scale them up or consider licensing or banning them.

    From an industry perspective, it's urgent to accelerate the licensing process, innovate mechanisms and make licensed exchanges competitive, says Livio Weng, chief operating officer of HashKey Group - one of only two licensed crypto exchanges in Hong Kong. "This can help avoid a situation in which inferior products could push the good ones out, thereby allowing the market to return to a healthy state," he says.

    For small-time players vying for a piece of the action, Lester Ip, chief inspector of the Hong Kong police's Cybersecurity and Technology Crime Bureau, offers two simple tips - trade with licensed crypto exchanges and be wary of any platform's promised returns. "If a platform promises a return rate of more than 10 to 20 percent, the public should know it defies logic," he warns.

    Opinion shifts

    When can confidence return to the industry? It's still too early to provide even a vague answer. According to a study conducted by the Hong Kong University of Science and Technology's Business School in September and October, 41 percent of respondents say they preferred not to hold virtual assets - up 12 percentage points from April to May. Only 20 percent of those polled were interested in securing virtual assets in the future - down five percentage points from a prior survey.

    Carman Fang, a 26-year-old who works in the consultancy business, views her virtual assets as safe for now, although the platform she used has yet to be licensed. However, her decision whether to close out or increase her investment is still up in the air.

    Bitcoin - the dominant token that accounts for nearly half of the crypto market capitalization - has seen its price go up by more than 70 percent since early this year, but it's still a far cry from that of its peak in 2021.

    "I'll probably wait and see. That's what my friends think too. I don't want to miss out on the next big thing for sure. But, what I fear most is my savings going up in smoke," says Fang.

    Contact the writer at [email protected]

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