JPEX crisis: Celebrity-endorsed scam, the straw that broke the camel’s back
#564
GM,
First, let's start with some good news! The results of the recent square fundraising event, Gitcoin Grants 18, were announced last weekend. Thanks to your support through micro-donations, Blocktrend is delighted to have achieved the 7th position globally in this round. We want to express our gratitude to all the Blocktrend community members who actively participated and to our community partners who collaborated during the fundraising event and helped create instructional materials.
Prior to this, I invited Blocktrend community members on Discord to assist in creating instructional content for Gitcoin Passport. I promised to issue Hypercerts as proof of contribution and to repurchase 1% ownership using matched funds as an economic reward. Fortunately, at that time, two community partners, 0xYCL and Denken, took the initiative to help many individuals participate in this square fundraising, benefiting numerous Chinese projects, including Blocktrend. Moving forward, I will commence the production and distribution of Hypercerts while openly sharing the entire process and outcomes.
Additionally, the third edition of RetroPGF, organized by Optimism, quietly began last week. Blocktrend will also participate in the evaluation, with RetroPGF's judges assessing Blocktrend's contributions to the Optimism ecosystem to determine corresponding retrospective rewards. Unlike Gitcoin Grants micro-donations, RetroPGF does not require active community involvement. I also pledge to redistribute all OP tokens received by Blocktrend to our paid members after the event, expressing our gratitude for your subscription support and impact investment. Now, let's get to the main topic.
The reason Blocktrend places such strong emphasis on novel mechanisms like Gitcoin Grants and RetroPGF, which fund public goods, is that currently, the cryptocurrency space lacks a sustainable business model. Where the money comes from dictates the direction the industry takes. Recently, the cryptocurrency exchange JPEX has been rumored to be on the verge of collapse, sparking a wave of online criticism. Public figures who once endorsed JPEX have become the target of public outrage. This article discusses how JPEX rose to prominence and the significant lessons to be learned from this impending crisis.
The Confusing Battle
I first heard about JPEX at the end of 2022. It was a time when the FTX exchange had halted withdrawals, causing panic among global users. It was during this period that an obscure exchange, JPEX, called for help, using a "rescue fund" to entice KOLs (Key Opinion Leaders) affected by the FTX incident to "switch sides" with the promise of up to 5,000 USDT per person. The total funds reportedly amounted to $2 million. In other words, JPEX aimed to recruit at least 400 KOLs.
Similar assistance programs were not uncommon during that time. The world's largest exchange, Binance, also launched an industry recovery fund called the "Web3 Industry Recovery Initiative," with a staggering $1 billion allocated to invest in promising Web3 startups (when the opportunity arose). Even if no one later verified whether these assistance programs were fulfilled, the companies had already successfully earned a positive image.
Creating a positive image was crucial for JPEX Exchange's rapid rise since its founding in 2020. According to the JPEX official website, JPEX, short for JP-EX Cryptocurrency Asset Platform, is headquartered in Dubai, holds licenses, and is recognized by various countries, including financial institutions in Dubai and the United States (or so it claims). This introduction is filled with ambiguous information that can easily mislead. For instance, the English name of the Japan Exchange Group, a well-known entity, is "Japan Exchange Group" or JPX. JPEX not only shares a remarkably similar name but also directly includes the words "Japan Exchange" in its brand logo, transforming from a Dubai-based company into a Japanese cryptocurrency exchange while heavily advertising in Hong Kong subway stations. It leaves one perplexed.
Japan experienced a series of hacker incidents in its early years, which led to the development of relatively robust cryptocurrency regulatory frameworks. During the FTX closure incident, Japanese users were among the very few globally who remained unaffected. However, JPEX's claim to be a Japanese exchange was not only a deliberate misrepresentation but also a source of great irritation for the Japan Exchange Group. They went to the extent of issuing a press release to clarify the misunderstanding:
Recently, we have received many inquiries as to whether the Japan Stock Exchange provides trading services for virtual currencies such as Bitcoin. Because there are advertisements on the Internet that use company names, logos and URLs similar to ours, such as "JPEX", "jpex", and "Japan Exchange" and are widely circulated. Please note that this company, and the services they provide, are completely unrelated to JSE Group.
However, this is just one of the many misconceptions manufactured by JPEX. JPEX had also claimed during a product launch event in early 2022 that they would collaborate with Visa to launch the JPEXCard debit card. However, Visa publicly contradicted this statement afterward, stating that they had received numerous inquiries about the JPEX Visa card, but JPEX is not a partner of Visa, nor is there any such card issuance program in place.
Lastly, JPEX placed the blame for these inaccuracies on their advertising contractors, claiming that it was their misinterpretation of their intentions that led to public misunderstandings. What's even more bizarre is that at the time, Hong Kong media reported that JPEX had described itself as an Australian company.
JPEX has a knack for causing misunderstandings. If there's any statement that doesn't align with the facts, they are quick to attribute it to others "misunderstanding" their intentions. However, the most recent clarification came from the Securities and Futures Commission (SFC) in Hong Kong, the regulatory authority for securities and cryptocurrencies. Unexpectedly, this announcement sent JPEX into a tailspin. Not only did JPEX immediately halt user withdrawals of personal assets, but even their office in Hong Kong reportedly became vacant.
Misappropriation of Funds
On September 13th, the SFC issued a public notice pointing out that the statement "JPEX describes itself as a licensed and regulated cryptocurrency platform" was inaccurate and that JPEX had not obtained any licensing or approvals from overseas regulatory authorities:
The Securities and Futures Commission (SFC) has noted the presence of a virtual asset trading platform named "JPEX" actively promoting its services and products to the Hong Kong public through influencers and over-the-counter exchange shops. The SFC wishes to clarify that no entity under the JPEX Group holds a license issued by the SFC, and they have not applied to the SFC for a license to operate a virtual asset trading platform in Hong Kong. The SFC has also observed various suspicious practices employed by JPEX and individuals actively promoting JPEX.
For readers who haven't been closely following the JPEX incident, they might wonder if this announcement is genuinely that significant. In the past few years, Binance has been constantly accused by various governments of being unregulated and lacking operating licenses, yet it remains the most widely used cryptocurrency exchange globally. The key difference here is that people initially had low confidence in JPEX, and this government announcement became the "last straw."
Since the FTX incident, governments worldwide have been expediting cryptocurrency legislation. In June 2023, the Hong Kong government introduced new cryptocurrency regulations, mandating that all exchanges soliciting customers in Hong Kong must obtain an operating license within one year, or they will have to cease operations. Additionally, the Hong Kong government imposed restrictions on influencer endorsements and media advertising. Promoting exchanges without proper licensing through influencers or media outlets is now considered a criminal offense.
However, Hong Kong is still in a transitional period regarding regulations, and the absence of a license for JPEX is not illegal at this stage. The critical aspect is that the Securities and Futures Commission (SFC), in its official capacity, confirmed long-standing negative claims about JPEX—specifically, allegations of misappropriating customer funds. In the past, individuals hesitated to voice unfavorable opinions about JPEX for fear of retaliation or cyberattacks. This time, the SFC listed six major charges against JPEX: lack of licensing, unreasonably high returns, reduction of user assets, illegal savings products, false advertising, and misleading statements. This exposed JPEX's actions for all to see.
Centralized exchanges worldwide operate as "black boxes." Similar to banks, people know that depositing money in a bank can earn interest, but it's challenging to determine whether the bank has the capability to repay customer deposits. Banks rely on government financial oversight, deposit insurance, and emergency bailout measures to ensure stable operations. To ensure the stability of centralized exchanges, there are generally two methods: user oversight or government regulation.
The reserve proof system that many exchanges introduced at the end of 2022 falls under user oversight. Exchanges argued that while they couldn't directly expose all customer balances, each user could verify whether the exchange's balance matches their account balance based on a public Merkle Tree. At the time, I likened this mechanism to a digital version of "blood tests" for exchanges.
Nearly a year later, I believe that this user oversight system has failed. While technically feasible, very few users are willing to invest the time to verify it. JPEX never provided any asset reserve proof, yet it still attracted a significant number of users to register. Clearly, people trust the endorsements of others more. This is why, after the JPEX crisis erupted, people took to the internet to criticize JPEX's endorsers and partners.
Even though most people inwardly understand that these paid endorsers lack the ability to evaluate the reliability of an exchange (does anyone genuinely believe Chen Ling Jiu understands cryptocurrencies?), this is the only basis for the public's trust in JPEX. In reality, whether it's influencers, media, or even the Hong Kong MTR (Mass Transit Railway), they all serve their own interests and do not have a substantial impact on the exchange's decisions. If people want to use an exchange with peace of mind, besides identifying which endorsers are money-driven, it's even more crucial to find roles capable of overseeing exchanges on behalf of users.
In my opinion, there's no better candidate for this role than various governments.
Government Intervention
Governments do not engage in exchange businesses and, theoretically, are accountable to the people. They undoubtedly have more capacity to oversee exchange operations than endorsers who are motivated solely by financial gains. In the past, the industry generally opposed government intervention out of fear that agencies like the U.S. Securities and Exchange Commission (SEC) would stifle innovation by citing inappropriate regulations. While such concerns are not baseless, it's also a bit like throwing the baby out with the bathwater—should we allow people's assets to be "harvested" just because we fear government mistakes? Compared to unscrupulous businessmen who only care about their own interests, distrust in government is relatively less justified.
The JPEX crisis has not only revealed the true nature of some media and endorsers but has also underscored the importance of regulatory systems. The current cryptocurrency industry is still somewhat like a primitive society where people tend to trust a particular exchange because it has a "bigger fist." In the past, people blindly believed that SBF wasn't short of money, and this time they believed in the well-known endorsers that JPEX brought in. In the future, there might be even more reasons for people to believe that certain exchanges are "too big to fail."
People shouldn't have to rely solely on these reasons to choose centralized exchanges. Instead, it should be more like choosing a bank. Regardless of the bank, as long as it operates legally, people should not have to worry about their life savings disappearing. When KOLs receive advertising collaborations, they should feel recognized, just like receiving endorsement invitations from reputable banks, rather than worrying about damaging their reputation.
A few years ago, industry players were concerned that governments didn't understand the space, leading to opposition against regulation. Governments also tended to view the cryptocurrency industry as too small to warrant separate regulation. However, after several years of development, both sides have begun to find common ground. Recently, the Taiwanese government not only created a new independent category for exchange operators but also announced plans to release regulatory guidelines in October, reducing the risk for investors to step on landmines. These are significant milestones for the cryptocurrency industry. It is believed that in a few years, when people mention cryptocurrency, they will no longer think of crime and risk but rather innovation and opportunities.
However, until that time comes, people need to find ways to safeguard their cryptocurrency holdings.
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