- Hounax exchange is alleged to have swindled hundreds of Hong Kong residents.
- The SFC has been criticized for not doing enough to prevent losses.
- The Hounax incident comes in quick succession to the prior JPEX scandal.
Hong Kong’s crypto hub ambitions took a severe dent in September following the JPEX exchange scandal, in which local investors lost an estimated US$152 million. The incident turned an already crypto-skeptic public away from digital asset investing, forcing authorities to vow tighter controls and tougher policies on crypto businesses operating in the city-state.
Despite added assurances post-JPEX, city-state regulators the Securities & Futures Commission (SFC) have come under renewed criticism as a fresh crypto scandal threatens to blow up. Local reports indicate that the Hounax exchange has disappeared, taking victims’ crypto funds. Critics argue that the SFC had failed to protect investors by taking a “passive” response.
SFC Under Fire
The SFC’s “passive” response to the alleged wrongdoings perpetrated by Hounax consisted of adding the exchange to its alert list and labeling it as a “suspicious virtual asset trading platform” on November 1. The accompanying comments to the alert noted that the company’s claims of being affiliated with “a financial institution” and “a venture capital firm” were false.
SFC CEO Julia Leung stated that the agency first became aware of fraudulent activity on the Hounax platform in September. Leung added that Hong Kong’s crypto licensing rules on the one-year grace period for crypto exchange applications are adequate. Under SFC rules, only licensed exchanges can operate in the region and market services to Hong Kong residents.
Despite the SFC adding Hounax to its alert list, lawmakers Doreen Kong Yuk-foon and Johnny Ng Kit-chong criticized the financial watchdog for its inadequate response. Kong felt that the SFC could have done more to warn crypto investors and prevent losses from accumulating.
“It’s like saying ‘best of luck’ to the public. If they thought the platform was suspicious, why couldn’t more be done? Their actions are very passive now,” stated Kong.
Criticism over the passive response from the SFC intensified as the scale of the number of victims and losses emerged.
Hounax Lured Victims
According to local reports, the number of Hounax victims totaled around 130 individuals, losing an estimated HK$120 million (US$15.4 million) collectively. While this represents a fraction of the amount stolen in the JPEX scandal, it is a devastating loss for those who fell prey to the alleged scam.
One of the victims, who lost HK$150,000 (US$19.3k), stated that the scam began when he followed some “financial experts” on Facebook in April. He subsequently joined the financial experts’ WhatsApp group for stock trading tips. The WhatsApp messages soon changed from stock content to cryptocurrency trading tips using the Hounax platform, with multiple group users posting positive experiences.
In retrospect, the victim realized that the positive messages were part of the rouse to elicit trust in the platform. Similarly, another victim, who had also joined a WhatsApp group, stated that she let her guard down after winning several HK$1,000 (US$128) prize draws in the WhatsApp group, spurring her to open a Hounax account to claim the winnings.
Further trust in Hounax was built after the victim withdrew funds from Hounax twice. However, Hong Kong police stated that typical victim reports say withdrawals were denied using multiple excuses, including charging 80% fees as part of anti-money laundering requirements.
On the Flipside
- Hong Kong police are investigating and have requested social media platforms remove Hounax posts in the meantime.
- High-profile crypto scams hurt Hong Kong‘s reputation as a safe financial center.
- To date, only two crypto exchanges are approved by the SFC to operate in the region.
Why This Matters
From JPEX to Hounax, Hong Kong is developing an unfortunate track record of failing to shield residents from crypto scams. This latest incident shows regulators lack the power to match their rhetoric on getting tough on crypto post-JPEX. Unless real active enforcement is introduced, more broken lives and dreams seem inevitable as fraudsters continue to exploit vulnerabilities.
Learn more about the SFC’s revised approach to crypto post-JPEX scandal here:
SFC Vows Tougher Stance on Sus Crypto Platforms Post-JPEX
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