Hong Kong’s JPEX, a cryptocurrency exchange embroiled in controversy, is offering a “DAO Stakeholders Dividend Plan” in a bid to attract new investors, even as authorities and regulators intensify their efforts to curb what could potentially be one of the city’s largest financial frauds. The exchange, which halted trading and faced police raids, promises new users the opportunity to invest in a dividend-paying asset with a potential buyout price of double its original value after two years. This plan includes the distribution of 49% of stakeholder dividends, totaling $400 million.
As of Thursday, existing investors with assets locked in JPEX were voting on the plan, allowing them to convert their funds into DAO Stakeholder dividends with a repurchase ratio of one-to-one after two years, according to JPEX. DAO, short for decentralised autonomous organisation, is an entity in which collective decisions are made, and JPEX is run by an anonymous DAO, as stated on the company’s website.
However, this move by JPEX defies a regulatory crackdown that has already resulted in the arrest of at least eleven individuals on charges related to aiding and abetting misleading information about the exchange. The plan raises suspicions because it appears to ask users to become equity owners rather than returning the assets they own, according to Jason Ho, EY Financial Services’ technology risk consulting leader. He also noted that JPEX’s restrictions on user withdrawals indicated a lack of proper safeguards for client assets.
Authorities reported receiving over 2,000 complaints from investors who were unable to access assets worth over HK$1.3 billion ($166 million) on JPEX. Jack Poon, a fintech and entrepreneurship professor at Hong Kong Polytechnic University, commented that a dividend distribution plan is only economically viable if there are prospects that the entity can fulfil its commitments. Given JPEX’s uncertain future, he suggested that the counterparty risk was too high to engage with, regardless of the promised payout.
JPEX’s response also included accusations against the Securities and Futures Commission (SFC) for freezing user funds, attributing it to “third-party market makers maliciously locking up funds.” However, cryptocurrency market maker Keyrock’s Justin d’Anethan emphasised that a cryptocurrency exchange should have ultimate operational control over user deposits and withdrawals.
In a subsequent statement, JPEX accused the SFC of subjecting it to “ambiguous guidelines and trumped-up charges” and claimed that the SFC had instructed telecom providers to block the platform. The exchange also urged investors to use a virtual private network to access the platform. This statement directly challenged a warning from the SFC, which criticised JPEX for publicising email exchanges with the regulator, alleging that the exchange sought guidance from the SFC, contrary to the regulator’s claims.
The SFC further asserted that it began inquiries into JPEX’s activities in March 2022 and accused JPEX of breaching its obligations to preserve confidentiality in an investigation. The regulator also reiterated that JPEX had never approached them regarding a potential licence application.
The situation surrounding JPEX has raised concerns about the policing of financial activities in the open internet, where companies operate across borders. It remains to be seen how investors will respond to the exchange’s dividend plan amid the ongoing legal and regulatory challenges it faces.