First Criminal Case Involving Hong Kong’s Cryptocurrency Circle What Crime Did JPEX Criminals Commit?

First Criminal Case in Hong Kong's Crypto Circle What Crime Did JPEX Criminals Commit?

Many colleagues in the cryptocurrency circle may remember a recent article published by the Sa team, which analyzed the “Warning: Improper Operating Practices of Virtual Asset Trading Platforms” issued by the Hong Kong Securities and Futures Commission (SFC) to the virtual asset market and Web3 practitioners. At that time, this warning statement confused many people, as they wondered who the SFC was warning.

Now we have the answer: JPEX Exchange. On September 13, 2023, the SFC released the “Warning Statement on Unregulated Virtual Asset Trading Platforms,” which revealed the mystery.

Subsequently, on September 18, 2023, the Hong Kong judiciary took action against JPEX. They first targeted Lin, a Hong Kong internet celebrity who had vigorously promoted and claimed to have applied to become a JPEX partner. Lin was arrested, and his office in Central was searched. According to media reports, law enforcement officials seized a large amount of materials and cash. Following this, some investors discovered that JPEX was unable to repay their investments properly. For example, an application for the redemption of 1000u could only be redeemed for 1u. The development of this case is currently unclear.

Today, the Sa team will delve deep into the history of JPEX Exchange and its various irregular, illegal, and even criminal operations, enumerating the “crimes” of JPEX.

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01 JPEX’s History

As a virtual asset trading platform with flashy marketing and unique strategies, the Sa team had actually paid attention to JPEX as early as last year. Even in 2022, when the Web3 and virtual asset frenzy reached its peak in Hong Kong, with virtual currency platforms advertising everywhere, JPEX managed to break through the noise in its marketing efforts. The reason was simple: its marketing was aggressive.

It was precisely because JPEX invested heavily in marketing, combined with its highly attractive high investment returns and gameplay, that countless investors from various regions (mainly mainland China, Hong Kong, and Macau) flocked to participate.

However, beneath the apparent prosperity, JPEX faced many extremely risky “reefs”.

(1) JPEX has never made effective information disclosures and has not disclosed its controlling individuals or registered location.

According to current public sources, since its registration in 2020, JPEX has been in operation since 2021. It has registered and operates in multiple countries and regions globally (including Hong Kong, Japan, Australia, the United States, Canada, Lithuania, and others). However, apart from Guo, who serves as a director of JPEX and has appeared publicly to handle relevant matters, JPEX has never publicly disclosed information about its founding team or registered location. The actual responsible individuals and office locations in these regions have also never been made public. The Sa team has conducted some background checks on JPEX through conventional means but has not found any additional valid information.

According to “Hong Kong 01” news, JPEX has been registered in several countries around the world, and the registration information is suspected to be “dummy” registration. There are rumors that its founder is a well-known figure in the cryptocurrency community named “Huang”. However, there is currently no solid evidence to confirm this rumor.

Friends familiar with the cryptocurrency community and various “projects” should know that basic information about the founding team, operational policies, business models, and other key information are crucial to proving the credibility of a project. Nowadays, the cryptocurrency community is no longer the mysterious community that used to develop freely with a hint of mystery. Being mysterious not only fails to bring profits to a platform, but also makes investors hesitate. JPEX is such a mysterious platform that lacks a sense of security.

(II) JPEX has repeatedly attracted investors through “ambush-style” and “fraud-style” marketing methods

Starting in 2022, when JPEX began its aggressive external marketing, it established two basic guidelines: (1) celebrity marketing; and (2) ambush-style/fraud-style marketing. All aimed at gaining popularity and attracting investors in the short term.

Celebrity marketing is easy to understand. Hong Kong internet celebrity Lin and certain male and female stars from Hong Kong have all been used as spokespersons for JPEX, attracting “traffic” under a large number of sweet-talking campaigns. As for the ambush-style and fraud-style marketing, the most well-known thing about JPEX is the “minor conflict” incident with VISA in early 2022.

At the beginning of 2022, JPEX announced its cooperation with Simplex (a card issuing institution under VISA) and announced the launch of VISA card in the fourth quarter. JPEX then started aggressively targeting VISA, conducting extensive promotional campaigns to establish credibility for itself. Soon, VISA discovered JPEX’s false advertising and quickly sent a warning letter to JPEX. JPEX quickly apologized and shifted the blame to its advertisers, saying, “Sorry, the advertisers printed promotional materials without authorization.”

02 JPEX’s wild gameplay

‍‍‍‍‍After attracting a large amount of traffic, JPEX quickly launched a series of “wild” gameplay methods that are highly risky but offer extremely tempting promises.

(I) High return rate for new recruits

First, there are new recruit activities with super high return rates under the name of “partners”. JPEX promises to recruit partners with high commissions (which is also why the arrested internet celebrity Lin previously claimed to apply to become a JPEX partner). The “partner” terms explicitly state that if they invite 1,000 people to become JPEX customers and the average assets of the invited people reach 10 million U within 30 days, the partners will receive a dynamic reward of 6,000 U per month. In April 2023, JPEX directly increased the dynamic income from this new recruit activity to as high as 1 million U, clearly establishing a dynamic income system that rewards high returns based on the number of new recruits.

(II) 45-second Contract Battle

Next is a new game invented by JPEX. According to the JPEX official website: users will see a green fluctuation line moving upwards and a red fluctuation line moving downwards on the screen. This is the market price trend line. After 45 seconds, users can enter the betting amount and press “PUMP” or “DUMP” to predict the rise or fall of the line after 45 seconds. If the trend is guessed correctly, profit can be made. Otherwise, the betting funds will be lost. Virtual currencies such as Bitcoin or Ethereum can be used for betting.

(III) The JPC token only rises and has a large volume but poor liquidity

Next is the serious suspicion of data falsification for the platform’s own token. Through third-party data detection, it can be found that JPEX’s platform token is very interesting. Despite the global economic downturn and the generally poor state of the cryptocurrency market, it rises against the trend and only goes up. From the listing at 0.001U on August 8, 2022, to 0.04U in June 2023, it has multiplied by 40 times, reaching a peak total market value of 1.88 trillion RMB.

Although the total market value of JPEX seems to be 1.88 trillion, strangely, the 24-hour trading volume of the token is less than 10 million. Combined with the fact that JPEX itself has almost no information disclosure, there is a high possibility of data falsification, and there may even be a large number of wash trading transactions in historical data, posing a great investment risk.

Note: This image is from the internet and is for learning and communication purposes only.

03 JPEX’s Possible Criminal Offenses in Mainland China

Based on the facts that the Sa team has currently seen from public channels, JPEX is likely to be a large-scale Ponzi scheme, and its methods and practices in the operation may involve multiple criminal offenses under Chinese law. The Sa team needs to remind everyone that since there are a large number of victims of JPEX who are residents of mainland China, without considering other circumstances, the judicial authorities in mainland China probably have jurisdiction over the case, but whether they have actual jurisdiction is a complex issue.

(I) Crime of Organizing and Leading Pyramid Selling

JPEX’s high return rate recruitment activities using “partners” as a name may be involved in the crime of organizing and leading pyramid selling.

Article 224a of the Chinese Criminal Law stipulates: Whoever organizes or leads pyramid selling activities under the name of selling products, providing services, etc., requires participants to pay fees or purchase goods, services, etc. to obtain membership qualifications, and forms a hierarchical structure in a certain order, directly or indirectly using the number of developed personnel as the basis for rewards or rebates, enticing or coercing participants to continue developing others to participate, cheating for money, and disrupting the economic and social order of pyramid selling activities shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention, and shall also be fined; if the circumstances are serious, they shall be sentenced to fixed-term imprisonment of not less than five years and also be fined.

For the crime of organizing and leading pyramid schemes, the most important thing in practice is to determine the organization’s business model, profit methods, and personnel composition. According to the “Opinions on the Application of Criminal Law in Handling Criminal Cases of Organizing and Leading Pyramid Schemes” issued by the Supreme People’s Court, the Supreme People’s Procuratorate, and the Ministry of Public Security in 2013, Article 1 clearly states: “If the number of participants in the pyramid scheme within the organization is more than 30 and the hierarchy is more than three levels, the organizers and leaders shall be held criminally responsible.”

Among the many cases of organizations and leaders involved in pyramid schemes that the Sajie team has encountered, the coexistence of static income and dynamic income is one of the typical characteristics. It is already clear that JPEX exists as a fact that generates income by recruiting people, raising funds, and reaching a certain number of new recruits (1000 people) and a certain amount of funds (10 million US dollars) (if each “partner” strictly follows the promotional rules). Now the key is to investigate whether the new recruits of JPEX and the people recruited by them have formed an upline and downline relationship, and calculate and pay the upline rewards based on the number of downlines developed below the downline.

(II) Crime of operating a gambling establishment

The so-called “45-second contract war” is a very clear online gambling behavior. JPEX, as the bookmaker, is suspected of operating a gambling establishment under Chinese law.

In the “Interpretation on Several Issues Concerning the Specific Application of Laws in Handling Criminal Cases of Gambling” issued by the Supreme People’s Court and the Supreme People’s Procuratorate of China, Article 2 further refines the determination of the act of operating a gambling establishment using the Internet, defining it as establishing a gambling website on the computer network or acting as an agent for a gambling website and accepting bets for profit. The risk of the “45-second contract war” being suspected of operating a gambling establishment is extremely high.

In the case of He Mou, Wang Mou, Shu Mou, and others operating a gambling establishment (Case No. (2020) Ji 0622 Xing Chu 73), the defendants He Mou and Wang Mou acted as agents for a foreign virtual currency website through online friends, established and operated a team, and used the Internet and mobile terminals to send platform profit screenshots, website links, and other advertisements to attract players to play the “guess rise and fall game”. The specific mode of the game is that the website sets a leverage trading multiple of 50 times, and players can use USDT to place bets on the rise and fall of other types of virtual currencies. The website then deducts two thousandths of the player’s bet amount as a handling fee. In the first-instance court, it was found that the defendant He Mou acted as an agent for the gambling website and accepted bets for profit, constituting the crime of operating a gambling establishment. The defendant Wang Mou, for profit purposes, helped He Mou set up the website and participated in the profit sharing of the gambling, constituting the crime of operating a gambling establishment.

Sajie team reminder: This type of gameplay carries extremely high risks and directly violates the red line of criminal law. Friends, please remember to stay away from it.

(III) Crime of fund-raising fraud

In the case of data falsification of their own virtual currency after the issuance of JPEX, it is likely to constitute the crime of fundraising fraud.

According to Article 192 of the Criminal Law of our country, the crime of fundraising fraud refers to the act of illegally raising funds using fraudulent methods with the purpose of illegal possession. Under Chinese law, the crime of fundraising fraud can actually be regarded as an advanced charge of the crime of illegal absorption of public deposits. Without the relevant administrative permission, promising to guarantee principal and interest, publicly absorbing deposits from the general public, and subsequently using forged data, restricting withdrawals, and creating obstacles for transactions are the most typical forms of fundraising fraud.

In practice, there are two typical behavior patterns for using fraudulent methods. One is to fabricate facts, and the other is to conceal the truth. By washing and trading, and self-buying and selling, the price of the virtual currency deviates significantly from its original price, which is a typical act of fabricating facts.

04 Final Thoughts

As of today, the Hong Kong judicial authorities have taken detention measures against JPEX-related individuals, including but not limited to those who have promoted JPEX, held JPEX virtual currency and vigorously promoted it, recruited others, and provided support for JPEX’s business expansion in Hong Kong. The next step will be to take action against the actual controllers and beneficiaries of JPEX. There are reports that at the Web3 cryptocurrency summit “Token2049” held in Singapore, all the staff in JPEX’s booth have already evacuated, and various measures to restrict user withdrawals have been implemented on the platform.

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