Late last year, Jonathan Crompton, a Hong Kong-based partner at Reynolds Porter Chamberlain, offered advice to a medical practitioner working in South Asia who had been scammed using cryptocurrency after receiving an apparently normal WhatsApp message from a Hong Kong number.
The scammers gained the trust of their victims by establishing virtual connections with them using Hong Kong phone numbers before asking them to deposit money into accounts on fictitious cryptocurrency exchanges. According to Crompton, the con artists eventually stopped responding to communications, but not before convincing victims to persuade their friends and family members to make deposits with the fake platform as well.
He claims that the victim he worked with, as well as the victim’s acquaintances, lost a “large portion” of the money they believed they had invested. He knows some very smart, sensible people who have been duped, but they all say the same thing: how could I?, he continues.
The number of cryptocurrency-related scams has exploded recently. In 2022, there were 2,336 crypto-related frauds reported in Hong Kong, up 67% from the previous year. The thefts involved $217 million ($HK1.7 billion), a 106% increase from 2021.
According to Crompton, the number “just keeps going up” despite the fact that the actual scope of the issue is difficult to fully estimate.
Dealing with the worry that digital assets could be used to commit fraud and scams is a top priority for lawyers in Hong Kong. They are also assisting the Securities and Futures Commission of the territory in walking the delicate line between safeguarding investors and giving crypto organizations just enough latitude to make the city a desirable base.
Rival jurisdictions have stepped up their scrutiny of the industry in response to a number of high-profile crypto-business failures, including the multibillion-dollar collapse of exchange FTX, the bankruptcies of the lending division of broker Genesis Digital, and the Singaporean hedge fund Three Arrows Capital.
RPC’s Crompton joined the Crypto Fraud and Asset Recovery Network’s founding committee in September, right before Hong Kong unveiled a high-profile crypto push. This organization assembles attorneys, accountants, and business leaders to spread knowledge about crypto fraud throughout Asia. Additionally, the attorneys work to assist victims in recovering their lost property.
Crompton claims that the second assignment is more challenging. He observes that in conventional finance, you tend to know who the bad guys are. However, digital wallets used to store stolen cryptocurrency are typically anonymous, and cryptocurrency fraudsters use aliases to conceal their identities.
Crompton also notes that in contrast to regular banks, crypto exchanges frequently ignore legal letters alerting them to suspect activities.
He asserts that it is incorrect to claim such exchanges lack comprehension. Many of the larger [crypto] exchanges have excellent lawyers on staff. He believes the volume of mails they have received has simply overwhelmed them.
Theoretically, courts may order exchanges to reverse transactions. But forcing the return of cryptocurrencies may be technically challenging or impossible due to a lack of precedent in completing that process. Additionally, a lot of victims of cryptocurrency fraud are already short on money, so the majority of clients are unwilling or unable to pursue cases all the way to the end.
He claims that they are searching for someone with additional resources who is willing to pursue the lost assets, but as of right now, they haven’t really identified the victim who is willing to put good money after bad on that.
He suggests that one option is for numerous clients to pool their resources in order to form joint entities and split any proceeds from successful recovery actions.
Gary Tiu, head of regulatory affairs at BC Technology Group, the parent company of OSL, one of just two cryptocurrency exchanges to be granted a licence by Hong Kong’s financial watchdog, thinks the city’s push for cryptocurrencies will encourage more investors to use licensed platforms, which should ensure that they are better protected from scams, hacks, or theft.
But he cautions that the regulatory drive may encourage some retail investors to use riskier, unlicensed exchanges outside Hong Kong’s regulatory purview. He also mentions the risk that scammers’ possibilities may grow as a result of publicly available information on authorized exchangers. Scammers, for instance, have targeted OSL, approaching victims under the guise of being a member of the company’s management and, in doing so, taking advantage of the company’s good name.
According to Tiu, warning individuals not to fall for really persuasive scammers is quite difficult. “[They] will also find it simpler to impersonate people using all the techniques they typically see in many online scams, like phishing, the author continues.
According to Michael Wong, partner at Dechert, lawyers are attempting to create a solution that would allow crypto groups to operate with more freedom while also addressing the regulator’s worries about investor protection. In order to obtain permits from the Hong Kong authorities, he offers hedge funds and exchanges advice.
The SFC wants to liberalize the market while also being concerned about investor safety, according to Wong.
The SFC claims to have informed investors of the dangers of using virtual asset platforms and would make sure that its regulatory framework strikes the appropriate balance between investor protection and support for innovation.
Wong and Jason Chan, an associate at Dechert, have already assisted Fore Elite Capital Management, a crypto-only hedge fund, in obtaining a license from the SFC and expanding the terms of that license to permit it to invest in the top 100 most traded cryptocurrencies and derivatives. In the past, the company’s license only allowed long trading positions in the top 20 coins.
According to Wong, the SFC’s increased confidence with a “riskier, aggressive strategy” has been aided by its developing expertise in dealing with cryptocurrencies in the wake of Hong Kong’s drive for digital assets.
Several organizations have contacted the law firm to inquire about the “widest scope” the SFC will grant them in its license.
According to Wong, this is how the cryptocurrency industry came to be; its founders yearned for a free society devoid of restrictions. They are attempting to strike a balance between the free world and what is actually taking place in the real world.
