Cryptocurrency is still in a very nascent stage, and the lack of regulation and promise of unsustainably high returns make it the perfect target for fraudsters. In 2021 crypto scammers took a record of 14 billion USD, making crypto scams the biggest digital finance scams.
Hong Kong is drifting towards becoming fertile ground for crypto scammers due to the general popularity of digital assets here and Hong Kong’s ad hoc approach to regulating them. For the past several years, while the Securities and Futures Commission (SFC) attempted to regulate virtual asset platforms and warned of cryptocurrency risks, not much has been done to protect crypto owners in Hong Kong.
With cryptocurrency in Hong Kong on the rise, here are some common issues we encounter in our legal practice:
Fake crypto trading websites and crypto wallet apps
Copycat trading websites and apps are flourishing. Unfortunately, they look very similar to the legitimate ones, and some fake websites even appear high in Google search, so it is hard to perceive the danger.
Investors can “buy” cryptocurrency through these fake websites and apps and even see their deposited funds growing on fake charts. Trying to be convincing, these platforms even allow to withdraw a small amount of money to earn trust. However, while attempting to withdraw all, investors will then discover that their money has already vanished.
We have been dealing recently with rising cases of so-called “romance scams” that follow the same formula: an attractive Chinese/Asian woman slides into the victim’s dating application, WhatsApp or another direct messaging app, starts a conversation on different topics, creates trust and then gives tips on crypto investing, recommending a crypto trading platform with the biggest return ever. The platform is almost always fake. A number of such cases has been reported in Hong Kong involving the currency OEN and platforms Bitfex.pro and Bitfex.vip.
The best practice when encountering a too good to be true crypto scheme is to be skeptical and do proper due diligence.
Initial coin offering (ICO)
New cryptocurrencies offering is an unregulated way to raise funds. Investors expect huge returns from such ICOs and eagerly sign up paying for future coin with another cryptocurrency, usually Bitcoin or Ethereum (ETH), directly to the fundraiser’s e-wallet. However, the fact that anyone can launch an ICO without any regulatory control makes it extremely risky – many ICOs don’t manage to raise funds, while others don’t happen at all.
Seemingly legitimate trading platforms freeze wallets without legal grounds
We encounter complaints against certain legitimate platforms that accept crypto assets, but then freeze the wallets on the grounds that the trader doesn’t comply with their AML/KYC procedures. This is a grey area – AML/KYC procedures usually should be cleared by the platform before acceptance of crypto funds. If the funds have already been deposited, and non-compliance with AML/KYC is stated as a reason for wallet freeze, it is our view that the entire transaction should be considered nullified, and crypto funds returned to their owner.
Given that the password is the only way to access your blockchain wallet, cryptocurrency investors now become invaluable and easy targets for criminals. In November 2021, Hong Kong Police rescued a 39-year-old cryptocurrency trader who supposed attending a USDT trade but in fact he was kidnapped by triad members for 7 days, and he was forced to disclose his passwords to his online banking account and cryptocurrency trading platforms, losing approximately 5 million USDT (approximately HK$39 million).
It is strongly advised that other than face-to-face transactions, cryptocurrency investors should conduct transactions through trustworthy online platforms, or simply through law firms, to add a layer of protection.
Unfortunately, upon reviewing the Hong Kong Court decisions and judgments relating to cryptocurrency, it can be deduced that unless the identity of the scammers is known plus the fact that the funds can be located in Hong Kong (such as banks or trading platforms located in Hong Kong), it can be very difficult to seek relief from Hong Kong Courts or law enforcement agencies including the Police due to lack of jurisdiction. Crypto transactions are hard to dispute in comparison with classic finance litigations – crypto assets sent to another wallet address is not that easy to trace, even if we manage to trace, they may already be in another jurisdiction, and Hong Kong police may not be able to intervene. If you find yourself a victim of a crypto fraud, the best advice is to contact the local police immediately and try to freeze the scammer’s account to keep your assets within Hong Kong/your own country.
If you need more assistance with cryptocurrency-related legal issues, we recommend contacting us. OLN has dedicated lawyers who work with blockchain technology and can provide advice and help you will need for your investment and other arrangements.
Crypto scammers took a record $14 billion in 2021: https://www.cnbc.com/2022/01/06/crypto-scammers-took-a-record-14-billion-in-2021-chainalysis.html Last access: 7 March 2022.
Sexy fraudsters scam $546m from crypto punters: https://www.thestandard.com.hk/sections-news-print/232236/Sexy-fraudsters-scam-$546m-from-crypto-punters. Last access: 7 March 2022.
Cryptocurrency trader in HK$30 million kidnap case escapes. https://www.thestandard.com.hk/breaking-news/section/4/182930/Cryptocurrency-trader-in-HK$30-million-kidnap-case-escapes Last access: 7 March 2022.