Hong Kong Court orders JPEX to return HK$1.85 million in USDT amid largest crypto fraud scandal

JP-EX Crypto Asset Platform Pty Ltd and its affiliated Hong Kong company (“JPEX”), a purported cryptocurrency exchange and investment platform, has been at the centre of Hong Kong's largest cryptocurrency fraud scandal.  While JPEX continues to be under investigation by the Hong Kong authorities for allegedly engaging in unlicensed activities and defrauding investors, the Hong Kong Court has entered default judgment against JPEX in Chan Wing Yan & Another v JP-EX Crypto Asset Platform Pty Ltd & Others [2024] HKDC 1628 and, amongst other things, ordered its Hong Kong affiliated company to recover and deliver up the Plaintiffs' crypto-assets.

Background

It is the Plaintiffs' case that JPEX had wrongfully and without authorisation transferred away 247,498 USDT (equivalent to approximately HK$1.85 million) that the Plaintiffs had originally deposited into wallets that were assigned with their accounts registered on JPEX's platform.  The Plaintiffs further submitted that there was an express trust over their USDT deposits and that JPEX, by transferring away the deposits without authorisation, had acted in breach of the trust.  JPEX did not file any defence and was not present at the hearing.

Discussion

Following Re Gatecoin Ltd (in liquidation) [2023] 2 HKLRD 1079, a landmark ruling that brought Hong Kong in line with other common law jurisdictions and confirmed that cryptocurrency is "property" capable of being held on trust, the Court in this case was satisfied that the Plaintiffs' USDT was likewise "property". 

Based on the Plaintiffs' pleaded facts alone (not evidence since this was a default judgment application), the Court was satisfied that JPEX held the USDT deposits on express trust for the Plaintiffs and that JPEX, by transferring away the deposits to unknown wallets without authorisation and failing to pay them back to the Plaintiffs, had acted in breach of the trust.  In particular:  

• JPEX held itself out to be creating and operating a cryptocurrency exchange platform for users to transact with each other for crypto-assets (as opposed to JPEX selling cryptocurrency for profit).

• JPEX's conduct in creating the platform without allocating to users the "private keys" (alphanumeric passwords used to authorise transactions and prove ownership) demonstrated its intent to hold the crypto-assets deposited by its users on trust.

• JPEX represented to its users that 95% of their cryptocurrencies would be stored in "cold wallets" (a storage device not connected to the internet) which suggested that they were not for free disposal by JPEX.  The remaining 5% was for the specific purpose of withdrawal by users.

• As trustee, JPEX had a duty to transfer the property to or at the direction of the beneficiary, take proper care of the trust property, and preserve and manage the trust property for the benefit of the beneficiaries.

• By transferring away the Plaintiffs' USDT deposits to a hot wallet and then to other unknown wallets without authority, and by failing to pay the USDT deposits back to the Plaintiffs despite their request, JPEX was in breach of its duties as trustee.

In granting default judgment, the Court also exercised its discretion and (i) made a declaration that JPEX's Hong Kong affiliated company was and is holding the USDT deposits on trust, (ii) ordered the company to recover and deliver up the deposits (alternatively, to pay equitable compensation), and (iii) granted an injunction against the company to prevent any further dissipation. 

Comments

While this judgment concerns a straightforward default judgment application in respect of a relatively modest sum, it is significant because it clarifies the common law responsibilities of cryptocurrency platforms and illustrates the range of legal recourse available to investors in the event of fraud or mismanagement.

Cryptocurrency platforms are also subject to the regulatory remit of the Securities and Futures Commission, which expanded its licensing regime for virtual asset trading platforms on 1 June 2023 to cover a range of virtual assets, whether or not they are considered as "securities".  The expanded regime contains extensive investor protection requirements, as well as sanctions and remedial measures against platforms in breach (see a previous note on our FSR and Corporate Crime blog for further information).

For more information, please contact Jojo Fan, Managing Partner, Rachael Shek, Partner, Sara Troughton, Professional Support Lawyer or your usual Herbert Smith Freehills contact.