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Proactive Measures: The Role of Independent Third-Party Control in Troubled Cryptocurrency Exchanges

The recent crypto fraud surrounding an unlicensed virtual asset platform in Hong Kong has shed light on the risks associated with investing in cryptocurrency platforms. With losses amounting to around HK$1.2 billion and numerous complaints filed against the exchange, it is crucial to examine the lessons learned from this incident and consider measures to protect investors in the future.

The crisis began when Hong Kong's financial watchdog, the Securities and Futures Commission (SFC), initiated a fraud investigation into the unlicensed cryptocurrency trading platform. In response to the warning from the SFC, the platform reportedly increased its withdrawal fee to discourage users from withdrawing their assets.

Lessons in Investor Protection: Licensing and T&Cs 

  • Verify Licensing: One important lesson from this crypto fraud, is that investors should always ensure that the cryptocurrency platform they use is licensed and regulated. Licensed platforms provide a level of oversight and accountability, reducing the risk of fraud and malpractice.
  • Importance of T&Cs: In an insolvency context, one of the main concerns for investors is the legal status of their cryptocurrencies. Specifically, investors want to know whether their cryptocurrencies are held on trust, typically resulting in a full return to the investor, or if they are considered assets of the platform, which would typically be liquidated to cover the costs of the liquidation and distributed among unsecured creditors. A recent ruling reveals that the resolution to this issue is likely dependent on the terms and conditions (T&Cs) of the platform. Therefore, it is crucial for investors to carefully review the T&Cs to understand the treatment of their assets should insolvency occur.

Options for Stakeholders: 

  • Regulators: To protect the public interests, regulators can take proactive measures to investigate companies and issue public notices to warn the general public about the risks associated with investing in such platforms. Additionally, regulators have the authority to appoint independent third-party firms to conduct investigations or assume control of the platform, adding an extra layer of oversight and ensuring the fair treatment of investors.
  • Directors: Directors have a fiduciary duty to act in the interests of the company and its creditors, particularly in cases of insolvency. Although Hong Kong lacks a formal statutory regime, directors should promptly consider voluntary liquidation once they become aware of the company’s insolvency or likelihood of insolvency. Cooperating with liquidators is crucial in effectively winding down the company, preserving its assets, and distributing them to creditors.
  • Creditors: Creditors can consider to take proactive action to protect their interests. They can enforce their debt by petitioning to wind up the company and in case there is urgency (particularly in cases of dysfunctional management or potential misappropriation of assets), they should consider to apply to the court for the appointment of provisional liquidators to take control of the company and to preserve its assets.

The recent crypto fraud in Hong Kong serves as a significant reminder of the importance of due diligence and caution when investing in cryptocurrency platforms. By thoroughly reviewing the licensing status, understanding the legal status of cryptocurrencies, and taking appropriate actions, investors, regulators, directors, and creditors can collectively contribute to safeguarding investor interests in the cryptocurrency market. Furthermore, appointing independent third-party firms to conduct investigations or assume control of these platforms is beneficial in ensuring transparency, accountability, and trust for all stakeholders involved.

The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals

FTI Consulting, Inc., including its subsidiaries and affiliates, is a consulting firm and is not a certified public accounting firm or a law firm.


business transformation & strategy, policy & regulation, risk & compliance, investigations & monitorships, crytocurrencies, crypto, crypto exchanges, sfc, corporate finance, restructuring, liquidator, voluntary liquidation, regulators, directors, creditors, provisional liquidators, bitcoin, investigations