UPDATE (5th June): This article has been updated with AIA’s comment

When Claus, a computer technician in the UK, came across a new exchange based in Hong Kong, his interest was piqued. He was looking to make a return on his litecoin and Hong Kong exchange HKCex offered a higher litecoin to bitcoin rate than others.

Claus deposited 1,000 LTC to HKCex on 15th May and was pleasantly surprised when his HKCex account balance showed an extra 88.8 LTC. It turned out that the new exchange was offering a promotional bonus on deposits. Claus hadn’t even noticed the sweetener.

“I thought their prices were inflated due to the abundance of USD deposit methods and low market depth as they were a new exchange,” he said.

Articles announcing HKCex’s $27m worth of investment and chatter on forums like BTC-e allayed some of Claus’ doubts about depositing funds with a new exchange. He had used less well-known platforms without a problem in the past.

“I felt [HKCex] were trustworthy,” he said.

But when Claus flipped his 1,000 LTC for 26 BTC and wanted to withdraw the balance, his pleasant experience soon turned sour. He noticed his withdrawal’s status was changed from ‘processing’ to ‘rejected’. He was then told to send a notarised copy of his passport to HKCex in Hong Kong because his account had been flagged for money laundering. Claus still hasn’t received his funds today.

Claus is a pseudonym for a HKCex user who wants to remain anonymous. He shared screenshots of his HKCex account with CoinDesk. He was also a Mt. Gox customer and suffered a $9,200 loss on his account there.

HKCex, which claims to have raised millions in funding, now faces allegations of fraud valued at more than $120,000 from customers who can’t withdraw their funds, according to a crowdsourced spreadsheet.

CoinDesk has found that one of the exchange’s alleged investors has denied any involvement with the company. Furthermore, public records in Hong Kong also throw up inconsistencies with the exchange’s claims.

HKCex investor denies involvement

In mid-May, HKCex announced it had raised an audacious amount of new funding: $27m. This would have put it ahead of Circle, one of the best funded startups in the bitcoin economy, in terms of investment raised. (CoinDesk reported on HKCex’s first claimed funding round, for $2m, in January)

When CoinDesk asked for more information about the investors, HKCex named one of them as Hang Seng Bank, Hong Kong’s second-largest bank. Lavin Lam, who signed off as the exchange’s marketing and public relations executive in emails, said the bank had put in $9m in the latest round.

“I’m sorry, we can’t disclose information about our investors except one public bank – Hang Seng Bank. They will invest about $9m in crypto-currency trading,” Lam wrote.

However, a check with Hang Seng Bank revealed that the claimed millions in funding for HKCex isn’t there. When contacted with details about the investment, a spokesperson for the bank said:

“Hang Seng Bank has no connections or banking relationships with Hong Kong Crypto Exchange (HKCEx).”

Missing bitcoin ATMs

Another bold claim made by HKCex – that it would install 30 bitcoin ATMs in Hong Kong by the year’s end – couldn’t be corroborated. When CoinDesk asked the exchange who would manufacture the machines, Lavin Lam replied that they would be made by manufacturing giant Foxconn.

As the world’s largest contract manufacturer of electronics, an entry into the bitcoin ATM market by Foxconn would be significant. Foxconn usually follows a “strict policy” of not commenting on products it makes for clients, according to its public relations firm, Burson Marsteller.

However, when Foxconn was presented with details of the alleged HKCex bitcoin ATMs, its spokesperson returned with a negative response after an internal check.

“No business group has acknowledged [a contract with HKCex for bitcoin ATMs],” spokesperson Simon Hsing said.

When Hang Seng Bank and Foxconn’s denials were put to HKCex in an email to Lavin Lam, there was no response.

One piece of information listed on the HKCex website did check out. The exchange claims that its servers are located in the SunnyVision Data Centre, among the “most reliable” server housing environments in Hong Kong. SunnyVision confirmed that the HKCex IP address is in its portfolio and is in use by a client.

HKCex also claimed in a press release that it was in talks with AIA to insure customer deposits. The insurance firm denied any relationship with HKCex when contacted by CoinDesk.

”We have had no discussions with this organisation and we do not underwrite this kind of insurance,” AIA Group’s director of group corporate communications in Hong Kong, Sonia Tsang, said.

Worldcoin Alliance distances itself

HKCex has also alienated some potential allies. The Worldcoin Alliance, a group that promotes that particular altcoin, announced a partnership with the Hong Kong exchange on 18th May.

The partnership would have created new ways to buy worldcoin through bank transfer and credit card payments, and allow the altcoin to be traded with fiat currency. Three days later, though, the group announced the partnership was off.

“We identified some red flags that warrants the worldcoin community be more cautious. We therefore chose to suspend this cooperation until we are fully convinced that HKCex.net is in fact a legitimate exchange service,” a Worldcoin press release said.

A Worldcoin Alliance spokesperson told CoinDesk the organization had concerns over the following issues: worldcoin users who were still waiting for their fund withdrawals, a period of time when the HKCex website appeared to have gone offline and the lack of SSL encryption on the website.

Potential breach of licence

When CoinDesk checked HKCex’s details against public records held by Hong Kong’s Companies Registry, inconsistencies were exposed.

According to HKCex’s website, the exchange is operated by a company called MG Foreign Exchange Limited. According to the registry, the firm was incorporated on 11th October last year. It has only one director, a man named Wong Kin Lung.

However, Wong’s name doesn’t appear anywhere in HKCex’s management team page. In fact, two men named Pheng Cheah and Long Liang are listed as co-founders. The firm’s registry records also show that its paid-up capital is HK$1. Ian Barlow, a Hong Kong-based security consultant, noted: “The single director does appear unusual, particularly in a money-handling business.”

Furthermore, the exchange could face a run-in with the authorities because of inconsistent addresses, according to Barlow. HKCex lists MG Foreign Exchange’s Money Service Operators (MSO) licence on its website. However, an issue arises because the company isn’t operating at the address on the licence.

Barlow, who is also a director of the Hong Kong chapter of the Association of Certified Fraud Examiners, pointed out:

“The terms of the MSO licence are quite specific … If [HKCex] isn’t operating at the registered address, that would be a breach of its licence terms.”

HKCex lists its operating address as 57 Belcher’s Street on Hong Kong island. Its licenced address, however, is an office building called MG Tower across Victoria Harbour in Kowloon. According to MSO licence guidelines, the registered address must match the premises where the money changing or remittance service takes place.

The Commissioner of Customs and Excise, which oversees the MSO licence, could publicly reprimand and impose a penalty of up to HK$1m on a licence holder that is found to have contravened its terms.

Link to MG Group?

A further check with public records showed that Wong is a director of 52 companies in Hong Kong. These include firms with names like World Toilet Research Centre Limited, and also a clutch of financial firms with ‘Marigold’ or ‘MG’ in their names.

These firms are referred to as the MG Group in the company literature of a Belize-registered broker called Marigold Global Markets. The group resides in MG Tower in Kowloon, which is where HKCex’s claimed parent company is also located.

Two MG Group companies that CoinDesk looked at have significant paid-up capital. A gold bullion dealer called Marigold International Bullion Dealers was incorporated in June 2007 with a paid-up capital of HK$13m ($1.7m). It is also a member of the Chinese Gold and Silver Exchange Society, where Wong sits on the executive and supervisory committee.

A futures broker called Marigold International Securities was started in 2009 with a paid-up capital of HK$23m ($3m). The firm has also gained trading rights in derivatives markets in Singapore and London in recent months.

However, besides the potential MSO licence breach and the confusion over HKCex’s investors and ATMs, none of the facts discovered suggest any actual wrongdoing on the part of MG Foreign Exchange or its director, Wong. Indeed, it’s possible that MG Foreign Exchange doesn’t actually operate the bitcoin exchange. So far, HKCex’s claim is the only link between it and Wong’s company.

CoinDesk contacted Wong for comment via his gold bullion dealing company, but has not received a response.

The trust deficit

Even as Mt. Gox’s slow implosion in February remains fresh in the memory of cryptocurrency traders, new exchanges are launching all the time to capitalise on the growing number of bitcoin and altcoin users. In response, some exchanges have submitted to basic audit-like checks that they have enough funds to cover customers’ account balances.

Still, if an exchange can entice deposits worth hundreds of thousands with nothing more than a website and loud claims about funding and partnerships, then it’s clear that the fundamental problem of trust between customer and exchange remains unsolved. That’s a problem for the wider bitcoin economy to consider.

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