Lawmakers push for regulatory framework review amid $500m trust fund fraud

Chinese cryptocurrency entrepreneur Justin Sun Yuchen, featured on the Forbes cover last week, has recently raised concerns about Hong Kong's financial system following a US$500 million trust institution fraud case, prompting lawmakers to call for a reassessment of the existing regulations.

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Lawmaker Johnny Ng Kit-chong stated that the absence of a specialised regulatory framework for custodians in the city has led Web3 companies to frequently rely on trust organizations to manage third-party assets, creating opportunities for some individuals to exploit these gaps for illegal activities. 

Given Hong Kong's reputation as a global financial center, Ng expressed concerns that such incidents would undermine the investor's confidence in the city, urging authorities to enhance public education and examine optimization over the current system.

Meanwhile, lawmaker Ronick Chan Chun-ying noted that most of the Mainland trust companies will assist clients with investing or financial products through banks, while Hong Kong's trust companies primarily manage entrusted assets, which are overseen by various regulatory bodies, such as the Mandatory Provident Fund Schemes Authority(MPFA).

Chan cautioned the public that assets entrusted to a company may fall outside the protection from Hong Kong's four major financial regulators–MPFA, the Hong Kong Monetary Authority, the Insurance Authority and the Securities and Futures Commission–urging investors to investigate the companies' backgrounds.

Since banks are subject to strict regulations, Chan suggested that investors opt for custodial services without opening an account.

Chan also advised the authorities to raise public awareness of fraud tactics and to propose legislation preventing unregistered organizations from using the term "trust."