A crypto controversy has erupted in Hong Kong amid a probe of a trading platform that has ensnared social-media influencers and unleashed criticisms against the key regulator.

Hong Kong’s police and market regulator will address the recent arrests against crypto platform JPEX, the city’s Chief Executive John Lee said at a weekly press conference on Tuesday. The scandal, just three months into a new regime for digital assets, suggests Hong Kong’s goal of creating a crypto hub won’t be smooth sailing.

JPEX’s troubles cast a spotlight yet again on the regulatory and legal showdowns in the crypto world, which has been trying to tout the potential of blockchain technology. The digital assets market has achieved only a modest recovery from last year’s $1.5 trillion rout after high profile blowouts like FTX and a US regulatory squeeze on exchanges such as Binance.

As much as crypto’s C-suite claims to be looking to Asia for the industry’s recovery, in Hong Kong at least, there’s scant evidence so far of substantial investment plans.

Under its new digital assets regime that was introduced in June, retail investors are allowed relatively narrow trading, limiting the opportunity for exchanges. Hong Kong’s regulator has been focused on stamping out bad practices, so as to protect investors and provide clarity for businesses.

Dubai-headquartered JPEX is a comparatively small platform that has been on a heavy marketing spree over the past months, roping in local stars and social media influencers.

The Securities and Futures Commission last week warned the public of JPEX being an unregulated entity, the first to be named under the new licensing regime. In subsequent days, reports have alleged that JPEX has raised administration fees so high as to effectively bar user asset withdrawals.

More than 1,400 complaints were made to local police against JPEX involving HK$1 billion ($128 million), according to the Hong Kong police. Six people were arrested on Monday and are suspected of “conspiracy to defraud,” the police said.

JPEX has been issuing tough-worded statements since the SFC warning, claiming the actions against the platform would set back Hong Kong’s Web3 dream. On Monday, it slammed the regulator for practices that disrupt market order, expressing “extreme disappointment.”

JPEX didn’t reply to emails seeking comments.

--With assistance from Sunil Jagtiani.