Crypto investor Jenny first learned about digital assets at a Hong Kong store that promoted cryptocurrency exchange JPEX in March -- but by September she was among more than 2,000 "inexperienced" victims police said the platform had defrauded.

"Many of my classmates and friends went all in with our investments," Jenny -- not her real name -- who lost "six figures" in Hong Kong dollars, told reporters.

"We never thought it would be a scam."

The scandal surrounding JPEX has so far seen 11 arrests of company staff and affiliated influencers this week for "conspiracy to defraud", with victims' losses exceeding $175 million.

JPEX's downfall is casting a shadow over Hong Kong's embrace of digital assets, with experts saying it has revealed regulatory gaps just three months after the rollout of rules requiring crypto exchanges to get licensed and meet investor protection standards.

The Securities and Futures Commission last week issued a warning against the platform, saying it falsely advertised itself as "licensed" and showed suspicious features like very high returns.

In response, JPEX halted its return-generating products and imposed sky-high fees on withdrawals.

Police on Monday conducted a high-profile raid of 20 premises -- including crypto businesses and private homes -- seizing cash, computers and luxury handbags.

Two telecommunications service providers confirmed Thursday they complied with police to block access to JPEX's website.

Investigators are probing whether JPEX conspired with influencers and shops to play up the platform's legal status and the value of JPEX-issued virtual coins.

"Victims often had a 'fear of missing out' mentality and impulsively believed in advertisements... (But) there is no such thing as a free lunch," said senior superintendent Kung Hing-fun, describing the scale of the case as "shocking".

JPEX -- headquartered in Dubai according to its website -- has blasted the regulatory action as "unfair" and "biased". 

It has not responded to multiple AFP requests for comment.

- 'Rogue players' -

Crypto trading is outlawed in China but Hong Kong, which has its own financial regulations, received Beijing's backing to pursue ambitions to become a digital asset hub.

In contrast, regulators in the United States have cracked down on the sector following the implosion of FTX last year, which lost investors billions and sparked a "crypto winter".

Kristi Swartz, a fintech lawyer at DLA Piper, said Hong Kong faced a difficult balancing act as it needed to entice crypto businesses while installing guardrails to protect retail investors.

The licensing system enacted in June targets exchanges but excludes over-the-counter (OTC) brokerages -- brick-and-mortar businesses outwardly resembling money changers -- which Swartz called a "loophole". 

As for the enforcement actions against JPEX, Swartz said regulators were "a little bit heavy-handed perhaps, but I think it's the right message to send". 

"This is an area where you've got a lot of rogue players."

Some of the OTC businesses are endorsed by popular influencers and host classes where victims like Jenny are subjected to high-pressure sales tactics.

She said the store where she first learned about blockchain felt "like a big family". 

A Hong Kong crypto business owner who requested anonymity told AFP that JPEX offered hefty incentives to partner with OTC shops, including better exchange rates and subsidies for advertisement and rent.

- 'Wake-up call' -

Regulators on Tuesday admitted they "do not have a number on how many OTC shops are actually operating in Hong Kong".

Clara Chiu, a former director of licensing at the SFC, told AFP such shops were less popular when she drafted Hong Kong's fintech rules in 2019, and so were not prioritised.

"It is time for us to consider stepping up and expanding our licensing and supervision regime to OTC crypto stores," Chiu said, citing the stores' more "aggressive" marketing lately.

Carlton Lai, head of blockchain and cryptocurrency research at Daiwa Capital Markets, said the scandal "could be a wake-up call" for authorities.

"More regulations are probably needed on OTC shops, from the standpoint of anti-money laundering and know-your-customer" -- but governing influencers will be tough, he said.

Despite the crackdown, JPEX unveiled a "stakeholders dividend plan" on its website Wednesday that let users vote -- and invest -- in the company's future.

"Even in the face of such oppression and unfair treatment, our platform will continue to operate as usual," it said. 

hol/dhc/dan