Taiwan's Financial Supervisory Commission's Draft Guiding Principles

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According to multiple sources, ABmedia has obtained the draft content of the guiding principles from Taiwan’s Financial Supervisory Commission (non-final version), which consists of thirteen principles and related appendices. The guiding principles, set to be announced in September 2023, will provide clarity for domestic operators regarding legal conduct and penalties; overseas operators not in compliance in Taiwan will be prohibited from advertising and soliciting business.

1. The Financial Supervisory Commission supervises operators from an existing anti-money laundering perspective.

Taiwan’s Financial Supervisory Commission indicated in the guiding principles that it will supervise operators from the “existing” perspective of anti-money laundering to ensure customer protection. For example: methods of asset custody, transparency of transaction information, guidance from external experts, internal control management, etc.

Although the Financial Supervisory Commission stated that it will only regulate based on existing laws, it will still refer to the regulatory trends of major countries to further strengthen management.

Guiding Principles Apply Only to Domestic Operators

The scope of the guiding principles applies to domestic virtual asset platforms and trading businesses (defined business scope), and they are required to complete anti-money laundering declarations.

Based on observations by Chain News, there are currently 25 virtual currency operators that have completed the anti-money laundering declarations through the Financial Supervisory Commission’s Securities and Futures Bureau. Aside from a few fiat exchanges (with order books)/proxy purchase platforms, most are engaged in OTC trading, and these operators fall under the category of VASP (Virtual Asset Service Providers).

However, no new anti-money laundering declarations have been approved for the past six months. The Financial Supervisory Commission has also announced that “individual coin dealers” are within the scope of supervision, and many operators are still awaiting approval.

(Recent declaration operators: Taiwan’s Financial Supervisory Commission has revealed that Binance has submitted an anti-money laundering declaration.)

2.Operators Can Issue Tokens, But Not Stablecoins

Operators under the guidance of these principles are allowed to issue virtual assets, but they must provide a white paper with comprehensive information disclosure (referring to the EU’s “Regulation on Crypto-asset Markets”), such as issuer information, issuance quantity, subscription conditions, and even the need to disclose whether the consensus mechanism adopted will have a significant impact on the climate. However, operators are not allowed to issue stablecoins.

Why is there no hope for a Taiwan Dollar Stablecoin?

The Financial Supervisory Commission believes that if stablecoins become a common payment tool, it may affect the national sovereign currency, and have implications for monetary policy and financial stability. Therefore, the Commission will continue to observe international markets and regulatory developments before considering any regulations.

Stablecoins: Neither Hong Kong nor Japan Are Particularly Lenient

Although both Hong Kong and Japan have established licensing systems for virtual currency exchanges, licensed exchanges in Hong Kong still prohibit retail investors from trading stablecoins, and regulations on stablecoins are still under consideration. Japan, although open to stablecoin issuance, still has obstacles in place for both domestic and foreign issuers (for details, see the Chain News Podcast). Licensed exchanges in Japan are also unable to trade stablecoins such as USDT and USDC.

3.Exchanges Need a Review Mechanism for Token Listing and Delisting

The Taiwan Financial Supervisory Commission, referencing the “EU Regulation on Crypto-asset Markets” and “Banking Self-regulation on Wealth Management and Financial Product Sales”, requires exchanges to set up standard procedures for the listing and delisting of tokens, as well as to record the operation process.

In the guidance, the Commission provides examples of review criteria, including the legal compliance status of issuers, liquidity and price manipulation, whether the issuer will continue to exist, and false advertising. However, explicit standards are not provided, and industry associations will likely determine them later.

(US Case: Detailed analysis of SEC’s criteria for determining securities — discussing technology, occupying token supply, and designing deflationary mechanisms are all considered violations.)

4.Regulation of Asset Segregation by Operators

The Taiwan Financial Supervisory Commission requires operators to ensure the segregation of “company assets” from “user assets”. These assets include both fiat and virtual currencies. For the fiat part, operators must obtain bank trust or performance guarantees, ensuring that they do not use customer’s fiat or virtual currencies. However, the requirements for bank trust or performance guarantees might impose higher costs on new OTC operators or emerging exchanges, and they may even face unfriendly banking environments.

How to Effectively Audit Virtual Currencies?

While the Commission requires operators to keep records of users’ virtual asset funds and to have them audited annually by accountants, the rapid changes in virtual assets used for transactions pose challenges. What recording standards can protect users’ rights and be consistent with operators’ actual operations? Currently, there are no international accounting standards for virtual asset auditing. How should Taiwanese operators best implement this?

The US SEC has even warned accounting firms that the degree of protection in audit reports depends on the firm’s auditing method. Failing to disclose this to investors will violate anti-fraud regulations and involve securities laws. Moreover, while many international exchanges often publish reserve proofs to gain users’ trust, there are still many imperfections.

(Extended report: Tether’s profits decline, using different indicators to mislead the audience. Is stablecoin a good business? Insights from Circle’s financial report.)

5.Trade Fairness and Transparency

The Taiwan Financial Supervisory Commission mandates the implementation of robust internal controls and the clear establishment of trading rules to ensure market fairness and to prevent manipulation and conflicts of interest. Although the guidelines do not go into extensive detail, the Commission has referenced regulatory standards from the EU, Japan, South Korea, and Hong Kong, stating that measures like abnormal price alerts should be set up. This indicates that the Commission has thoroughly researched and understands multi-national standards.

A Look at Hong Kong’s Fair Trading Mechanism: Prohibition on Exchanges’ Proprietary Trading

The Hong Kong Securities and Futures Commission prohibits exchanges from acting as market makers for liquidity and from holding virtual asset positions. However, it allows third-party market makers to provide liquidity.

(Wall Street Case: Understanding the difference between EDX Markets and crypto exchanges: non-custodial, pure trading.)

6.Collaboration with Banks Requires Monitoring Client Transactions

Anti-money laundering (AML) is the top priority for the Financial Supervisory Commission. Hence, activities between VASP users, operators, and banks are undoubtedly within the regulatory scope. The guidelines state that when operators deal with banks, they should cooperate with the banks in verifying client identities and monitoring transactions for AML compliance.

7.Eliminate False Advertising Content; Products Must Be Fully Disclosed

Promotional methods such as “To The Moon”, “High Profits”, and “Inflation-Proof” may need extra caution.

The Commission’s guidelines state that operators are obligated to fairly define contracts for goods or services. Advertisements and promotions should not be misleading or fraudulent. Operators must also establish a complaint process and fairly address consumer disputes.

8.Exchanges Should Define Cold and Hot Wallet Proportions and Liability Insurance

The Financial Supervisory Commission’s guidelines stipulate that exchange operators should clearly define the proportion of assets in cold and hot wallets, as well as related policies and procedures, to protect user assets. In addition, the Commission believes that operators should insure against losses incurred by users for events within their responsibility.

Hong Kong and Japan Case Studies

The Financial Supervisory Commission referenced the standards set by Japan’s Financial Services Agency. According to Chain News, many Japanese exchanges use 100% cold storage for their digital assets. The Hong Kong Securities and Futures Commission believes that cold storage (offline storage disconnected from the internet) provides a higher level of security. Exchanges should base 98% of customer virtual assets in offline storage. The Hong Kong Securities and Futures Commission plans to reduce the protection threshold for customer virtual assets held in offline storage to 50%, as even traditional financial institutions don’t have full compensation provisions.

9.Operating Derivative Transactions in Taiwan is Illegal and Punishable by up to Seven Years in Prison

The Financial Supervisory Commission clearly states that it is illegal to operate derivative financial product trading based on virtual assets or virtual asset businesses with securities characteristics.

The Commission believes that the prices of virtual asset derivatives fluctuate dramatically and are complex, difficult for the average person to understand. Without mature international regulations, violators will be regulated under the Futures Trading Act, punishable by imprisonment for up to 7 years and a fine of up to 3 million New Taiwan Dollars.

However, this does not mean that securities-type tokens cannot be traded in Taiwan. Although Taiwan’s regulations allow for the issuance (STO — Securities Token Offering) and trading of securities-type tokens, the conditions are quite restrictive, reducing the motivation for businesses to operate.

10.A “Virtual Assets” Industry Association Will Emerge! Detailed Rules Handed Over to Self-Regulatory Organizations

The Financial Supervisory Commission encourages industry players to add a “virtual asset” category with the Ministry of Economic Affairs and the Ministry of the Interior and form an association based on it. They hope that industry players will set up self-regulatory standards in line with the guiding principles. By having multiple industry players jointly determine self-regulatory standards, it will promote the virtual currency industry in Taiwan. According to Chain News, there is already a preliminary version of self-regulatory standards established by industry participants.

11.Can’t Sponsor Boxing Matches Anymore? Overseas Platforms Are Prohibited from Advertising in Taiwan

Almost all overseas exchanges have entered the Taiwanese market, offering services like derivative trading, financial products, trading tools, etc. These platforms are predominantly used by the Taiwanese crypto community. Local players only have an advantage in the “fiat money deposit and withdrawal” business.

However, according to the guidelines of the Financial Supervisory Commission, overseas exchanges might no longer be able to actively advertise or even sponsor public events such as boxing matches. The Commission has indicated that if foreign operators haven’t registered under anti-money laundering provisions, they cannot advertise to locals or offer New Taiwan Dollar deposit and withdrawal services. Yet, the Commission has not specified the penalties for foreign operators who violate these rules.

12.Implementation of the Travel Rule

In June 2023, Japan officially mandated VASPs to enforce the Travel Rule. When transfers exceeding a certain amount are made, financial institutions are required to record and report information related to the transfer. This includes the identity and account information of both the sender and the recipient, as well as the transferred amount.

The Financial Supervisory Commission of Taiwan will also start enforcing the Travel Rule for transfers above a certain threshold. In fact, local exchanges have already added relevant optional fields, and in the future, users might be required to fill in the necessary information under specific conditions.

Conclusion: Gradual Clarification of Regulation in Taiwan, with Greater Flexibility for Self-regulation by Industry Players

Although Taiwan’s Financial Supervisory Commission has not implemented a specialized crypto law, it is evident from the guiding principles that the government has studied regulatory frameworks from various countries and has left it to industry players to self-regulate. Chain News believes that the Taiwanese regulator, unlike Japan or Hong Kong, has not listed many stringent details. Instead, they have stipulated principles based on anti-money laundering guidelines, encouraging industry self-regulation, which is likely to be more conducive to the flexible development of the industry.

However, relatively speaking, there are no explicitly defined penalties for both foreign and local players who do not comply with these guidelines. The enforcement capability might be limited, potentially providing limited substantial protection to consumers.

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