Exclusive｜Interpreting the draft guidance principles of Taiwan’s Financial Supervisory Commission Can’t use the slogan To The Moon anymore?

Exclusive｜Interpreting Taiwan's Financial Supervisory Commission's draft guidance principles Can't use 'To The Moon' slogan?

According to multiple sources, Chain News has obtained the draft of the Taiwan Financial Supervisory Commission’s guidance principles for managing virtual asset platforms (non-final version), which consists of thirteen principles and related provisions. The guidance principles, which will be announced in September of this year (2023), will provide local operators with a clearer understanding of legal behavior and penalties. If overseas operators are not compliant in Taiwan, they will not be allowed to advertise or solicit business.

Table of Contents

(1) The Financial Supervisory Commission regulates operators from an existing anti-money laundering perspective

Guidance principles only apply to Taiwanese operators

(2) Operators can issue tokens, but not stablecoins

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Why is there no hope for stablecoins in Taiwan?

Stablecoins: Hong Kong and Japan have stricter regulations

(3) Exchanges must have a review mechanism for listing and delisting tokens

(4) Regulating the segregation of assets by operators

How can virtual currencies be effectively audited?

(5) Fairness and transparency in trading

Review of Hong Kong’s fair trading mechanism: prohibiting exchanges from engaging in proprietary trading

(6) Cooperation with banks, monitoring customer transactions

(7) Eliminating misleading advertisements and ensuring full disclosure of products

(8) Exchanges should establish the proportion of hot and cold wallets and have liability insurance

Examples from Hong Kong and Japan

(9) Operating illegal contract trading in Taiwan may result in imprisonment of up to seven years

(10) A “Virtual Asset” industry association will be established! Detailed rules will be delegated to self-regulatory organizations

(11) Can no longer sponsor boxing matches? Overseas platforms are not allowed to advertise in Taiwan

(12) Travel rules may be implemented

Conclusion: Taiwan’s regulations are gradually becoming clearer, allowing operators more flexibility in self-regulation

(1) The Financial Supervisory Commission regulates operators from an existing anti-money laundering perspective

The Taiwan Financial Supervisory Commission stated in the guidance principles that it will supervise operators from the perspective of existing anti-money laundering regulations to ensure customer protection. For example, asset custody methods, transparent transaction information, external expert guidance, internal control management, etc.

Although the Taiwan Financial Supervisory Commission stated that it will only regulate based on existing laws and regulations, it will still refer to the supervision trends of various major agencies to further strengthen management.

Guidance principles only apply to Taiwanese operators

The guidance principles apply to local virtual asset platforms and trading businesses in Taiwan (as defined by the scope of business), and they are required to complete anti-money laundering declarations.

According to Chain News observations, there are currently 25 virtual currency businesses that have obtained anti-money laundering declarations from the Taiwan Financial Supervisory Commission’s Banking Bureau, with the majority being cryptocurrency dealers engaged in OTC trading. These operators fall under the category of VASP (Virtual Asset Service Providers), with only a few being fiat currency exchanges (with order books)/brokerages.

However, there have been no new anti-money laundering declarations approved for the past six months, and the Financial Supervisory Commission has also announced that “individual cryptocurrency dealers” fall within the scope of regulation. There are more operators still awaiting approval of their declarations.

(2) Issuers can issue tokens, but not stablecoins

Regulated entities under guidance principles can issue virtual assets, but they must have a white paper with sufficient information disclosure (as specified in the EU “Regulation on Markets in Crypto-assets”), such as issuer information, issuance quantity, subscription conditions, etc. It may even be necessary to disclose whether the consensus mechanism used will have a significant impact on the climate. However, issuers are not allowed to issue stablecoins.

Why is there no hope for Tether in Taiwan?

The Financial Supervisory Commission believes that if stablecoins become widely used payment tools, they may affect major currencies and have an impact on monetary policy and financial stability. Therefore, they will observe the development of the international market and supervision before considering regulation.

Stablecoins: Hong Kong and Japan are not more lenient

Although Hong Kong and Japan have both established a licensing system for virtual currency exchanges, licensed exchanges in Hong Kong still prohibit retail investors from trading stablecoins, and the regulation of stablecoins is still under discussion. In Japan, although the regulation allows the issuance of stablecoins, there are still restrictions on the issuance by domestic and foreign entities, and licensed exchanges in Japan still cannot trade stablecoins such as USDT and USDC.

(3) Review mechanism required for listing and delisting of tokens

The Financial Supervisory Commission of Taiwan refers to the “Regulation on Markets in Crypto-assets” of the EU and the “Self-regulatory Rules for Wealth Management and Financial Product Sales Business Conducted by Banks” to require exchanges to establish review standards and record operational processes for listing and delisting tokens.

The Financial Supervisory Commission provides examples of review items in the guidance principles, including issuer’s compliance status, liquidity and price manipulation, whether the issuer will continue to exist, false advertisements, etc. However, specific standards are not specified, and they are expected to be formulated by industry associations later.

(4) Regulation of segregation of assets by issuers

The Financial Supervisory Commission of Taiwan requires issuers to properly separate and safeguard “company assets” and “user assets”. These assets include fiat currency and virtual currency, and the fiat currency portion must be held in a bank trust or performance guarantee. Issuers are not allowed to use customer fiat currency and virtual currency. However, the requirement for bank trust or performance guarantee may impose higher costs on OTC traders and emerging exchanges, and they may even face unfriendly situations with banks.

How to effectively audit virtual currency?

Although the Financial Supervisory Commission requires issuers to keep records of user virtual asset funds and have them audited by accountants annually, the funds of virtual assets used for transactions change rapidly. What kind of record standard can protect user rights and meet the operational practices of issuers? There is currently no international accounting standard for auditing virtual assets. How should practitioners in Taiwan implement the most appropriate approach?

The US SEC has even warned accounting firms that the level of assurance provided in audit reports depends on the audit approach of the accounting firm, and that failure to disclose violations of fraud and securities laws could be involved. In addition, although international exchanges often disclose proof of reserves to gain user trust, there are still many imperfections.

(V) Fairness and Transparency of Transactions

The Taiwan Financial Supervisory Commission requires the establishment of internal controls, the clear formulation of trading rules, to ensure market fairness, and to avoid manipulation and conflicts of interest. Although this regulation does not provide detailed guidelines, the Commission has referred to regulatory standards in the European Union, Japan, South Korea, and Hong Kong, indicating that at least measures such as price anomaly alerts should be established. The Commission also states that it has conducted research and fully understands the regulations of multiple countries.

Review of Hong Kong’s Fair Trading Mechanism: Prohibition of Exchange Proprietary Trading

The Hong Kong Securities and Futures Commission prohibits exchanges from conducting proprietary market-making activities and from holding virtual asset positions, but allows third-party market makers to provide liquidity.

(VI) Interaction with Banks, Compliance with Monitoring of Customer Transactions

Anti-money laundering is the top priority of the Financial Supervisory Commission, so the activities between VASP users, operators, and banks are bound by regulation. The guiding principles state that when interacting with banks, operators should cooperate with banks in carrying out customer identity verification and transaction monitoring for anti-money laundering purposes.

(VII) Elimination of False Advertising, Full Disclosure of Products

Advertising methods such as “To The Moon,” “High Profits,” and “Anti-Inflation” may need to be more cautious.

The guiding principles of the Commission state that operators have an obligation to clearly define the terms of the product or service contract, and that advertising solicitation should not be deceptive or fraudulent. Operators must also establish complaint procedures and fairly handle consumer disputes.

(VIII) Exchange Position Ratio for Cold and Hot Wallets, Liability Insurance

The guiding principles of the Commission require exchange operators to clearly define the ratio of cold and hot wallet positions, as well as the related policies and procedures, to protect user assets. In addition, the Commission believes that operators should provide insurance for user losses in events within their own scope of responsibility.

Examples from Hong Kong and Japan

The Commission refers to the requirements of the Financial Services Agency of Japan as a reference. According to Chain News, many Japanese exchanges adopt 100% cold storage for user digital assets. The Hong Kong Securities and Futures Commission believes that cold storage (offline storage) provides a higher level of security. Exchanges should have 98% of customer virtual assets stored offline as the basis. The Commission is preparing to lower the threshold for holding customer virtual assets offline to 50%, because even traditional financial institutions do not have a requirement for full compensation.

(IX) Operating Illegal Contract Trading in Taiwan is Subject to Imprisonment for up to Seven Years

The Financial Supervisory Commission (FSC) explicitly stated that it is illegal to engage in the trading of derivative financial products based on virtual assets or virtual asset transactions with securities-like characteristics.

The FSC believes that the prices of virtual asset derivatives fluctuate dramatically and the products are complex, making it difficult for the general public to understand. Until international regulations are mature, the FSC will regulate illegal operators through futures trading laws, with penalties including imprisonment for up to 7 years and fines of up to NT$3 million.

However, this does not mean that Taiwan cannot trade security tokens. Although Taiwan’s regulations are open to Security Token Offerings (STOs) and trading platforms, the limited conditions make it less attractive for operators.

(10) Association for “Virtual Assets” Industry to be Established! Detailed Rules to Be Handed Over to Self-Regulatory Organizations

The FSC encourages operators to add “virtual assets” as a new industry category to the Ministry of Economic Affairs and the Ministry of the Interior, and organize an association accordingly. It hopes that operators will establish self-regulatory norms based on the guiding principles. Multiple operators are expected to jointly develop self-regulatory norms to promote Taiwan’s virtual currency industry. According to Chain News, there is already a preliminary version of self-regulatory norms among operators.

(11) No More Sponsorships? Overseas Platforms Cannot Advertise in Taiwan

Almost all overseas exchanges have entered the Taiwan market, providing services such as derivative trading, financial products, and trading tools, and are the main platforms used by Taiwan’s crypto community. Local operators only have advantages in “fiat currency deposit and withdrawal” services.

However, according to the FSC’s guiding principles, overseas exchanges may no longer engage in aggressive advertising or even sponsor public events such as boxing matches. The FSC stated that if overseas operators have not made anti-money laundering declarations, they may not advertise or solicit services such as NT$ deposits and withdrawals in Taiwan. However, the FSC did not specify the penalties for violations by overseas operators.

(12) Travel Rule may be Implemented

As of June 2023, Japan officially requires Virtual Asset Service Providers (VASPs) to implement the Travel Rule. When conducting fund transfers exceeding a certain amount, financial institutions need to record and report information about the transfer, including the identities of the sender and receiver, account information, and transfer amount.

The FSC in Taiwan is also considering requiring compliance with the Travel Rule when transferring funds above a certain amount. In fact, local exchanges have already implemented relevant fields for users to fill in, and in the future, it may be mandatory for users to provide necessary information under specific conditions.

Conclusion: Taiwan’s regulations are gradually becoming clearer, with more flexibility for industry self-regulation.

Although Taiwan does not have specific legislation for cryptocurrencies, it can be seen from the guiding principles that the government has studied and referred to regulatory standards from various countries, and entrusted self-regulation to operators. Chain News believes that the FSC in Taiwan has not listed more stringent rules like Japan or Hong Kong, but instead, based on anti-money laundering principles, requires operators to self-regulate, which will be more conducive to the flexible development of the industry.

However, relatively speaking, there are no clear penalties for overseas and local businesses that fail to comply with the regulations, and the enforcement capabilities are also limited; the actual protection for consumers may be limited.

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