Legitimacy of Steaker Investment Questioned? Illegal Fundraising Court Ruling Could Have Significant Impact on Taiwan's Cryptocurrency Regulations!

The author of this article is Lawyer Mao Dong, currently a director of the Taiwan Virtual Currency Anti-Money Laundering Association and the founder of fintech.legal IG, dedicated to becoming a lawyer with in-depth knowledge of blockchain. IG: fintech.legal

Is Steaker's Investment Illegal?

Just yesterday, Steaker founder Huang Weixuan was accused of illegally raising hundreds of millions of dollars through the establishment of a diversified capital-guaranteed investment scheme on the official website, and has applied to the court for detention and isolation for violating the Banking Act and other serious crimes.

What is Illegal Fundraising under the Banking Act?

Before discussing the court's judgment, let's first talk about what illegal fundraising under the Banking Act is. In simple terms, it means that if you are not a bank, you cannot collect "funds" from the public and agree to interest that is "clearly disproportionate" to the principal. Violators may face 3 to 10 years of imprisonment and may also be fined up to NT$200 million.

The reason why the crime of illegal fundraising under the Banking Act is so severe (even heavier than the crime of fraud, which carries a sentence of up to five years) is because banking is a highly regulated privileged industry closely related to financial stability and order. Therefore, non-bank entities engaging in banking business may face significant responsibilities.

Potential Illegal Fundraising with Cryptocurrency?

In previous judgments, most fundraising schemes were conducted in physical cash. However, with the rise of blockchain and cryptocurrency, more and more business models that absorb virtual currencies and guarantee profits have emerged. Many people have begun to explore the possibility of illegal fundraising with cryptocurrency, and the most perplexing question is

"Does cryptocurrency qualify as 'funds' or 'money'?"

Cryptocurrency Does Not Violate the Banking Act

In the initial practical judgments, the courts' views were negative. From the Criminal Judgment No. 83 of the Supreme Court in 107th year of the Republic of China, it can be seen that the court, through the principle of legality of penalties, which means that to punish an act, there must be legal basis and clear legal provisions for punishment, cited the perspective of the Financial Supervisory Commission that cryptocurrency is not currency. They listed three reasons why it does not constitute illegal fundraising:

1. Cryptocurrency is not considered funds or money; the definitions of funds and money can be referred to in Articles 3(1) to 21 of the Banking Act
2. Cryptocurrency is not part of banking operations, so entities other than banks engaging in "non-banking" activities should not be subject to the regulations of the Banking Act
3. Cryptocurrency is not considered currency, and references were made to news releases issued by the Financial Supervisory Commission over the years (the Financial Supervisory Commission has always emphasized that cryptocurrency is a commodity!)

Does this mean that it is legal to attract cryptocurrency to guarantee profits? Don't celebrate too soon, because a year later, two judgments with completely opposite conclusions were made.

Cryptocurrency Constitutes Illegal Fundraising under the Banking Act

Let's first take a look at the judgment of the Taipei District Court in the 108th year of the Republic of China, Criminal Judgment No. 26 of the Financial Crimes Division. The difference between this judgment in the 108th year and Criminal Judgment No. 83 of the Supreme Court in the 107th year is that this judgment interprets cryptocurrency using virtual game tokens and cites several judgments on game token capital-guaranteed profit schemes that constitute illegal fundraising and violate the Banking Act, to explain that attracting cryptocurrency to guarantee profits is also illegal.

Why does the judgment in the 108th year draw such a conclusion? This dates back to the reasons for the amendment of Article 125 of the Banking Act. As early as the 106th year, amendments to Article 125 of the Banking Act proposed that new criminal methods of illegal fundraising were emerging, including through virtual game tokens such as "Pikcoin" and "Darkcoin."

This amendment explanation also provides the court with room to expand the definition of "funds" and "money" under the Banking Act, speculating that the legislature did not intend to exclude other fundraising methods through virtual media such as game tokens and cryptocurrency from the regulations of the Banking Act.

From the text below the judgment in the 108th year, it can be seen that the court believes that the form of funds and money is not the key; the key is whether there is interest that is "clearly disproportionate" to the principal. This direction of interpretation also appeared in the Criminal Judgment No. 3277 of the Supreme Court in the 110th year. The Supreme Court even stated "If it has economic value, then the fundraising medium should be considered a transformation of legal currency," and subject to the relevant regulations of the Banking Act.

Future of Illegal Fundraising with Cryptocurrency?

However, it is worth noting that in the criminal facts of the judgments in Criminal Judgment No. 26 of the Financial Crimes Division in the 108th year and Criminal Judgment No. 3277 of the Supreme Court in the 110th year, they mostly involve patterns similar to Ponzi schemes and multi-level marketing, which differ from Steaker's operational model. In recent illegal fundraising judgments involving cryptocurrency as a medium, the court has not emphasized defining the scope of interest within the cryptocurrency ecosystem.

Most cryptocurrency investors are aware that the interest in the cryptocurrency ecosystem is very different from interest in fiat currency deposits, and they can even be considered two completely different ecosystems. If the standard of bank deposit interest rates is the sole criterion for determining whether the interest is "clearly disproportionate," declaring all cryptocurrency financial products illegal, and even seriously ignoring the fundamental differences between cryptocurrency and fiat currency, the definition standard for interest will be a major issue of dispute between the prosecution and defense in the future.

Regarding the future development of the Steaker case, Attorney Mao reminds major cryptocurrency exchanges and investment platforms to "pay high attention" to the development of this case. Although from the integrated judgments above, it can be seen that the practical judgments of the courts regarding whether cryptocurrency constitutes illegal fundraising under the Banking Act still lack a clear and consistent attitude.

However, given the incidents involving Luna, FTX, Steaker, and others in 2022, which have severely impacted Taiwanese investors, it is necessary to continue to monitor whether the courts will develop towards considering cryptocurrency as constituting illegal fundraising under the Banking Act based on reasons such as "protecting investors" and "maintaining financial order." This is a direction that needs to be continuously monitored and cannot be taken lightly!