Taiwan's VASP custody by banks resolved? Taiwan's trial program for virtual asset custody services launched

With the gradual increase in global financial market demand for virtual assets, financial institutions are further accelerating the pace of promoting virtual asset custody services. Recently, the Financial Supervisory Commission of Taiwan announced the launch of the "Trial Operation of Theme-based Business for Virtual Asset Custody Services" to enhance financial innovation and align with the development trends of the virtual asset market.

Financial Supervisory Commission Promotes Trial Program to Seek Compliance Solutions for Custody

The Financial Supervisory Commission (FSC) stated that the trial program is in response to the establishment of the Virtual Currency Business Association and the future demand for virtual asset custody.

At the same time, international financial institutions have begun to engage in virtual asset custody services. Therefore, this trial program aims to reference the operating models of foreign financial institutions to provide development references for domestic financial institutions and further promote the implementation of virtual asset custody services.

Necessary Demands in the Taiwanese Industry

Due to the limited custody providers available to Taiwanese exchanges and reports of major local custodians exiting the market, many exchanges have started seeking custody solutions from overseas providers. The trial program not only provides an opportunity for entities interested in providing custody services to comply but also opens the door for traditional banks to enter the digital asset custody business.

Referencing International Experience, Financial Institutions Need to Clarify Business Models

According to the trial program, when planning virtual asset custody services, financial institutions should refer to the risk management and information security requirements of international financial institutions and encourage collaboration with fintech companies to jointly develop virtual asset custody services.

The FSC stated that financial institutions wishing to participate in the trial program must submit application documents according to relevant operational guidelines, including specific business models for virtual asset custody, risk management measures, information security architecture, etc. The trial program particularly emphasizes that financial institutions should provide detailed explanations of custody processes, from the types of assets under custody, service targets, to operational details such as Hardware Security Module (HSM) and Multi-Party Computation (MPC) for key sharding.

Custody Conditions for Taiwanese VASPs Are Not Simple

According to the trial program, the scope of virtual asset custody services covers a variety of management and custody services for different virtual assets. These services mainly target virtual asset platforms, VASPs, professional investors, and general investors to meet the needs of different market segments.

Technical Specifications

Financial institutions providing these services can employ hardware encryption technology, multi-signature wallets, and biometric identification technology to ensure the security of the custody process. In addition, the design of the system architecture should consider the isolation of customer assets to prevent confusion with the financial institution's own assets.

Risk Management and Security Requirements

Virtual asset custody involves high-risk and security requirements. Therefore, the trial program emphasizes risk management and information security. Financial institutions must conduct comprehensive security tests on their premises, equipment, software, and algorithms, including data encryption, DDoS protection, penetration testing, etc., and ensure the implementation of uninterrupted operation mechanisms.

In the event of damage or loss of virtual assets, financial institutions must also provide specific responsibility standards and even propose insurance plans to safeguard the security of customer assets.

Regulatory Compliance and Anti-Money Laundering Requirements

The trial program emphasizes that financial institutions participating in virtual asset custody services must comply with relevant regulations, including banking laws, and securities firm establishment standards. In addition, financial institutions must strengthen Know Your Customer (KYC) and Anti-Money Laundering/Counter Financing of Terrorism (AML/CFT) requirements to prevent the inflow of high-risk assets and promptly isolate and report illegal assets.

Organizational Management and Customer Service

During the trial period, financial institutions must clearly define internal organizational responsibilities and management systems to ensure that business decisions and risk controls are well-defined. Additionally, for customer service, financial institutions must provide transparent service processes, including deposit and withdrawal procedures and required timeframes, and establish a robust customer dispute resolution mechanism.

The "Theme-based Trial Program for Virtual Asset Custody Services" provides a significant opportunity for financial institutions to engage in virtual asset custody services. With the continuous expansion of the virtual asset market, the successful implementation of the trial program will set an example for future compliance and security in virtual asset custody, promoting innovative development in the financial market.