"Encryption Act" is for the protection of businesses or consumers? Professor Yang Yueping interprets Taiwan's regulatory path

In Taiwan, regulatory efforts are moving towards the discussion of a "special law." Legislator Jiang Yongchang held a public hearing on the "necessity of a special law for virtual assets" on October 6, seeking public opinions on the legislator's version of the special law. The hearing invited Harvard Law School Ph.D. and Associate Professor of Law at National Taiwan University, Yang Yueping, to comment on "this special law proposal" and the development of special laws in Taiwan.

Taiwan's "Crypto Law": Is it for Protecting Businesses or Consumers?

According to the records of the "Bitcoin and Virtual Currency Development Association," Professor Yang Yueping believes that the legislative proposal by Legislator Jiang Yongchang mainly relies on the guidance principles of the Financial Supervisory Commission and self-regulatory rules of associations. However, it would be a pity if the "special law" only targets businesses. There are more important issues that should be addressed through special laws:

Regulating the Market: Fraud, Manipulation, Insider Trading

Professor Yang Yueping believes that issues commonly seen in financial products like "fraud, manipulation, insider trading" are not only limited to virtual asset businesses, despite the regulatory provisions in the special law proposal.

In reality, insider trading, manipulation, and market collusion involve not only businesses but also investors, related celebrities, and others. This is the real issue that needs to be addressed.

Preventing business manipulation is already covered in the current self-regulatory provisions. Therefore, the special law should be able to do more.

Light Penalties, or No Penalties at All?

Professor Yang Yueping stated that the proposed penalties in the special law are too lenient, sometimes even based on measuring the profits and losses of businesses. "Even if many businesses are not making money, does that mean they shouldn't be fined?" Professor Yang mentioned, "This is actually a significant issue."

How to Effectively Investigate?

Professor Yang Yueping pointed out that investigating financial events through administrative penalties often encounters a problem:

The investigative authority of financial regulators is actually limited and cannot delve into such detailed illegal activities.

For instance, the financial regulations regarding "engaging in activities without permission" involve various manipulative insider trading behaviors, all of which are accompanied by criminal liability. Effective investigation often requires the resources of law enforcement agencies to be involved.

Association Self-Regulation is Like Letting Water Flow

Professor Yang Yueping pointed out that a significant issue in the legislator's version of the special law is that many rules are to be drafted by industry associations first and then issued by the regulatory authorities.

"This approach actually poses a significant problem in the constitutional system. When regulating the virtual asset industry, it is not just for businesses; we need to protect consumers, investors, current and future investors, and businesses cannot represent these individuals."

"Allowing industry associations to formulate these rules is like letting water flow."

Professor Yang Yueping believes that this is a problematic and undemocratic approach.

Association Self-Regulation Cannot Serve as the Basis for Penalties

Professor Yang Yueping stated that industry associations can establish self-regulatory norms, but these are not laws or orders and cannot be the basis for penalties.

Regulatory authorities must formulate their own rules, and the opinions of industry associations can serve as references. The practice of "industry associations drafting rules for the regulatory authorities to decide whether to issue them" is highly problematic.

Related Report: Formation of Association Preparatory Office by Nine Exchanges

Misunderstanding International Regulatory Rules May Lead to Legislative Deficiencies

When many countries are formulating digital asset regulatory frameworks, they often refer to the frameworks and guidelines of the EU and the Financial Action Task Force (FATF) for Anti-Money Laundering. Professor Yang Yueping believes that due to misunderstandings of these international norms in the legislator's version of the special law, the regulations that are formulated may result in legal loopholes. He then points them out one by one.

• Misunderstanding of Supervising "Stablecoins": The legislator's version of the special law has misconceptions about the "electronic money tokens" mentioned in the EU's MiCA proposal. It does not refer to "digital legal tender" but rather to the well-known stablecoins like USDT and USDC. Hence, it suggests that banks or electronic payment companies can issue them.

• Misunderstanding the Supervision of "NFTs": The legislator's version of the special law misinterprets the FATF standards, believing that NFTs do not need to be within the scope of special law regulation. However, FATF's approach to supervising NFTs also depends on the content and nature of the NFTs. Excluding NFTs from special laws based on misunderstandings could create significant loopholes.

Major Flaws in Taiwan's Special Law Proposal Penalties

In addition, Professor Yang Yueping also mentioned that the attempt in the legislator's version of the special law to differentiate penalties between legal entities and natural persons is entirely incorrect. The punishment for natural person operators is limited to a maximum of six months, leading businesses to opt for natural person operators as the penalties for violations are not severe. This is not how domestic laws are supposed to be handled.

The approach should be the same for all violators, whether they are natural persons or legal entities.

Good Intentions Behind the Special Law, But Lacking Registration Mechanisms

Professor Yang Yueping believes that the intentions behind the special law are good, and with the supervision of the Financial Supervisory Commission and the issuance of guiding principles, progress is being made. However, the current Anti-Money Laundering Act lacks a "registration or licensing mechanism for virtual asset operators," leaving regulatory authorities without proper legal grounds, resorting only to "Anti-Money Laundering Act compliance statements" in place of a registration system.

Issues with Anti-Money Laundering Statements: No Registration, No Penalties

Professor Yang Yueping believes that the problem with using Anti-Money Laundering statements as a substitute for a registration system is that when dealing with operators who do not submit these statements or comply with the guidelines, the basis for penalties is weak.

Special Law Needs Time, Registration and Penalty Rules Can Be Implemented First

Professor Yang Yueping suggests that while formulating the special law will take time, at the very least, amending the Anti-Money Laundering Act to establish a "registration system for virtual asset operators" and incorporating penalty provisions for non-registration and non-compliance with regulations can be done first. This way, a more comprehensive regulation of virtual asset operators can be implemented.

Related Article by Professor Yang Yueping