Exclusive | Interpreting the Taiwan FSC's draft guidelines: Overseas operators can no longer place advertisements?

According to multiple sources, the draft guidelines for regulating virtual asset platforms by Taiwan's Financial Supervisory Commission have thirteen principles and related provisions. The guidelines, set to be announced in September 2023, will provide local operators with a clearer understanding of legal requirements and penalties. Overseas operators must comply with regulations in Taiwan to advertise and solicit business.

1. FSC to Regulate Industry Players from Existing AML Perspectives

The Financial Supervisory Commission (FSC) in Taiwan has stated that it will supervise industry players to ensure customer protection from existing anti-money laundering (AML) perspectives. This includes aspects such as asset custody methods, transparent transaction information, external expert guidance, internal control management, among others.

Although the FSC has mentioned that it will only regulate based on existing laws and regulations, it will also consider regulatory trends from major countries to further strengthen governance.

Guidelines Applicable Only to Domestic Industry Players

The guidelines apply to domestic virtual asset platforms and trading businesses, as defined within the scope of operations, and require the completion of AML declarations.

Currently, there are 25 virtual currency businesses that have passed the FSC's declaration requirements, with most of them engaged in over-the-counter (OTC) trading. These businesses fall under the category of Virtual Asset Service Providers (VASPs).

However, some businesses have not renewed their declarations in the past six months, and the FSC has announced that "Personal Currency Businesses" will now fall under its regulatory scope, with more businesses awaiting declaration approval.

Recent declarants: FSC reveals Binance has submitted an AML declaration.

2. Operators Allowed to Issue Tokens, But Not Stablecoins

Regulated operators are permitted to issue virtual assets but must provide a comprehensive whitepaper with full disclosure of information, as per the EU's "Regulation of Cryptocurrency Markets" standards. This includes issuer information, issuance quantity, subscription conditions, and the need to disclose if the consensus mechanism adopted will have significant climate impacts. However, operators are not allowed to issue stablecoins.

No Hope for TWD Stablecoins, Why?

The FSC believes that if stablecoins become a common payment tool, it may affect the national sovereign currency, leading to impacts on monetary policy and financial stability. Hence, after observing international market and regulatory developments, the FSC will consider regulations.

Stablecoins: Hong Kong, Japan's Regulations Not More Lenient

While Hong Kong and Japan have cryptocurrency exchange licensing systems, licensed exchanges in Hong Kong still prohibit retail trading of stablecoins and their regulation is still under discussion. Japan allows the issuance of stablecoins but imposes restrictions on the issuance by domestic and foreign operators. For more details, see the Podcast; licensed exchanges in Japan still cannot trade stablecoins like USDT and USDC.

3. Review Mechanism Required for Coin Listings

The FSC in Taiwan requires exchanges to establish review standards and procedures for coin listings based on the "EU Regulation of Cryptocurrency Markets" and the "Self-Regulation Standards for Banks in Wealth Management and Financial Product Sales" guidelines. The FSC provides examples of review items such as issuer's compliance status, liquidity and price manipulation, issuer's survival, false advertising, among others. However, clear standards are not specified, and they are expected to be developed by industry associations later on.

US Case: Explaining SEC's determination of securities standards, issuers discussing technology, token supply ownership, designing deflation mechanisms are all crucial.

4. Regulating Asset Segregation for Operators

The FSC in Taiwan requires operators to ensure the separation and custody of "company assets" and "user assets," including fiat and virtual currencies. The fiat portion must be held in bank trusts or performance guarantees, and operators are prohibited from using customer fiat and virtual currencies. However, the requirements for bank trust or performance guarantees may pose higher costs for OTC declarants or emerging exchanges, potentially facing unfriendly banking situations.

How to Effectively Audit Virtual Currencies?

Although the FSC requires operators to retain records of user virtual asset funds and undergo annual audits by accountants, the rapid fluctuations in transactional virtual asset funds raise questions about the appropriate record standards to protect user rights while aligning with practical operational needs. There are currently no international accounting standards for virtual asset audits, leaving Taiwanese operators to determine the most suitable approach.

The SEC has even warned accounting firms that the level of assurance in audit reports depends on the audit company's methodology. Failure to disclose violations of securities laws could lead to fraud allegations and securities laws violations. Additionally, despite many international exchanges publicizing reserve proofs to gain customer trust, there are still many imperfections.

Extended Coverage: Tether's declining profits, confusing audiences with different indicators, and the viability of stablecoins. Insights into Circle's financial reports reveal its business model.

5. Ensuring Fairness and Transparency in Trading

The FSC in Taiwan requires the establishment of internal controls and clear trading rules to ensure market fairness, prevent manipulation, and conflicts of interest. Although the regulations lack detailed specifics, the FSC has referenced regulatory standards from the EU, Japan, South Korea, and Hong Kong, indicating the need for measures such as price anomaly alerts. The FSC states that it has researched and understands multinational regulations thoroughly.

Reviewing Hong Kong's Trading Fairness Mechanism: Prohibition of Exchange Proprietary Trading

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

Wall Street Case: Understanding the differences between EDX Markets and cryptocurrency exchanges: non-custodial vs. pure trading.

6. Interactions with Banks Require Monitoring of Customer Transactions

Anti-money laundering (AML) is the primary focus of the FSC's supervision; hence, activities between VASPs, operators, and banks fall within the regulatory scope. The guidelines state that when operators interact with banks, they must comply with the bank's requirements for confirming customer identities and transaction monitoring for AML purposes.

7. Prohibiting Misleading Advertisements, Requiring Full Disclosure of Products

Phrases like "To The Moon," "High Profits," "Anti-inflation," and similar promotional methods need to be handled with caution.

The FSC's guidelines require operators to fairly and clearly define product or service contracts, prohibit deceptive or fraudulent advertising, establish complaint procedures, and fairly address consumer disputes.

8. Establishing Cold and Hot Wallet Ratios, Liability Insurance

The FSC's guidelines require exchange operators to clearly define the ratios of cold and hot wallets and related policies and procedures to protect user assets. Additionally, the FSC believes that operators should provide insurance for user losses within their responsibility scope.

Cases in Hong Kong and Japan

The FSC referenced the regulatory requirements of the Japanese Financial Services Agency. Many Japanese exchanges reportedly use 100% cold storage for digital assets. The Securities and Futures Commission in Hong Kong considers offline cold storage to offer better protection. The commission plans to lower the threshold for safeguarding customer virtual assets held in offline storage from 98% to 50%, as even traditional financial institutions do not have full compensation regulations.

9. Operating Illegal Contract Trading Can Lead to Imprisonment

The FSC explicitly states that illegal operation of derivative financial product trading with virtual assets or virtual asset businesses with securities characteristics is prohibited. The FSC considers the price volatility and complexity of virtual asset derivatives challenging for the general public to understand. Until international regulations mature, operators engaging in illegal activities under the Futures Trading Act may face up to seven years in prison and fines of up to three million New Taiwan Dollars.

However, this does not mean that Taiwan cannot trade security-type tokens. Although Taiwan's regulations allow Security Token Offerings (STOs) for issuing and trading security-type tokens, due to restrictive conditions, operators may have lower motivation to operate.

10. "Virtual Asset" Industry Association to Emerge! Detailed Rules to be Left to Self-Regulatory Organizations

The FSC encourages operators to establish the "virtual asset" industry category with the Ministry of Economic Affairs and the Ministry of the Interior and organize an association based on this. Operators are expected to establish self-regulatory standards according to the guidelines. It is understood that several operators have already developed preliminary self-regulatory versions.

11. No More Sponsorship for Boxing Matches? Overseas Platforms Cannot Advertise in Taiwan

Almost all overseas exchanges have entered the Taiwanese market, offering derivative trading, financial products, trading tools, among other services, being the main platforms used by the Taiwanese crypto community. Local operators have advantages only in "fiat currency deposits and withdrawals" services.

However, according to the FSC's guidelines, overseas exchanges may no longer engage in extensive advertising or even sponsor public events like boxing matches. The FSC states that if foreign operators have not completed AML declarations, they are not allowed to conduct advertising to locals or nationals or engage in solicitation activities such as new Taiwan Dollar deposits and withdrawals. However, the FSC did not specify the penalties for violations by foreign operators.

12. Travel Rules Likely to be Implemented

Japan officially requires the implementation of Travel Rules for VASPs starting June 2023. When conducting transfers above a certain amount, financial institutions need to record and report information related to the transfer, including sender and receiver identity information, account details, transfer amounts, etc.

The FSC in Taiwan is considering starting to require compliance with Travel Rules for transfers above a certain amount. In fact, local exchanges have already introduced related fields, and in the future, mandatory requirements for users to provide necessary information may be enforced under specific conditions.

Conclusion: Taiwan's Regulations Gradually Clarifying, Operators Enjoy More Flexibility in Self-Regulation

Although Taiwan has not implemented specific cryptocurrency laws, the government's guidelines suggest that it has studied various international regulatory standards and delegated self-regulation to operators. Taiwan's FSC appears to be more focused on requiring operators to self-regulate based on AML principles rather than imposing strict detailed rules as seen in Japan or Hong Kong, which could potentially foster more flexible industry development.

However, compared to domestic operators, the lack of specified penalties for non-compliance and limited enforcement capabilities may restrict substantial consumer protection.