To capture a greater share of the booming digital assets business, Taiwan needs more comprehensive regulation and proactive government support for the industry.
During his four years in office, former Chinese Nationalist Party (KMT) legislator Jason Hsu spoke of turning Taiwan into a “crypto nation.” It was always a long shot; the island’s financial services ecosystem, from firms to regulators to investors, usually errs on the side of caution, and volatile, esoteric cryptocurrencies have “high risk” written all over them.
In the past year, the performance of bitcoin, the first and most traded decentralized virtual currency, has illustrated this volatility, hitting an all-time high of US$68,990.90 while also plummeting to a low of $28,825.76.
Yet the long-term trend for bitcoin thus far points in just one direction: up. Its price has increased 3,539% over the past five years.
The overall digital assets industry has grown in tandem with bitcoin as total cryptocurrency market capitalization reached US$2 trillion in March. The market has grown to the extent that large banks like Standard Chartered, BNY Mellon, Citibank, and UBS are actively investing. To Taiwan’s cautious financial industry, this trend likely signals that crypto is here to stay.
The question is whether Taiwan can develop a niche in the burgeoning digital assets industry with its current approach, characterized by an absence of clearly articulated guidelines, which has forced industry players to self-regulate instead. The exceptions are security token offering (STO) regulations enacted in 2020 – largely considered overly restrictive – and anti-money laundering (AML) rules that came into effect in July 2021, which are generally supported by the crypto industry.
“The Taiwanese government carries out prudential supervision of anti-money laundering and pays less attention to the control of cryptocurrency transactions compared to other countries,” says Lee Cheng-hwa, a senior industry analyst at the semi-governmental Market Intelligence & Consulting Institute (MIC).
This apparent openness to decentralized virtual currencies could be an advantage for Taiwan if it sought to develop itself as a regional hub for the industry. In Asia, a crypto hub has yet to emerge. Hong Kong, the region’s largest financial center and once a likely candidate, is effectively out of the running given mainland China’s crypto ban and the former British colony’s shrinking autonomy. Singapore is a better bet and has developed some key regulations, though its government is keener on promoting institutional investing than retail crypto. For its part, Japan has a mammoth cryptocurrency trading market of US$900 billion.
Brian Lu, a partner at Infinity Ventures Crypto, which invests in Asia’s early-stage digital asset startups, is skeptical about Japan’s potential. He cites the difficulty of whitelisting a token for trade on a Japanese exchange and contrasts that with Taiwan, where there are no restrictions as tokens are not considered a security.
As for Singapore, “I feel like Taiwan and Singapore’s regulations are comparable,” Lu says. “Whatever you want to do in crypto in Singapore, you can do it in Taiwan too.”
The two countries’ regulatory approaches are different, though. The city-state’s financial regulator, the Monetary Authority of Singapore (MAS), has been more explicit than Taiwan’s Financial Supervisory Commission (FSC) about its views on decentralized digital currencies. In November 2021, MAS Managing Director Ravi Menon told Bloomberg: “We think the best approach is not to clamp down or ban these things… If and when a crypto economy takes off in a way, we want to be one of the leading players.” He added that a larger crypto market would create jobs and other positive knock-on effects that would extend beyond the financial sector.
However, Singapore has been selective about issuing licenses to provide digital token payment services under its Payment Services Act. Only four of roughly 170 applicants have received full licenses thus far. It also issued guidelines in January discouraging cryptocurrency trading by the general public.
By comparison, Taiwan is more permissive of crypto retail investment. Regulators have warned investors about the risks of investing in decentralized digital currencies but have not moved to curb trading. MaiCoin, Taiwan’s foremost cryptocurrency exchange, sees roughly US$20.4 million in daily trading volume, according to cryptocurrency data aggregator CoinGecko. MaiCoin makes about 80% of its revenue from Taiwan and expects trading revenue to rise more than 70% annually through 2025, according to a March Bloomberg report.
The same report said that MaiCoin is completing a Series C funding round that could value it at about US$400 million and will use the proceeds to finance expansion into Southeast Asia. The company reportedly may also pursue a Nasdaq listing within two years.
Crypto trading has taken place in Taiwan since at least 2013, when MaiCoin was established, but industry regulations are much more recent and are thus far a mixed bag. STO regulations, meant to control the introduction and exchange of security tokens, are largely seen as overly restrictive. A security token is a digital asset a company launches for fundraising purposes. Just about any asset traded as a security on a traditional exchange can be tokenized, including stocks, bonds, and mutual funds.
The STO regulations should have helped create a reliable new equity fundraising channel for Taiwan startups. In theory, STOs enable a wider range of parties to invest early in companies without requiring accreditation (as needed for IPOs) or taking on the high risk of participating in an initial coin offering (ICO), in which a company sells a new cryptocurrency to raise money. Since ICOs are unregulated, they are more susceptible to malfeasance than other fundraising channels.
However, the Financial Supervisory Commission (FSC) imposed prohibitively restrictive STO regulations. The rules generally permit only professional investors, defined as those with assets of NT$30 million or more and sufficient “knowledge and trading experience,” to participate in STOs and also cap the subscription amount per project at NT$300,000. Institutional investors typically do not invest such small sums.
STOs above NT$30 million must be conducted through Taiwan’s Fintech Regulatory Sandbox. But given the sandbox’s reputation for red tape, it is unlikely to be useful for STO fundraising. The sandbox is “a cumbersome tool for a startup to use,” says MaiCoin founder and CEO Alex Liu.
All firms dealing with security tokens are required to apply for a securities dealer license, which most in the industry consider to be a reasonable requirement. Yet if a company only deals with security tokens, it must have a minimum invested capital of NT$100 million and an NT$10 million operating margin. These requirements exclude many startups.
A key problem with the regulations is that they only permit investors to use New Taiwan dollars (NTD) to purchase the token. “Selling something that can be transacted globally but only allowing for its purchase using NTD – that defeats the purpose,” says Liu. To facilitate STOs in Taiwan, the regulations would need to be revised to be “less restrictive and more commercially attractive,” he adds.
Until January when the FSC revised STO regulations, foreigners could not even participate in STOs here. However, the amended rules permit “overseas Chinese” and foreigners to invest up to NT$30 million in an STO.
Additional revisions permit brokerages to accept two or more STO transactions on a single platform six months after the first one is operational. They also increase the single platform fundraising cap to NT$200 million from NT$100 million.
Taiwan’s crypto industry has generally reacted positively to AML regulations that came into effect last July. The regulations subject cryptocurrency exchanges and other platforms that operate security token offerings to the Money Laundering Control Act (MLCA). Exchanges must report transactions greater than NT$500,000 conducted in cash and complete know-your-customer (KYC) requirements to authenticate the identity of their clients.
The AML rules are “very helpful,” says Wayne Huang, CEO and co-founder of Taipei-based blockchain firm XREX, which focuses on providing dollar liquidity in emerging markets. “We absolutely need to operate in jurisdictions with regulatory clarity. High-quality institutional investors expect it, and it makes a difference when applying for global licenses.”
When it comes to the future of digital assets in Taiwan, MaiCoin is betting big on a stablecoin – a cryptocurrency pegged to a reserve asset. Examples include USD-backed Tether, Dai, and crypto exchange Binance’s BUSD. The stablecoin MaiCoin plans to launch later this year will be pegged at a 1:1 ratio with the New Taiwan dollar. The current market capitalization of stablecoins is US$185.23 billion, accounting for 9.38% of the digital asset total, according to cryptocurrency data tracker CoinCodex.
The NTD stablecoin “is an ideal way for Taiwan to leapfrog ahead,” says Leo Seewald, a director at MaiCoin and former Taiwan country manager of BlackRock. “It’s a way to open Taiwan up to an entirely new ecosystem for supply chain settlement and transacting business.”
He emphasizes that with the one-to-one NTD backing, the stablecoin “is not a money-making tool for us.” Rather, MaiCoin hopes that the NTD stablecoin will facilitate the development of a secure and regulated crypto ecosystem that improves the investment climate and trading environment for digital assets in the country. “We are running it [the stablecoin project] in the most conservative way possible, showing that consumers will be protected and that it won’t destabilize the financial system,” Seewald says.
Infinity Ventures’ Lu expects that the NTD stablecoin will boost the digital assets trading market in Taiwan. “It will make it much easier for people to trade and in bigger amounts,” he says.
Some observers are less sanguine about the NTD stablecoin. “An NTD stablecoin probably isn’t going to work, as it flies in the face of one of the major pillars of the ROC Central Bank’s fiscal policy, which is preventing the internationalization of the NTD,” says Sam Reynolds, a Taipei-based reporter with CoinDesk’s Asia markets team and an expert on cryptocurrency. While Taiwan’s monetary authorities might take a permissive stance toward crypto or non-NTD liquidity, “controlling the NTD is something they take very seriously.”
“The only way they could pull this off is to only allow it to be traded among whitelisted addresses that they can confirm are in Taiwan, so likely on the MaiCoin platform or other exchanges domiciled in Taiwan with confirmed KYC that the user is an ROC resident,” he says.
Reynolds adds that “MaiCoin already has excellent liquidity on their fiat NTD-USD denominated stablecoin pairs” and asks, “is there really a need for an NTD stablecoin?”
There have been many attempts to create a non-USD denominated stablecoin in the past, but market data suggests that demand is limited for such a product. For instance, issuance of Euro-backed stablecoins is about 1/1000th that of their USD counterparts, according to the Switzerland-based fintech firm Numbrs. There has not been a yen-backed stablecoin to date, though Japan does plan to issue one in 2023 called Progmacoin, backed by Mitsubishi Bank, the largest Japanese lender. Dozens of gold-backed stablecoins have failed.
Even if MaiCoin’s NTD stablecoin comes to fruition, Taiwan will still need to make more adjustments to its financial business environment for the fast-moving cryptocurrency industry to thrive here. Case in point: MIC’s Lee notes that in recent years some DeFi firms have set up shop in Taiwan, “but their international visibility is still quite limited.” DeFi (short for “decentralized finance”) is an umbrella term for peer-to-peer financial services on public blockchains, usually Ethereum. It is a fast-growing industry, having expanded 47% over the past year to reach a market size of US$106 billion.
Though Taiwan has plenty of blockchain startups, Lee says that “DeFi concentrates more on innovations in new financial models and financial engineering where Taiwan does not have the upper hand. If Taiwan wants to gain a strong foothold in the DeFi field, it should concentrate more on financial innovation.”
Taiwan’s risk-averse financial services sector could also pose an obstacle to the growth of the cryptocurrency industry, Lee observes. Though the Taiwanese government’s approach to crypto transactions “is not strict at all” compared to the U.S. and other advanced economies, it is much more cautious about integrating digital assets with the existing financial system. “The real problem is that when cryptocurrencies try to link up with traditional finance institutions like banks, regulators’ attitude to crypto in Taiwan is quite conservative,” Lee says. “This has affected traditional financial institutions’ attitude toward crypto, which is impeding the industry’s development in Taiwan.”