In the wake of significant losses incurred by users of the collapsed FTX exchange, questions arise as to whether minimal regulation focused on preventing money laundering is still sufficient.
Taiwan’s financial services sector is known for its conservatism, and its regulators for their caution. These factors usually help reduce financial risk and protect investors.
But in the case of cryptocurrency, hesitancy to enact regulations beyond those addressing money laundering has had consequences. Taiwanese investors incurred heavy losses from the collapse of FTX, once the world’s third-largest cryptocurrency exchange by trading volume, and they have no recourse.
FTX filed for bankruptcy in November last year, and its former founder and CEO Sam Bankman-Fried now faces eight criminal charges in the U.S., including wire fraud and conspiracy to defraud investors. An estimated 500,000 to 600,000 Taiwanese investors lost a combined NT$1.5-3 billion (about US$49-98 million) from FTX’s implosion, making Taiwan the fifth or sixth most affected nation, aside from tax havens.
Following FTX’s collapse, the Financial Supervisory Commission (FSC) issued a statement warning about the high risks of investing in digital assets given the lack of transparency and high volatility of many trading platforms. The FSC said it would “continue to watch closely related developments and how other countries respond to the situation,” Taiwan’s Central News Agency reported.
“Regulators around the world, including Taiwan’s FSC, are no doubt spooked by the swift collapse of FTX,” says Sam Reynolds, a Taipei-based expert on digital assets and a senior reporter for CoinDesk, a digital currency news site. “Given the lack of yield-generating opportunities at banks in Taiwan, hundreds of thousands of Taiwanese in search of higher returns lost their capital when FTX collapsed. Right now, there’s not much the Taiwan government can do, as FTX is a foreign entity and outside the control of the FSC.”
“The government must get its act together” when it comes to crypto regulation, says Jason Hsu, a a former Chinese Nationalist Party (KMT) legislator who is now a senior research fellow at Harvard University’s Ash Center for Democratic Governance and Innovation.” But, he adds, Taiwan’s digital assets industry also has work to do.
“The crypto community has been really dysfunctional,” Hsu says. “People trying to get rich quick have lost all their money and all their friends’ money. The community has to share some of the responsibility.”
Of the government’s response to FTX’s collapse, Alex Liu, chief executive officer of Maicoin, Taiwan’s largest digital asset trading group, says: “By largely regulating crypto in a piecemeal fashion, Taiwan’s government has allowed FTX and other offshore platforms like Binance to serve Taiwanese with little or no formal consumer protection. That approach needs to change.”
Liu notes that offshore trading platforms for digital assets frequently change physical headquarters to avoid being confined to a single regulatory jurisdiction and also offer many products not permitted onshore. If these offshore platforms were all run according to financial industry standards, these offerings would be acceptable.
Taiwan has had firsthand experience with a major player in the cryptocurrency sector opportunistically operating in the country. Reynolds notes that when Tether, a stablecoin (a cryptocurrency tied to a real-world asset), was spun out of its Hong Kong parent Bitfinex in the mid-2010s, it kept US$50 million in deposits spread between several Taiwanese banks until at least early 2018. Tether withdrew its funds from Taiwan only when its U.S. partner bank Wells Fargo told the company and its Taiwanese partners it would no longer provide banking correspondent services for all Tether-related transactions at its Taiwanese partner banks.
Reynolds largely attributes Tether’s decision to use Taiwanese banks to a “culture of lackadaisical KYC /AML checks,” a reference to “know your customer” and anti-money laundering practices. Policies tightened in the wake of AML failures that caused Mega Bank’s New York branch to be fined US$180 million in 2016.
Undefined and unregulated
Unlike China and India, where regulators see cryptocurrency as a threat to be contained, or Singapore where it is treated more as an economic opportunity, the Taiwanese government has taken a relatively neutral stance toward digital assets. This agnosticism has given the domestic crypto sector room to develop but has the potential of leading to bureaucratic inertia. Even after the fallout from FTX’s collapse, the Taiwanese government has yet to show a sense of urgency about regulating digital assets.
One reason for Taiwan’s slowness in developing cryptocurrency regulations is that it has never formally defined what cryptocurrency is, says Lee Cheng-hwa, a senior industry analyst at the semi-governmental Market Research & Consulting Institute (MIC). “Is it a type of currency?” he asks. “A financial commodity? Or just a simple digital item? Who should enact and be responsible for enforcing cryptocurrency regulations will depend on the definition.”
In December 2013, the FSC and Taiwan’s Central Bank did issue a joint statement outlining the government’s position on bitcoin. Bitcoin cannot be considered “legal tender,” “currency,” or a “generally accepted medium of exchange” in Taiwan, but rather is a “highly speculative digital virtual commodity,” the statement said.
Since then, the government has used that statement as a guiding principle. It has permitted the development of onshore cryptocurrency exchanges, but has not supported integration of the digital assets ecosystem with the existing financial system. For instance, in December 2017, the FSC asked Taiwanese financial institutions to avoid trading cryptocurrencies. Then-FSC Chairman Wellington Koo said Taiwan considers crypto to be a “highly speculative virtual commodity” and inappropriate for local financial institutions.
Since FSC regulations cover all financial activities in Taiwan, “there is no reason why it cannot regulate the alternative finance of the virtual currency, whether centralized or decentralized, a security virtual currency, or a functional virtual currency,” Taiwanese law firm Hsu & Associates argued in a published report.
However, the FSC still seems to prefer to keep cryptocurrency at arm’s length. At a January press conference, FSC Chairman Thomas Huang said that the decision on whether to enact a special cryptocurrency law is still under inter-ministerial discussion. “We must determine the classification of digital assets and their legal characteristics before going forward with any regulations,” he said.
“Financial regulators normally can proactively shape the business environment for new industry segments, like digital banks, but cryptocurrency is different,” says Zennon Kapron, director of the financial technology research firm and consultancy Kapronasia. “Crypto is something that has been forced on to regulators and something they can’t control directly, so it becomes all the more important to act quickly.”
Huang suggested a few possibilities for enhanced oversight of the cryptocurrency sector, including segregating assets between clients and trading platforms, supervising fair-trading activities, and protecting data security. However, Huang noted that Taiwan has not yet legislated how these activities should be regulated, and the FSC can only follow the Money Laundering Control Act.
He also proposed that banks could play a more prominent role in overseeing cryptocurrency activities using their KYC process and recommended that the digital assets industry strengthen self-regulation.
Former legislator Hsu is not sanguine about the ability of Taiwanese banks to play a leading role in digital assets regulation. “The banks don’t want to deal with it,” he says. “Why would they take on something unfamiliar that could introduce new risk?” He notes that the local banking industry is deeply conservative, having resisted regulatory calls for consolidation for years. “They just want to keep things the way they are,” he says.
The next steps
During a December news conference at Taiwan’s Legislative Yuan, Taiwan People’s Party (TPP) lawmakers noted that many of those affected by the FTX collapse are young, in some cases students. They cited a 2022 study by the Taiwan Academy of Banking and Finance, which found that financial resilience and literacy among young Taiwanese had fallen over the previous two years. According to the study, 40% of people aged 20-29 had already started investing, with 7% investing in digital assets, but more than half said they know little or nothing about finance.
TPP legislator Cynthia Wu proposed at the press conference that the Ministry of Education and FSC cooperate to draft a compulsory financial literacy course for high school students. She noted that the current national curriculum focuses on economic theory and lacks practical content about personal finance.
Besides the rising political pressure to increase investor protection and education, there is also likely to be a push for more comprehensive regulations of digital assets. Such regulations could be built from the ground up or by augmenting existing regulations, similar to the way Taiwan developed its rules for security token offerings (STOs) in 2019, says MIC’s Lee.
He suggests Taiwan refer to the experience of Japan, which has built one of the world’s most comprehensive regulatory frameworks for digital assets. In 2017, Japan became the first major economy to recognize bitcoin as a currency and the first government to issue formal operating licenses to crypto exchanges.
Cryptocurrency in Japan is regulated by the Japanese Financial Services Agency (FSA), the country’s main financial regulator in collaboration with two self-regulation entities: the Japan Virtual Currency Exchange Association (JVCEA) and the Japan Security Token Association (JSTOA). The JVCEA creates rules and policies for crypto exchange service providers, while the JSTOA supervises token offerings and other crowdfunding events.
Japan’s parliament – the Diet – also plays an active role in shaping the regulatory environment for digital assets. In June 2022, the upper house of the Diet passed a landmark law clarifying stablecoins’ legal status. The law defined stablecoins as virtual currencies, imposed an obligatory link with the yen, and enshrined the right to redeem them at face value. The law will go into effect this year.
CoinDesk’s Reynolds agrees that Taiwan could learn from Japan when it comes to regulating virtual assets. He notes that after the 2014 collapse of the Tokyo-based Mt. Gox exchange, when hackers made off with US$460 million, Japan required crypto exchanges to use third-party custodians – a trust company or bank trust – to manage customers’ fiat money balances. This regulation reduces the risk of a crypto exchange tampering with customers’ money.
As a result, “FTX’s Japan clients did not lose out like their peers elsewhere,” Reynolds says. The Japanese unit of the bankrupt exchange began permitting withdrawals of crypto and fiat currency deposits on February 21. “Japan crypto exists in an almost parallel universe to the rest of the world,” he adds.
For his part, MaiCoin’s Liu suggests Taiwan present offshore exchanges with a simple choice: comply with Taiwan’s regulations or stop serving Taiwanese customers. Singapore took that approach in regulating Binance, the world’s largest cryptocurrency exchange. In December 2021, the Monetary Authority of Singapore ordered Binance to comply with the Payment Services Act or stop serving Singaporeans. Binance chose to withdraw from the market and no longer provides offshore services to users based in Singapore.
“The de minimis approach Taiwan has taken to crypto has run its course,” Liu says. “The time has come to view crypto as an industry worthy of cultivation.”