Taiwan Keeps Cryptocurrency at Arm’s Length

Ever-cautious regulators aim to minimize risk, even if it comes at the expense of certain market opportunities.

Taiwan has maintained an agnostic stance on cryptocurrency, with cautious financial regulators focusing on minimizing the associated risks. An unspoken rule still holds: As long as onshore digital asset providers hold themselves to high standards and avoid becoming too intertwined with the domestic banking system, they have relative freedom to operate in Taiwan – with a few caveats.

Taiwan’s financial authorities were early to draw some lines in the sand regarding digital assets. In December 2013 a joint press release by the Central Bank and the Financial Supervisory Commission (FSC) stated that virtual currencies like Bitcoin are not “legal tender,” “currency,” or a “transaction medium generally accepted by the public.”

Instead, the FSC defined a virtual currency as a “highly speculative digital ‘virtual asset’” that “lacks transaction protection mechanisms provided by dedicated legislation” in Taiwan. In December 2017, the FSC prohibited Taiwanese financial institutions from participating in or providing related services or transactions linked to cryptocurrencies, signaling its intention to keep digital assets segregated from the broader banking system.

This approach has worked for Taiwan in certain respects, allowing a small onshore crypto market to thrive while insulating the banking system from the volatility and malfeasance that remain all too common in the digital assets world. However, rising investor interest in digital assets, offshore exchanges’ determination to serve Taiwanese customers (sometimes without ensuring compliance with local regulations), and the possible return of a crypto bull market point to the need for a more proactive approach.

“Taiwan is behind on regulating crypto,” says Sam Reynolds, a Taipei-based senior reporter for crypto news site CoinDesk and an expert on digital assets. “This isn’t a bad thing per se, as it can look to the success and failures of other nations to see what works and what doesn’t.”

Combating fraud

Highlighting the need for Taiwan’s regulators to take a more hands-on approach to digital assets is the rising number of homegrown cryptocurrency scams. In December, the Criminal Investigation Bureau (CIB) said it had arrested 10 suspects alleged to have defrauded more than NT$200 million out of local investors.

The suspects set up physical shops in Taipei City and New Taipei City – giving the operation an air of credibility to its victims – where they purported to be acting as stock market “tutors” for the cryptocurrency stablecoin Tether, whose value is pegged to that of the U.S. dollar. Then in January, police arrested 14 people in what to date is one of Taiwan’s most notable cryptocurrency criminal investigations. According to authorities, the suspects lured investors into purchasing “shady” crypto tokens like MOCT through manipulative social media advertisements. This case is especially problematic for the island’s crypto community since it implicates David Pan, founder of ACE Exchange, one of Taiwan’s largest crypto exchanges.

Despite ACE’s assertion that Pan no longer holds a position within the company, his name remains closely associated with the crypto exchange, and his arrest has cast a negative light on the company in the media. The Taipei District Prosecutors’ Office estimated in late January that Pan, together with his business partner and alleged accomplice Lin Keng-hong, had recorded illegal revenue of more than NT$1 billion over the past three years.

ACE moved quickly to contain any fallout, releasing a statement on X that any alleged illegal actions stemmed from “individual token listings” in 2019 and that media reports inaccurately stated that its employees were implicated in the case. The announcement continued that “specific currency disputes or violations” would not affect the exchange’s operations. ACE announced its intention to cooperate with any investigations by removing the MOCT/TWD trading pair from its platform on January 8. ACE had first listed MOCT in 2019.

Alex Liu, CEO of Taiwanese crypto exchange Maicoin, expects there to be pushes to amend Taiwan’s crypto laws this year due to scams like these. “Just as concerning is the behavior of offshore platforms such as Binance in abetting illegal activity.”

While Binance is reportedly applying to be registered under Taiwan’s Money Laundering Control Act – the island’s only digital assets regulation – it is unclear how far that effort has progressed. In a June 2023 blog post on its official website, the massive crypto exchange said it conducted a one-day training program together with the CIB in Taipei.

“This collaboration is part of our broader commitment to contribute to combating cybercrime in alliance with law enforcement agencies around the globe,” Binance said in the post.

Money laundering risk

In addition to increasing instances of fraud, Taiwan is facing mounting money laundering risks tied to digital assets. In October 2023 Taiwanese law enforcement authorities arrested an individual identified only by the surname Qiu. He was believed to have laundered a whopping NT$10.4 billion for criminal use of digital assets, charging his “customers” a 1% fee per transaction.

It is the largest such case in Taiwan’s history. Qiu allegedly funneled money through multiple accounts, exchanging the funds for Tether and then selling the stablecoin to convert it back into cash to cover up the origins of the money. The case originated in 2022 when Taiwanese law enforcement began investigating a fake securities app. As they looked into financial transactions with the app, the trail led them to Qiu.

“Unfortunately, pseudonymity and global reach make cryptocurrency payments attractive for illegal activities like money laundering,” says Zennon Kapron, founder and director of Singapore-based financial services consultancy Kapronasia. However, the transparency of blockchains also enables the tracking of illicit funds, he notes.

To reduce money laundering risks, crypto companies can conduct mandatory know-your-customer (KYC) checks, monitor transactions, report suspicious activity, limit anonymity features, and comply with travel rules for transferring funds between firms, Kapron says.

“With thoughtful regulation and responsible practices from industry players, crypto’s compliance with anti-money laundering rules will improve over time,” he adds.

As of the publishing of this article, the price of Bitcoin has surpassed US$50,000 for the first time since December 2021. Investors seem confident that the United States will make it easier to invest in the mercurial digital asset. Some investors also expect U.S. lawmakers to permit the creation of exchange-traded funds (ETFs) that track the price of Bitcoin and permit investment in the digital asset without the need to purchase it directly.

In January, the U.S. Securities and Exchange Commission (SEC) said that it had approved the first U.S.-listed ETFs to track Bitcoin in a move Reuters described as “a watershed.” The SEC approved 11 applications, including those of BlackRock, Fidelity, and Invesco.

“With the passage of the Bitcoin ETFs [in January], we have already begun seeing billions of retail funds entering the market,” says Maicoin’s Liu. “This is a long-term positive development. We expect Taiwanese retail investors to follow suit, and suspect institutions will not be far behind.”

In December, the FSC said Taiwan is considering permitting the inauguration of crypto ETFs, although it would first assess product development elsewhere in the world. For now, the FSC says that the idea is “in the exploratory phase.”

Kapronasia’s Kapron considers Taiwan’s cautious approach to be warranted. “Taiwan taking a wait-and-see approach on crypto ETFs is prudent,” he says, “Just because the U.S. has approved ETFs, it doesn’t mean it is the right solution for all markets.”

Regarding Taiwan’s evolving regulatory framework for digital assets, Kapron notes that regulating crypto helps provide clarity and oversight while still allowing innovation. However, regulations must strike the right balance between protecting consumers and enabling the growth of this new sector. “As they draft final rules, Taiwanese regulators should think about what they want Taiwan’s role to be in the future development of crypto to be able to find that sweet spot,” he says.