With the uptick in market growth, a light-touch approach to digital asset regulation is increasingly insufficient to manage risk and protect investors.

Taiwan has long taken a gradualist approach to digital asset regulation, aiming to minimize risk to its financial system while allowing onshore operators of cryptocurrency exchanges relative freedom to serve a limited market. Taiwanese regulators have chosen this hands-off approach with the characteristics of a retail investing market in mind.

“Most Taiwanese retail investors take a conservative approach to investing and have been cautious with regards to ultra-volatile digital assets,” says Joe Jelinek, research director of Singapore-based financial services consultancy Kapronasia. Regulators are even more cautious, with a focus on minimizing risk to the banking system and protecting investors. For these reasons, “crypto has yet to make deep inroads in Taiwan in the same way it has in Japan, South Korea, Hong Kong, and Singapore,” he says.

But as the digital assets market in Taiwan grows, scammers increasingly target Taiwanese crypto investors. An inflection point came in April 2024 when the Taipei District Prosecutors Office indicted 32 individuals, including a prominent lawyer, for allegedly defrauding victims of nearly NT$800 million (US$24.3 million). The defendants were accused of persuading investors to purchase large sums of worthless crypto coins such as MoChange Token, CSO, FITC, NFTC, and BNAT, promising their victims lucrative returns.

Known as the “ACE Exchange scam” – borrowed from the name of the cryptocurrency trading platform that defrauded investors – the event highlights how large-scale criminal activity involving digital assets can be homegrown in Taiwan.

“Before the indictment of the ACE Exchange scammers, there was a perception that this type of problem was more likely to occur overseas – like the collapse of FTX,” says Jelinek, referencing the now-defunct exchange led by Sam Bankman-Fried, who is currently serving a 25-year prison sentence for defrauding investors of approximately US$8 billion.

Jelinek argues that to prevent future incidents like the ACE Exchange scam, Taiwan must implement more tailored regulations for digital assets, aligning them with the comprehensive frameworks already in place for securities and banking. “A lot can go wrong when the focus is narrowly on restricting what banks can do with digital assets. The digital asset market has developed outside of the traditional banking system,” he says.

Regulatory momentum

There are signs that Taiwan’s Financial Supervisory Commission (FSC) is adjusting its approach to digital assets, a tacit recognition that change is needed. On February 2, Taiwanese media reported that the FSC will unveil draft legislation for the cryptocurrency industry in March. This legislation will build on existing anti-money laundering (AML) rules that came into effect in November 2024.

While the details are still being fleshed out, the legislation is likely to require that digital asset services providers, which Taiwan refers to as virtual asset service providers (VASPs), secure permits within 15 months of the legislation’s promulgation. Under the legislation, all VASPs will be classified as financial institutions. However, the FSC has yet to specify which category they will fall under. The classification – and corresponding capital requirements – may depend on the nature of the services each provider offers.

The FSC said it would require digital asset exchange operators to separate their assets from those of clients and “observe information transparency.” It also said digital assets will serve as “alternative investment channels” following the establishment of control and oversight measures.

Prior to the AML rules that came into effect in November, “many entities had been offering virtual asset trading and investment services to domestic investors in the shadows,” says Chen Ti-chen, a researcher at the Taiwan Academy of Banking and Finance (TABF), a financial training center and think tank affiliated with the FSC. The activities of those seeking to exploit the regulatory vacuum ranged from unscrupulous – advertising high-yield cryptocurrency investments they were not authorized to offer Taiwanese investors – to criminal, including fraud and money laundering. This illicit activity has “cast a shadow over the development of the virtual asset market in Taiwan,” she says.

For its part, the Ministry of Finance is moving to clarify Taiwan’s tax regulations for cryptocurrency. Under these regulations, transactions involving cryptocurrencies with a securities-type nature are temporarily exempt from taxation, whereas those that are not securities-type are subject to tax. The tax treatment also varies according to the investor’s status – individual investors must report gains as property transaction income, while corporate investors’ gains are included as business income for taxation.

To ensure accurate tax collection, the National Taxation Bureau has designated transactions conducted by individuals and corporations on online cryptocurrency trading platforms as targets for tax audits, says Chen. Currently all 26 virtual asset operators that have complied with anti-money laundering reporting requirements to the FSC have also registered for tax purposes and are paying business and enterprise income taxes, “making the taxation measures for the corporate side of cryptocurrency relatively robust,” she says.

Stablecoins and digital asset custody

Stablecoins – cryptocurrencies pegged to fiat currencies such as the U.S. dollar – are not currently under the jurisdiction of the FSC but could be in the future. At a recent press conference, FSC Chairman Peng Jin-lung stated that stablecoins could serve as a bridge between fiat money and cryptocurrency. He added that the FSC and Taiwan’s central bank will jointly oversee the stablecoin market moving forward.

The Chinese-language United Daily News (UDN) reported on February 14 that the FSC’s definition of stablecoins appears to diverge from the widely accepted global standard. For example, the world’s largest stablecoin by market capitalization, Tether (USDT), is issued by a private company of the same name. However, according to UDN, the FSC defines stablecoins as fiat-backed cryptocurrencies issued by domestic banks in Taiwan. Under this framework, banks could begin issuing stablecoins once the relevant legislation is enacted – potentially this year. If the legislation adopts this definition, trading Tether and other stablecoins issued overseas could become problematic in Taiwan.

The global stablecoin market has surged in the last 18 months. Data analytics platform Alphractal reported on January 31 that the market capitalization of stablecoins had jumped 73% to a new zenith of US$211 billion, compared to US$121.8 billion reported in August 2023.

In late February, Bank of America CEO Brian Moynihan told the Economic Club of Washington, D.C. that the bank could launch a stablecoin if regulations are passed in the United States. “If they make that legal, we will go into that business,” he says. “So you’ll have a Bank of America coin and a Bank of America U.S. dollar deposit, and we’ll be able to move them back and forth.”

With regard to stablecoins, “everyone is watching what the U.S. Fed and law enforcement agencies decide to do,” says Alex Liu, cofounder and CEO of Taipei-based cryptocurrency exchange MaiCoin. “From a law enforcement perspective, stablecoins don’t interfere with money supply, so the Fed is not especially concerned, but if you are FinCEN (the U.S. Treasury’s Financial Crimes Enforcement Network) or the State Department, you are more concerned with AML/CFT (counterterrorism financing).”

Several Taiwanese banks are preparing to participate in a pilot digital asset custody program set to launch in the coming months. While local media reports have not specified the banks involved, industry sources indicate that CTBC Bank, Cathay Bank, and KGI Bank are among those expected to take part. Notably, CTBC is Taiwan’s largest privately held bank by assets, deposits, and loans. Although the pilot program will initially focus on serving virtual asset exchanges and professional investors, the FSC has suggested that it may eventually expand to include retail investors.

An increasing number of banks are eyeing the digital asset custody market as institutional investor demand for secure cryptocurrency custody solutions grows. A survey published in October 2022 by BNY, the world’s largest custodian bank, found that 91% of institutional investors are interested in investing in tokenized products, and 41% held cryptocurrency in their portfolio at the time of the survey, while an additional 15% planned to invest in digital assets within 5 years’ time.

As Taiwan moves toward a more defined regulatory framework for digital assets, striking the right balance between innovation and oversight will be crucial. The government’s approach to this transition will ultimately determine whether Taiwan emerges as a key player in the digital asset space or remains on the sidelines.