Stablecoins promise new efficiencies for Taiwan’s globally connected economy. But before the island can enter the market, regulators must resolve unanswered questions about risk, oversight, and the future role of banks.

Stablecoins, many of them backed by the U.S. dollar, have existed since 2014, when early tokens like BitUSD and Tether were introduced, but until recently remained a niche financial instrument. Adoption accelerated last year as transaction volumes surged 72% to a record US$33 trillion, fueled by a more favorable regulatory climate in the United States, rising institutional interest, and expanding use in cross-border payments.

In a February report, the consultancy McKinsey & Company notes that the stablecoin market has grown exponentially since the start of the decade. Circulating supply exceeds US$300 billion, up from less than US$30 billion in 2020.

Credit card giant Visa noted in February that stablecoins are one of the most promising tools for modernizing cross-border finance. They offer faster settlement windows, predictable value with USD-backed assets, and borderless reach through digital wallets, the company said.

Although stablecoins present regulatory and financial risks, policymakers see potential advantages for Taiwan, particularly given the economy’s heavy reliance on global trade and exports.

The draft Virtual Asset Service Provider (VASP) Act is intended to establish a dedicated supervisory framework for virtual asset service providers, including provisions governing the licensing and oversight of stablecoin issuance and management. According to the Financial Supervisory Commission (FSC), the bill was submitted to the Executive Yuan for review on June 27, 2025, and would still require Legislative Yuan action before being implemented. Under the proposed framework, stablecoins are defined as virtual assets whose value is linked to one or more fiat currencies.

In public comments, the FSC has said that, at least initially, stablecoin issuance would be limited to licensed financial institutions. FSC Chairman Peng Jin-lun has also indicated that once subordinate regulations are finalized, an additional six-month buffer period will be required before the framework takes effect.

In drafting the VASP framework, the FSC examined stablecoin regulatory regimes in the United States, the European Union, and Japan, placing particular emphasis on the EU’s Markets in Crypto-Assets Regulation, or MiCA. The result is a bespoke legal framework aimed at regulating virtual assets and domestic stablecoin issuance.

While the draft legislation spans a broad regulatory framework for virtual asset service providers, stablecoin issuance itself is addressed primarily in Articles 34 and 35. These articles require issuers to obtain approval from the FSC before issuing stablecoins and to maintain sufficient reserve assets to fully back outstanding issuance while meeting minimum capital requirements. The provisions also restrict the use of reserve assets and prohibit the payment of interest on stablecoins. Issuance and redemption must take place at face value.

However, industry experts say additional details and implementing regulations will be needed as the VASP framework advances before financial institutions can move forward with concrete plans.

“What we can say is that when you look at [VASP], you see many gaps that need to be discussed like on stablecoin. In the public information, as you see only two articles, that is not enough,” says Kao Yi-cheng, president of the Taiwan Academy of Banking and Finance (TABF).

Joining Asia’s stablecoin race

Globally, the stablecoin market is estimated to exceed US$300 billion, according to CoinGecko, the world’s largest independent cryptocurrency data aggregator. Asia accounts for about 60% of stablecoin payment volume (as distinct from overall on-chain transfer volume). Stablecoins are used primarily for business-to-business payments, cross-border remittances, and as a store of value within the broader digital asset ecosystem.

Across Asia, regulators have moved rapidly to define stablecoin frameworks. In Japan, fintech firm JPYC launched what it described as the country’s first legally recognized yen-backed stablecoin in October 2025. South Korea has also seen market-led initiatives, including the won-backed KRWQ stablecoin launched in October 2025 and KRW1, reported to have debuted a month earlier.

Singapore already hosts a functioning non-U.S. dollar stablecoin market, anchored by XSGD, a Singapore-dollar-backed token first issued by fintech provider StraitsX in 2020. The Philippines has pursued a similar path through PHPC, a peso-backed stablecoin piloted in the central bank’s regulatory sandbox beginning in 2024 and cleared for broader deployment after exiting the program in mid-2025. Hong Kong, meanwhile, implemented its Stablecoins Ordinance in August 2025, establishing a licensing regime for fiat-referenced stablecoin issuers, with the Hong Kong Monetary Authority expected to grant its first licenses in 2026.

Still, the most widely used stablecoins remain Western-issued tokens such as Tether (USDT) and USD Coin (USDC), both of which are pegged to the U.S. dollar. Their dominance reflects the continuing central role of the dollar in the global financial system. According to CoinGecko, U.S.-dollar-backed stablecoins account for roughly 97% of the more than US$300 billion global stablecoin market.

For Taiwan, stablecoins are expected to be used primarily for cross-border payments, where proponents see several potential advantages. By enabling faster settlement and lowering transaction costs, stablecoins could improve the efficiency of international payments, benefiting Taiwanese exporters and importers conducting business with overseas partners.

The use of stablecoin “helps promote the development of the digital economy and finance, making it easier for the public and private sectors to participate in global trade and financial activities,” says an FSC Banking Bureau official who asked to remain unnamed.

“Although the Taiwan dollar (NTD) is not a globally strong currency, issuing an NTD stablecoin will help enhance the digital application of the NTD, increase the convenience and efficiency of domestic payments and transactions, strengthen the modernization, inclusiveness, and accessibility of the domestic financial system, and promote financial innovation,” the official says.

TABF’s Kao identifies other opportunities. “We think that facilitating international trade might be a major advantage in using stablecoins because of cross-border efficiency and faster transaction speed,” he says. “I think [the first local stablecoins] might be USD-denominated stablecoins that can be used for international trade.”

Kao also sees the possibility of stablecoins as a digital asset for foreign investors interested in Taiwan.

“For investment, especially with our strong economic growth, maybe foreign investors might want to invest in Taiwanese domestic-issued securities,” he says. “There might be demand if they need to convert between the NTD and U.S. dollar or other foreign currencies. For this, we need to see digital assets. As government bonds are a standardized asset, it will be easy to be linked to digital assets.”

Systemic questions

Despite growing interest in their economic potential, stablecoins introduce complex regulatory challenges, including risks related to financial crime, investor protection, and data and information security.

“The government and regulatory agencies need to devote more effort to formulating relevant regulations,” says the FSC official, adding that “stablecoins may impact the traditional banking system and change the structure of the entire financial market. These challenges will be properly addressed in future bespoke law and subordinate legislation.”

Because major stablecoins such as Tether  have at times been linked to scams and illicit transactions, including human trafficking operations in parts of Southeast Asia, TABF has argued that stronger regulation of stablecoin transactions is necessary. “Moving those into a regulated system in general is good for the people who are not using stablecoins for fraud,” says David Stinson, research fellow at TABF.

Further, he points out that authorities must also consider potential risks related to interest rate dynamics and the possibility of bank runs.

“Stablecoin issuers cannot provide an interest rate but in the secondary market they allow the credit market to borrow and lend stablecoins with interest rate, that is in the secondary market, not the issuers,” he says, noting that this issue remains a debate in the United States.

In principle, stablecoins could offer interest payments, Kao says. Still, regulators worry that if stablecoins offer higher returns, they could begin to displace some traditional banking functions. Unlike most private stablecoin issuers, banks operate under strict regulatory supervision and existing prudential safeguards, including deposit insurance for traditional bank deposits. Regulators view this institutional oversight as an important factor in mitigating potential risks associated with stablecoin issuance, even though the legal treatment of stablecoin holdings would differ from insured deposits.

In the United States, stablecoin issuers are prohibited from paying interest or yields following the passage of the Guiding and Establishing National Innovation for U.S. Stablecoins, or GENIUS, Act last July. The restriction, however, does not extend to third-party exchanges, which may still offer yield-generating products linked to stablecoins outside the traditional banking regulatory framework.

Authorities must also consider the risk of a run on stablecoins, Kao notes. If large numbers of holders were to suddenly seek to redeem or convert stablecoins into U.S. dollars, issuers might not be able to liquidate underlying assets quickly enough to meet demand. Such pressures could in turn trigger broader panic, raising concerns about redemption risk and the quality and liquidity of reserve assets.

In Taiwan, banks are expected to play a central role in the launch of stablecoins, reflecting their prominent position within the domestic financial system. Unlike most private stablecoin issuers, banks operate under government supervision and provide protections such as deposit insurance, safeguards that regulators view as critical to maintaining financial stability.

Banks in Taiwan play an outsized role in the financial system compared with their counterparts in the United States or the European Union, particularly in terms of the share of assets and transactions they handle, Kao says. Many Taiwanese consumers rely on banks not only for deposits, but also for investments such as exchange-traded funds and mutual funds. This reliance reflects the sector’s high level of regulation, which has helped foster a perception of safety and stability among customers.

Despite these challenges, passage of the VASP legislation would position Taiwan to join the emerging global stablecoin market, potentially paving the way for the launch of domestically issued tokens later this year.