The Taiwan Banker

In response to the ever-changing market environment of virtual assets, regulators around the world have recently adjusted their stances including Singapore’s regulatory framework for stablecoins, the EU’s Markets in Crypto Assets Regulation (MiCA), the UK’s regulatory framework for crypto assets and stablecoins, and Hong Kong’s licensing regime for over-the-counter trading of virtual assets. Most notably, upon taking office in January, US President Donald Trump immediately signed an executive order entitled “Strengthening US Leadership in Digital Financial Technology,” supporting the growth and application of digital assets, blockchain, and related technologies in various sectors of the economy, establishing a market working group to formulate a federal regulatory framework for digital assets. The Securities and Exchange Commission (SEC), one of the members of the group, announced in May this year that it would reform virtual asset policies, allowing qualified registered securities firms to legally trade non-securities. The Senate also passed the GENIUS Act to regulate stablecoins. Taiwan could follow suit if its Virtual Asset Service Provider (VASP) Law is passed. The Financial Supervisory Commission (FSC) announced the draft of the VASP Law in March and provided a channel for all sectors to express their comments. It is expected to be submitted to the Executive Yuan for review as early as the end of June. Criminals often use virtual assets to launder money due to their anonymity, cross-border nature, and difficulty in tracking. As early as 2015, the Financial Action Task Force (FATF) issued the Guidance for a Risk-Based Approach to Virtual Currencies to address their anti-money laundering and financing of terrorism (AML/CFT) risks. In October 2018, the recommendations were revised, adding definitions of “virtual assets” and VASPs, and applying them to relevant AML/CFT provisions. At that time, during Taiwan’s FATF evaluation, the Ministry of Justice warned of the money laundering risks of virtual currencies. Referring to relevant examples, it found that most countries included regulations on money laundering in their legislative frameworks. Therefore, the Executive Yuan revised and promulgated the Anti-Money Laundering Act in November 2018, designating the FSC as the money laundering authority for virtual asset trading. Subsequently, referring to the FATF recommendations, the FSC issued the AML/CFT Measures for Virtual Currency Platforms and Trading Businesses in June 2021 (now called the AML/CFT Measures by Businesses or Personnel Providing Virtual Asset Services. Subsequently, virtual assets gradually turned into a hot topic for investors. In March 2023, the Executive Yuan instructed the FSC to regulate virtual assets. That September, the FSC issued the Guidelines for the Management of VASPs and Trading Businesses, but these Guidelines were only administrative orders, lacking mandatory legal force. However, the Guidelines urged VASPs to take proactive action to prohibit illegal behavior and strengthen customer protection, including transparency of transaction information, customer asset custody methods, internal audit and internal control management, and cold and hot wallet management, representing stronger regulation. In addition, in line with the July 2024 amendment of Article 5 of the Anti-Money Laundering Act, designated non-financial businesses or personnel must first complete registration, further strengthening AML in VASPs. Therefore, on November 26, 2024, Article 2, Paragraph 2 of the VASP AML Regulation was amended to add a money laundering registration system, requiring them to complete “registration” to provide virtual asset services. Since then, VASP AML statements have switched from a “declaration” to a “registration” system. The VASP Law provides the legal basis for the FSC to take over supervision, thereby driving the Taiwanese virtual asset market towards clear regulation. A careful study of the draft Law shows that virtual assets are considered as a type of value that can be stored, exchanged or transferred digitally using cryptography and distributed ledger technology (DLT) or other similar technologies, and are mainly used for payment or investment. However, the Law also specifically lists forms that are not considered virtual assets, including non-fungible tokens (NFTs), digital forms of New Taiwan dollars, foreign currencies, and central bank digital currencies (CBDCs) issued by China, Hong Kong or Macau, as well as securities and other financial assets. Even if backed by cryptography, DLT, or similar technologies, these do not count as virtual assets, which means that asset tokenization is not included. Even though the Law was designed with reference to foreign examples, it is also worth noting certain points of innovation. For example, FATF Recommendation No. 15 defines any asset that can be digitally traded or transferred, and can be used for payment or investment purposes, as a virtual asset. The Law is limited to the use of cryptography and DLT; FATF recognizes a broader class of virtual assets than Taiwan. The highlight of the Law is regulating the behavior of VASPs, including industry licensing, capital requirements, internal control and audits, responsible person clauses, customer asset preservation, stablecoin issuance, and supervision of trading. In contrast to existing regulations, the Law regulates only to consumer protection, but also improper behaviors such as market manipulation and fraud. The operator license is issued by the FSC, but the Law does not explicitly stipulate capital or operating funds requirements. The third draft however authorizes the FSC to set different minimum capital regulations for different types of financial management service providers. This differs slightly from the EU MCA Act or Singapore’s Payment Services Act, which directly regulate the minimum capital requirements by law, as well as from the EU's Class 1 of 50,000 euros, Class 2 of 125,000 euros and Class 3 of 150,000 euros; as well as Singapore's S100,000 for standard payment institutions and S250,000 for major payment institutions. The minimum capital limits set by the FSC will form thresholds to separate the weak domestic VASPs from the strong. Furthermore, the draft Law also includes consumer protection measures, one of which is to clearly distinguish the fiat or virtual assets of customers and keep them separate from those of the VASPs themselves. Foreign legislative examples of this provision are mainly based on the MiCA Act, Japan's Capital Resolution Law, and the Policy Recommendations for Crypto and Digital Asset Markets Final Report of the International Organization of Securities Commissions (IOSCO). The VASP guidelines follow the same principles, which extend to business models such as custody of legal tender and virtual assets. In the former, the customer opens a trust account in the bank and remits funds into it, while in the latter, the bank handles custody of the assets. The FSC is currently accepting applications from businesses in trial mode. The Law also requires dealers and underwriters to provide issuance statements to customers, mainly with reference to the EU MiCA crypto asset white paper. The crypto issuer and platform provider must publicly disclose the rights and obligations, underlying technology, risks, and other relevant information in a fair, clear, concise, easily understand, and not misleading manner, without major omissions, whether or not it is a stablecoin. The importance of that statement should be equivalent to that of prospectuses for marketable securities, but the draft VASP Law only mentions in the legislative description that VASPs who do not issue statements in regulatory compliance should refuse to provide services, without explicitly authorizing the regulator to establish legally required disclosure items. It would be advisable to announce the content, form, and types of information that should be included as soon as possible, so that VASPs can have something to follow when applying for licenses, and customers can fully understand their rights and obligations. The bill also includes stablecoins, subjecting stablecoin issuance in Taiwan to a licensing system; issuers must set up and maintain sufficient reserve assets to be deposited with domestic financial institutions. Of course, the reserve assets must be segregated from the issuer’s own property, and the design of the stablecoin is also the subject of the above-mentioned consumer protections. However, the draft Law opens the door to stablecoins linked to a single or multiple fiat currency. In contrast to the MICA Act, it divides stablecoins into Electronic-Money Tokens (MTS), which use a single legal tender to maintain the value and serve as a medium of exchange, and Asset-Reference Tokens (ARTs), which maintain their value through multiple currencies, one or more commodities, one or more virtual assets, or a combination thereof. The European Commission had first attempted to classify stablecoins within existing rules, yet they are difficult to apply or cannot be fully integrated within the Electronic Money Directive, Payment Services Directive, or Markets in Financial Instruments Directive. The draft Law is more inclined to Singapore's approach to stablecoin law. Observing the Stablecoin Regulatory Framework of the Monetary Authority of Singapore (MAS), it calls stablecoins a Digital Payment Token (DPT) that produces a constant value that is consistent with one or more designated legal currencies. Stablecoins can become a trustworthy medium of exchange with an appropriate management mechanism, therefore MAS manages coins pegged to the Singapore dollar or the G10 currencies. Eligible issuers can apply to MAS for the “MAS-regulated stablecoin” designation, distinguishing them from other digital payment tokens. Upon passage of the Law, VASPs will have reasonable compliance and operating costs, addressing regulatory deficiencies such as insufficient customer identity verification and customer service, so that they can fully understand transaction patterns, identify the sources of customer funds, and investigate suspicious transactions. The draft Law has inspired various responses. Some industry participants believe that VASPs cover different industries and should be classified by their scale and degree of risk. Some experts argued at the public hearing in April that direct licensing without differentiation by operating scale may force small VASPs out of the business. Moreover, the definition and responsibilities of custodians are still vague. Some have also noted that the Law does not allow VASPs to engage in decentralized finance (DeFi). FATF has stated that anyone with control or sufficient influence over DeFi may be a VASP – including issuers, owners, operators, and others – but FATF also preserves space for different countries to regulate DeFi in different ways, and it also requires continuous re-evaluation. Thus, DeFi does not necessarily need to be included in the Law. At the same time, however, the supervisory model of traditional finance cannot be directly applied to virtual assets, and must be adjusted from both market and technical perspectives. The author of this article is an assistant research fellow at the Financial Research Institute of TABF.