Asian jurisdictions have been cautious in developing legal frameworks for virtual currencies, but the volatile market and the unstoppable development of cryptos urge regulators to act
AAt the time of this writing, cryptocurrencies are not currently accepted as currencies in Taiwan. Since 2013, both the Central Bank of the Republic of China (Taiwan) and the Financial Supervisory Commission (FSC) have taken the position that Bitcoin is not a currency, but a highly speculative digital virtual commodity. The FSC has been instructing local banks since 2014 not to accept bitcoin or provide services related to bitcoin.
Abe Sung
Partner at Lee and Li in Taipei
Tel: +886 2 2763 8000 (ext. 2232)
Email: [email protected]
Other than that, no laws or regulations have been officially promulgated or changed to specifically deal with cryptocurrencies, with the exception of:
(1) the regulations for security tokens, commonly referred to as security tokens, and their offerings, commonly referred to as security token offerings (STOs); and
(2) the Anti-Money Laundering Regulations (AML) for “virtual currency platforms and trades”.
Token offers
The central regulatory issue in relation to a token offering, such as: B. an Initial Coin Offering (ICO), is whether a token offering is considered an offering of securities under Taiwan’s securities regulations. To that end, in 2017 the FSC expressed its view that an ICO that includes the offering and issuance of securities should be subject to the Taiwanese Securities and Exchange Act (SEA).
In other words, if a token offering involves the offering and issuance of securities (i.e. the tokens being offered are considered security tokens) it would be considered an illegal fundraising activity in violation of the SEA, unless the STO regulations are followed.
Security tokens and STOs
In July 2019, the FSC officially issued a ruling designating cryptocurrencies of a certain type as securities (i.e. security tokens) under the SEA. As per the 2019 ruling, security tokens refer to those who:
(1) Use cryptography, distributed ledger technology, or other similar technology to represent their value, which can be stored, exchanged, or transmitted through a digital mechanism;
(2) are transferable; and
(3) include all of the following attributes of an investment:
(i) Investor funding;
(ii) providing funding for a joint undertaking or project;
(iii) investors who expect profits; and
(iv) Profits derived primarily from the efforts of the issuer or a third party.
The FSC and the Taipei Exchange (TPEx) worked together on a series of regulations for STOs that were finalized in January 2020. The STO regulations differ by the NT $ 30 million (US $ 1 million) threshold. For an STO of NT $ 30 million or less, the STO can be performed in accordance with STO regulations.
An STO over NT $ 30 million must first be tested in the Financial Regulator’s sandbox and should be performed in accordance with the SEA in the event of a positive result of the experiment. Certain important provisions of the STO regulations include:
(1) The issuer must be a limited liability company under Taiwanese law and not be a company listed on the Taiwan Stock Exchange or TPEx or traded on the emerging stock market.
(2) The issuer can only issue profit-sharing or promissory notes without shareholder rights.
(3) Only professional investors are eligible to participate in STOs. If the professional investor is an individual, the maximum subscription amount is NT $ 300,000 per STO.
(4) The platform operator should acquire a securities dealer license, have a minimum paid-in capital of NT $ 100 million and provide an operating guarantee of NT $ 10 million.
(5) The total offer amount of all STOs on a single platform should not exceed NT $ 100 million.
(6) As per STO regulations, some other requirements and restrictions include those related to trading (secondary market), real-name base, New Taiwan dollar only, etc.
To the best of our knowledge, while this article was being written, there were discussions about issuing security tokens, e.g. B. in connection with emission allowances, but due to the relatively strict restrictions under the STO, no STO programs have been started.Regulations such as the qualifications of the STO issuer, eligible investors and amount limits, etc., as well as other compliance costs incurred when introducing an STO Project may arise.
Eddie Hsiung
Associate partner at Lee and Li in Taipei
Tel: +886 2 2763 8000 (ext. 2162)
Email: [email protected]
anti Money Laundering
Although there is no STO platform operator in Taiwan, there have been crypto platform or exchange operators offering services related to cryptocurrencies other than security tokens. As mentioned above, as long as there are no security tokens involved, there are no laws or regulations specifically dealing with trading cryptocurrencies, so there is currently no required license to operate crypto platform or exchange operators in Taiwan.
From AML’s perspective, the recently amended Money Laundering Control Act (AML Act), which went into effect in November 2018, has incorporated virtual currency platforms and trading into Taiwan’s AML regulatory regime. However, the government had made no further progress in implementing the amended AML law until the AML ruling was passed.
In April 2021, Taiwan’s Executive Yuan (the Cabinet) issued a decision (the AML Decision) to interpret the scope of companies’ virtual currency platforms and trading transactions under the AML Law, which is expected to come into effect on July 1, 2021, im AML judgment includes those who engage in the following activities for others:
(1) An exchange between virtual currency and New Taiwan Dollars, foreign currencies, or currencies issued by mainland China, Hong Kong or Macau;
(2) An exchange between virtual currencies;
(3) Transfer of virtual currencies;
(4) Custody and / or management of virtual currency or provision of instruments that enable control over the virtual currency;
(5) Participation in and provision of financial services in connection with the issue or sale of virtual currencies.
Based on the authors’ experience and understanding of local practice, it is generally expected that after the AML ruling has been issued, the FSC will make clearer or more detailed regulations in the AML Act regarding the crypto industry.
The regulations would cover the operator’s responsibilities in terms of knowing your customer, keeping records, reporting suspicious activity, continuous monitoring, etc. Therefore, it is recommended that the relevant market participants remain vigilant for new developments, including the above AML-relevant regulations, which will be further specified by the FSC.
DeFi and NFT
New applications of cryptocurrency and blockchain technology such as DeFi (decentralized finance) and NFT (non-fungible tokens) have been hotly debated in Taiwan in recent years.
The government does not appear to have an official opinion on the rise in DeFi activity. However, from a local perspective, the classification of all DeFi activities should be determined on a case-by-case basis, and laws such as those relating to banking, fiduciary operations, and futures would need to be reviewed to verify and ensure compliance with Taiwanese laws.
Market participants could argue that there is no centralized entrepreneur in a DeFi structure who should be held liable for illegal or non-illegal activities. From a legal point of view, however, this should be more of a question of fact or evidence, so that we cannot rule out the possibility that every person who initiates a DeFi project or program or who later plays an essential role is still seen as the actual actor, with considered with regard to possible legal consequences.
NFTs have generally been structured to represent digital works of art, musical works, collectibles, baseball or basketball cards, photo albums, and so on. While recent discussions have tended to focus on what an NFT owner actually owns or receives, the classification of an NFT or its offering should also be considered on a case-by-case basis.
Although there can be different ways to structure an NFT – e.g. B. what is the underlying asset, to what extent the NFT would be bound to the underlying (digital) asset, the rights and obligations of the parties involved in the offer and of the NFT holders etc. – it is recommended that the rights and obligations of the participating parties (NFT issuers, NFT platform operators and / or service or technology providers, etc.) to clearly identify or in the terms and conditions of the as far as possible, in particular from a copyright point of view.
Even if NFTs are not fungible and unique, we still cannot completely exclude the applicability of financial laws (e.g. securities regulations) due to their potential investment character.
Finally, it is also unclear whether the DeFi and NFT market participants would fall within the scope of the above-mentioned AML-related regulations. From a regulatory point of view, this creates uncertainty for the future development of such newly emerging activities.
Lee and Li
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Zhongxiao East Road
Taipei 11072, Taiwan
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