At a glance: cryptoassets for investment and financing in Taiwan

Cryptoassets for investment and financing

Regulatory threshold

What attributes do the regulators consider in determining whether a cryptoasset is subject to regulation under the laws in your jurisdiction?

Generally, the regulators examine the nature of a cryptoasset, focusing in particular on whether the asset is a security or financial service or product.

On 30 December 2013, the Central Bank of the Republic of China (Taiwan) and the Financial Supervisory Commission (FSC) released a joint press release outlining the government’s position on bitcoin. The two authorities hold the view that bitcoin is not a currency but instead is a highly speculative digital virtual commodity. In another FSC press release issued in 2014, the FSC ordered that local banks neither accept bitcoin as a payment method nor provide any other services related to bitcoin (eg, exchange of bitcoins for fiat currency). The FSC issued another press release on 19 December 2017 in which it reiterated the government’s positions as specified in the previous press releases mentioned above. Bitcoin is still considered to be neither legal tender nor a currency nor a generally accepted medium of exchange under the current regulatory regime in Taiwan; instead, bitcoin is deemed to be a digital virtual commodity. Even though the government’s press releases only mentioned bitcoin, the authors believe that any other virtual currencies and cryptocurrencies of nature and characteristics similar to those of bitcoin will also be considered virtual commodities.

Also, the generally considered core legal issue concerning virtual currencies and cryptocurrencies except bitcoin is whether the securities legislation applies – that is, whether an initial coin offering (ICO) or any other investment activities regarding virtual currencies and cryptocurrencies would be considered issuing securities under Taiwan’s current securities law regime. On 3 July 2019, the FSC officially announced the criteria for determining whether virtual currencies and cryptocurrencies with the nature of securities shall constitute ‘securities’ under Taiwan’s Securities and Exchange Act.

Investor classification

How are investors in cryptoassets classified and treated differently?

Security tokens

According to the security token offerings (STO) regulations published by the Taipei Exchange (TPEx) under the authorisation of the FSC, only professional investors are eligible for STOs, and if the professional investor is a natural person, the maximum subscription amount is NT$300,000 for each STO. Under the current regulatory regime, a natural person is generally qualified as a professional investor if he or she may provide a proof of assets of at least NT$30 million and has sufficient professional knowledge and trading experience.

Initial coin offerings

What rules and restrictions govern the conduct of, and investment in, initial coin offerings (ICOs)?

In 2017, the FSC, in response to the rising size of ICOs and other investment activities regarding virtual currencies and cryptocurrencies, stated that:

  • an ICO refers to the offer and sale of virtual commodities (eg, digital interests, digital assets or digital virtual currencies) to investors. Whether the issue of an ICO token would be deemed ‘securities’ under Taiwan’s Securities and Exchange Act would depend on the relevant facts of each case. When an ICO token has the nature of securities, its offering will be deemed a securities’ offering, thus subject to the Securities and Exchange Act; and
  • where the issuer of virtual currencies or an ICO makes any misrepresentations or promised unreasonably high returns to attract investors or both, the issuer would be deemed to have committed fraud or conducted illegal fundraising.

 

Under the current regime, the offer and sale of securities in Taiwan, whether through a public offering or private placement, are regulated activities and shall be conducted under the Securities and Exchange Act, its related regulations and relevant rulings issued from time to time by the FSC. Given this, cryptocurrencies that have the nature of securities (and should therefore constitute ‘securities’ under the Securities and Exchange Act) should be subject to the Securities and Exchange Act and the regulations on STOs promulgated by the TPEx under the authorisation of the FSC.

Concerning cryptoassets that do not have the nature of securities or are not deemed financial products or services, which authorities will be competent will depend on the nature of these assets and the applicable rules and restrictions will also depend on the cryptoassets’ nature. For example, if the assets are designed to be used for electronic payment, these assets may be subject to the rules and restrictions under the relevant banking or payment laws. By contrast, if the assets are not related to any regulated businesses or activities, the general principles under Taiwan’s Civil Code or Consumer Protection Act or both shall be applicable.

Security token offerings

What rules and restrictions govern the conduct of, and investment in, security token offerings (STOs)?

The FSC issued a ruling on 3 July 2019 to officially define security tokens as a type of security; it amended several regulations and issued several rulings in January 2020 to lay out some major principles concerning the issuance of security tokens, exemption of STO for the filing obligation under the Securities and Exchange Act, and establishment of STO platforms; and further, authorise the TPEx to supervise STOs. With the authority and intent to regulate the issuance of security tokens and the establishment of STO platforms, in January 2020, the TPEx promulgated the ‘TPEx Rules Governing the Operation by Securities Firms of the Business of Proprietary Trading of Security Tokens’ and ‘TPEx Rules Governing Information to be Published in Prospectuses for Applications for Security Token Offerings for Over-the-Counter Trading’ (together with the regulations and rulings published by the FSC on STO, the STO regulations). Below is a summary of the FSC’s position and the STO regulations.

 

Definition of security token

Virtual currencies with the nature of securities (security tokens) refer to tokens that:

  • utilise cryptography, distributed ledger technology or other similar technologies to represent their value that can be stored, exchanged or transferred through digital mechanism;
  • are transferable; and
  • encompass all of the following attributes of an investment:
    • funding provided by investors;
    • providing funding for a common enterprise or project;
    • investors expecting to receive profits; and
    • profits generated primarily on the efforts of the issuer or third parties.

 

Key points of STO regulations

The FSC contemplates the application of different regulations on STOs below or above the threshold of NT$30 million. An STO of NT$30 million or less (exempted STO) should comply with the STO regulations as stated below and the filing obligation under the Securities and Exchange Act may be exempted. An STO above NT$30 million must first apply to be tested in the financial regulatory sandbox under the Financial Technology Development and Innovative Experimentation Act and, if the experiment has a positive outcome, its offering may then be conducted under the Securities and Exchange Act.

For exempted STOs, key points of the STO regulations are outlined below.

 

Regulations on issuance (primary market)
  • Qualifications of the issuer: the issuer must be a company limited by shares incorporated under the laws of Taiwan and not a company listed on the Taiwan Stock Exchange or TPEx or traded on the Emerging Stock Market;
  • eligible investors and amount limits: only professional investors are eligible for STOs. Where a professional investor is a natural person, the maximum subscription amount is NT$300,000 per STO; and
  • issuance process: issuers must conduct STOs on a single platform, and the platform operator must ensure that the issuer meets the relevant qualifications and that the prospectus is well prepared. Where the platform operator itself is an STO issuer, the issuer should not launch an STO without a prior review by TPEx.

 

Regulations on trading (secondary market)
  • Trading mechanism of security tokens: the platform operator should obtain a securities dealer licence and handle the trading by way of price negotiation. The platform operator should be the counterparty to every transaction and should offer a reasonable reference quotation based on the market conditions. Also, each security token under an STO programme may be traded only on a single platform; and
  • maximum transaction amount: where a professional investor is a natural person, the maximum amount of holding under an STO programme is NT$300,000. Also, the maximum daily transaction limit for each STO is 50 per cent of the total issuance amount under the STO programme.

 

STO platform operator
  • Qualifications of the platform operator: the platform operator should obtain a securities dealer licence, have minimum paid-in capital of NT$100 million and provide an operation bond in the amount of NT$10 million;
  • total offering amount capacity: the total offering amount of all exempted STOs on a single platform should not exceed NT$100 million. A platform can accept to process a second STO only one year after the security tokens of the first STO have been traded on the platform; and
  • transfer and record-keeping: the platform operator should enter into an agreement with the Taiwan Depository and Clearing Corporation and transmit the trading information such as balance changes and balance statement to the Taiwan Depository and Clearing Corporation for its record daily. The Taiwan Depository and Clearing Corporation should provide an STO balance inquiry service to investors.

 

Subscription and trading

Subscription and trading of security tokens should be conducted on a real-name basis and the transactions must be conducted in New Taiwan dollars under the same name as that featuring on the bank account.

 

Prospectus for STO

To apply for an STO with the TPEx, a prospectus of the STO is required. The preparation of and disclosure in the prospectus should follow the TPEx Rules Governing Information to be Published in Prospectuses for Applications for Security Token Offerings for Over-the-Counter Trading as promulgated by the TPEx.

Also, since TPEx is designated by the FSC as the supervising authority of STOs and the FSC authorises TPEx to further promulgate the relevant regulations governing STOs, STOs should comply with the relevant rules and regulations promulgated or amended by the TPEx from time to time, in addition to the regulations and ruling issued by the FSC.

Stablecoins

What rules and restrictions govern the issue of, and investment in, stablecoins?

There are no rules and restrictions that explicitly govern the issue of, and investment in, stablecoins. Also, the authors are not aware of any relevant regulatory policies or guidelines announced by the FSC or other competent authorities. However, depending on the nature, structure and models involved in or relating to the particular stablecoins, stablecoins and their issuance may be subject to the laws and regulations governing, among other things, securities (especially if the stablecoins would still appreciate) and electronic payments.

Airdrops

Are cryptoassets distributed by airdrop treated differently than other types of offering mechanisms?

The nature of a cryptoasset will still be the determining factor as to whether it is subject to the laws and regulations governing securities or financial products. Generally, no cryptoasset will be treated differently simply because it is distributed by airdrop.

Advertising and marketing

What laws and regulations govern the advertising and marketing of cryptoassets used for investment and financing?

The advertising and marketing of security tokens should comply with the STO regulations, as well as the relevant rules and regulations that may be issued by the relevant regulators from time to time.

Trading restrictions

Are investors in an ICO/STO/stablecoin subject to any restrictions on their trading after the initial offering?

The trading of cryptoassets with the nature of securities (ie, security tokens) should comply with the STO regulations, as well as the relevant rules and regulation that may be issued by the relevant regulators from time to time.

Crowdfunding

How are crowdfunding and cryptoasset offerings treated differently under the law?

The FSC previously established the following regulatory regime for equity-based crowdfunding, which is exempted from the prior approval or effective registration normally required under the Securities and Exchange Act, namely:

  • The Go Incubation Board for Start-up and Acceleration Firms (GISA) of TPEx: TPEx, one of the two securities exchanges in Taiwan, established GISA in 2014 to assist innovative and creative small-sized non-public companies with capital raising. A company possessing innovative or creative ideas with growth potential is qualified to apply for GISA registration with TPEx. After TPEx has approved the application, the company will first start receiving counselling services from TPEx regarding accounting, internal control, marketing and legal affairs. After the counselling period, there will be another TPEx review to examine, among other things, the company’s management teams, the role of the board of directors, accounting and internal control systems, and the reasonableness and feasibility of the plan for capital raising; if TPEx is satisfied with the review, the company may raise capital on GISA. The amount raised by the company through GISA may not exceed NT$30 million unless otherwise approved. Also, an investor’s annual maximum amount of investment through GISA should not exceed NT$150,000, except for angel investors defined by TPEx or wealthy individuals with assets exceeding an amount set by TPEx and having professional knowledge regarding financial products or trading experience.
  • Equity-based crowdfunding on the platforms of securities firms: a securities firm may also establish a crowdfunding platform and conduct equity crowdfunding business. Currently, a company with paid-in capital of less than NT$50 million may enter into a contract with a qualified securities firm to raise funds through the crowdfunding platform maintained by the securities firm, provided that the total amount of funds raised by the company through all securities firms’ crowdfunding platforms in a year do not exceed NT$30 million. The amount of investment made by an investor on a securities firm’s platform may not exceed NT$50,000 for each subscription, and may not exceed NT$100,000 in aggregate in a year, except for angel investors as defined in the relevant regulations.
Transfer agents and share registrars

What laws and regulations govern cryptoasset transfer agents and share registrars?

The FSC issued a ruling on 3 July 2019 that officially defines ‘security tokens’ as a type of securities; it further amended several regulations on securities firms and issued several rulings in January 2020 to give authority to the issuance of security tokens, exemption of STOs for the filing obligation under the Securities and Exchange Act, and the establishment of the STO platforms and authorise the TPEx as the supervising authority of STOs. To regulate the issuance of security tokens and the establishment of the STO platform, the TPEx promulgated in January 2020 the TPEx Rules Governing the Operation by Securities Firms of the Business of Proprietary Trading of Security Tokens and TPEx Rules Governing Information to be Published in Prospectuses for Applications for Security Token Offerings for Over-the-Counter Trading (together with the regulations and rulings published by the FSC on STO, the STO regulations). The qualifications for the STO platform operators are stipulated in these regulations. For other cryptoassets, there are no rules and restrictions explicitly governing the transfer agents or share registrars of other cryptoassets.

Anti-money laundering and know-your-customer compliance

What anti-money laundering (AML) and know-your-customer (KYC) requirements and guidelines apply to the offering of cryptoassets?

As far as the authors understand, it has been the FSC’s policy since July 2018 that, for AML, if a bank’s client is a cryptocurrency platform operator and that operator provides a fiat-to-cryptocurrency exchange service, the operator should ensure that its service is provided on a real name basis.

Further, Taiwan’s Money Laundering Control Act was amended in November 2018 to bring the cryptocurrency trading platform operators and relevant transactions into the regime.

According to the statement of the former FSC chair Willington Koo made before the Legislative Yuan (Taiwan’s unicameral legislature) on 23 October 2018, the FSC will regulate the AML activities of cryptocurrency trading platforms or relevant transactions under the Money Laundering Control Act after the Executive Yuan officially authorises the FSC as the regulator of AML activities of cryptocurrency trading platforms or exchanges. The Executive Yuan, however, has yet to grant this authorisation to the FSC. Also, it is unclear at this stage what requirements will be imposed by the FSC on AML activities of cryptocurrency trading platforms or exchanges.

Sanctions and Financial Action Task Force compliance

What laws and regulations apply in the context of cryptoassets to enforce government sanctions, anti-terrorism financing principles, and Financial Action Task Force (FATF) standards?

There are no laws and regulations in this regard, except for AML regulations.

Law stated date

Correct on

Give the date on which the above content is accurate.

23 October 2020.

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