1 Legal and enforcement framework
1.1 In broad terms, which legislative and regulatory provisions govern virtual currencies in your jurisdiction?
Currently, no single set of laws or regulations specifically governs virtual currencies in Taiwan. The Financial Supervisory Commission (FSC) generally characterises Bitcoin and other virtual currencies as highly speculative virtual goods that are bought and sold for profit. Furthermore, the FSC has repeatedly warned citizens that virtual currencies are highly speculative and risky assets.
The FSC issued a ruling on 27 June 2019 stating that certain tokens that meet the Howey test will constitute a securities token offering (STO). The criteria of the Howey test are as follows:
- There is an investment of money;
- in a common enterprise;
- with an expectation of profits from the investment; and
- the profits come mainly from the efforts of the issuer or a third party.
Such tokens are treated as securities under Taiwan law and are subject to all relevant securities regulations, including the Securities Exchange Act of Taiwan.
1.2 In broad terms, which legislative and regulatory provisions govern entities that provide services relating to virtual currencies? Must they be registered or licensed by a regulatory authority?
No specific regulatory provisions govern entities that provide services relating to virtual currencies. However, if the issuance or offering of virtual tokens constitutes an STO under the Howey test (see question 1.1), the issuer must comply with existing securities laws and regulations in Taiwan.
In addition, any entity that provides services relating to virtual currencies (eg, trading platforms) must comply with the Money Laundering Control Act. The government has yet to promulgate the details associated with compliance by virtual currency service providers, but it is expected to do so in the near future.
1.3 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?
The FSC is the administrative body responsible for enforcing the financial services regulations that govern businesses such as banks, securities firms, futures firms and insurers. Currently, it is unclear whether virtual currencies fall within the supervisory framework of the FSC.
However, if the issuance or offering of virtual tokens constitutes an STO under the Howey test (see question 1.1), such issuance or offering will fall under the jurisdiction of the FSC.
1.4 What is the regulators' general approach to virtual currencies?
Since 2013, the FSC has issued several press releases to remind the public of the risks of investing in virtual currencies, including the price volatility of virtual currencies and the risk of virtual currencies being stolen by hackers or being used in illicit activities.
The FSC also views virtual currencies as ‘highly speculative virtual goods' and has reminded the public to be aware of the risks of virtual currencies before investing. All indications are that the FSC will keep a close eye on the development of virtual currencies and the providers of related services.
1.5 Has there been any notable enforcement action relating to virtual currencies?
As yet there has been no notable enforcement action directly relating to virtual currencies. However, whenever instances of suspected fraud or multi-level marketing scams involve virtual currencies, such cases are generally investigated for potential violations of criminal law or the Money Laundering Control Act.
2.1 How are ‘virtual currencies' defined in your jurisdiction? Have there been any judicial decisions which have helped to define virtual currencies or their interplay with the existing body of laws (eg, contracts law, property law)?
The Financial Supervisory Commission (FSC) and the Central Bank of Taiwan still view virtual currencies as ‘virtual goods', which do not possess the characteristics of fiat money.
The same view has been expressed in judicial decisions.
2.2 How are ‘initial coin offerings' and ‘security token offerings' defined in your jurisdiction?
As defined by the FSC in 2017, an ‘initial coin offering' is a way of raising funds whereby companies issue ‘virtual goods' such as digital rights, digital assets and digital currencies for interested investors to buy.
In 2019 the FSC further defined ‘security tokens' as "virtual currencies with the nature of securities". The FSC adopted the Howey test to differentiate security tokens from virtual currencies or tokens (see question 1.1).
2.3 Are stablecoins treated as virtual currencies in your jurisdiction or do they fall under an existing category (eg, electronic money)?
To our knowledge, there are no specific regulations or official government opinions on the treatment of stablecoins.
3 Virtual currencies market
3.1 Which virtual currencies have become most embedded in your jurisdiction? Does this vary depending on the specific use?
Virtual currencies are mostly treated as virtual goods that people invest in. At present, Bitcoin is the most prevalent and well-recognised virtual currency in Taiwan.
3.2 What different products and services are offered?
Virtual currency service providers in Taiwan generally provide transaction services between different cryptocurrencies. A number of service providers also provide transaction services between virtual currencies and fiat currencies.
3.3 How are virtual currency service providers generally structured? How are they generally financed?
In Taiwan, the providers of virtual currency services platforms may be structured as offshore companies or onshore companies that provide services in Taiwan. Generally, they are financed by founders who establish such businesses as internet businesses, as well as by investors that invest in the equity of such businesses.
3.4 Are virtual currency trading platforms subject to a specific regulatory regime in your jurisdiction? Must they be registered or licensed by a regulatory authority? Does this vary depending on whether the platform accepts legal currency or whether the platform is custodial? Are virtual currency trading platforms subject to any form of ‘market abuse' regulation?
Virtual currency trading platforms are not subject to specific regulations in Taiwan and need not be registered or licensed. Nonetheless, virtual currency trading platforms are subject to the Money Laundering Control Act. If such platforms accept legal currency, they often cooperate with banks to provide deposit and withdrawal services.
Other than that, if the activities of trading platforms involve securities token offerings (STO), they will be subject to additional regulations. Regulations governing STOs of under NTD 30 million were issued on 20 January 2020, which include compliance rules for token issuers and guidelines on the issue of prospectuses to investors and other regulations under the Securities and Exchanges Act. STO platforms must obtain a securities dealer permit before they can conduct such activities. Under the current regulations, for STOs above NTD 30 million, the issuer must first apply for inclusion in the regulatory sandbox regime under the Financial Technology Development and Innovative Experimentation Act before such offerings can be made (see question 11.1).
4 Crossover with banking
4.1 How are virtual currencies positioned within the broader banking landscape in your jurisdiction?
Given that the Financial Supervisory Commission (FSC) still views virtual currencies as ‘virtual goods' rather than fiat money, and forbids financial institutions from providing deposit and exchange services for virtual currencies, there is little interaction between the banking system and virtual currencies. However, some local banks nonetheless serve as fiat money payment service providers for some virtual currency exchanges.
4.2 What impact could mainstream adoption of virtual currencies have on the ability to control inflation in your jurisdiction?
As this issue requires knowledge of complex macroeconomic factors in Taiwan, we do not have sufficient expertise to provide an opinion.
4.3 What other implications could the mainstream adoption of virtual currencies have for the banking system in your jurisdiction (eg, with respect to payment services)?
There is no sign that the adoption of virtual currencies will have any implications for payment services or the banking system.
4.4 Regarding decentralised finance, do the banking regulations in your jurisdiction apply to loans of virtual currencies or interest-bearing deposits of virtual currencies? Does this vary depending on whether stablecoins are loaned or deposited?
No, the banking regulations do not apply to virtual currencies in Taiwan, whether stablecoins or otherwise. Furthermore, the FSC has explicitly prohibited banks in Taiwan from dealing in virtual currencies.
5.1 Is blockchain technology in itself regulated in your jurisdiction and what specific legal issues are associated with its use?
There are no relevant regulations or governmental opinions on blockchain technology.
5.2 What other implications could the mainstream adoption of virtual currencies have from a technological perspective?
Virtual currencies remain a niche asset outside the mainstream for most people in Taiwan. Therefore, it is unclear what impact they might have in case of their mainstream adoption.
6 Data security and cybersecurity
6.1 What is the applicable data protection regime in your jurisdiction and what specific implications does this have for virtual currencies?
All data controllers are subject to the Personal Data Protection Act (PDPA), including virtual currency service providers. Pursuant to the PDPA, data collectors and processors must comply with certain requirements when collecting personal data from individuals.
Data controllers must also implement appropriate security measures to prevent personal data from being stolen, altered, damaged, destroyed or disclosed under the PDPA.
6.2 What is the applicable cybersecurity regime in your jurisdiction and what specific implications does this have for virtual currencies?
Cybersecurity is governed by the Cyber Security Management Act (CSMA). The CSMA does not apply to all business entities: its main targets are government agencies and critical infrastructure providers. The specific entities to which it applies are still under discussion by the competent authorities; but according to a press release issued by the Executive Yuan, entities such as energy companies, healthcare providers and major financial institutions are likely to be designated as critical infrastructure providers. Entities that are considered critical infrastructure providers will be subject to the security and reporting requirements under the CSMA.
To protect themselves from hacks, in practice, virtual currency trading platforms often establish their own internal control protocols to identify risk factors and conduct regular risk assessments.
For trading platforms whose activities involve STOs under NTD 30 million, the Taipei Exchange has issued relevant regulations with which they must comply, including relevant internal control guidelines.
In addition, offences such as hacking and denial of service attacks will incur criminal penalties, including imprisonment and fines.
7 Financial crime
7.1 What provisions govern money laundering and other forms of financial crime in your jurisdiction and what specific implications do these have for virtual currencies?
The Money Laundering Control Act (MLCA) governs money laundering activities and related crimes in Taiwan. In 2018, virtual currency platforms and trading businesses were included within the scope of the MLCA. Virtual currency platforms are generally required to undertake customer due diligence to verify the identity of customers and beneficial owners, and to retain all information obtained from this process. It is anticipated that relevant rules and regulations governing the implementation of the MLCA by virtual currency platforms will be issued in the near future.
8 Consumer protection
8.1 What consumer protection provisions apply to virtual currencies in your jurisdiction?
As mentioned in question 2.1, virtual currencies are viewed as ‘virtual goods' according to the Financial Supervisory Commission. However, under the Customer Protection Act (CPA) ‘goods' are defined as real estate or personal property in business transactions, including end products, semi-finished products, raw materials, parts and components. Hence, virtual currencies do not fall within the scope of the CPA. It is also unclear whether virtual currency service providers would qualify as ‘financial services enterprises' under Financial Customer Protection Act. As a result, in case of disputes involving virtual currencies, customers can only seek remedies under civil law.
8.2 What other implications could the mainstream adoption of virtual currencies have from a consumer perspective?
Virtual currencies could be viewed as alternative niche assets from a consumer perspective.
9.1 Do virtual currencies present any specific challenges or concerns from a competition perspective?
We currently do not envisage any notable challenges or concerns from a competition perspective.
10.1 How are transactions in virtual currencies treated from a tax perspective in your jurisdiction?
According to the Ministry of Finance, the transaction fees charged by virtual currency trading platforms constitute consideration for the sale of services. Therefore, if a transaction occurs within Taiwan, both business tax and income tax should be levied on the transaction fees. As regards the trading of virtual currencies, income tax should be levied on the income from the transaction.
11 Trends and predictions
11.1 How would you describe the current landscape and prevailing trends in your jurisdiction as regards virtual currencies? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
In 2018 the Financial Supervisory Commission introduced the Financial Technology Development and Innovative Experimentation Act, which establishes the regulatory sandbox regime, with the aim of promoting the development of financial technology. Taiwan has also introduced regulations on securities token offerings, although the requirements are considered rather stringent for virtual trading platforms. The government is expected to promulgate rules and regulations regarding anti-money laundering for virtual currency service providers in the near future.
We anticipate that the government will continue discussions with virtual currency service providers on how best to address the rapid innovation in this space.
12 Tips and traps
12.1 What are your top tips for virtual currency providers seeking to enter your jurisdiction and what potential sticking points would you highlight?
Despite the current lack of formally promulgated rules on anti-money laundering, it is advisable that new virtual currency service providers:
- implement robust know-your-customer and anti-money laundering protocols to control risks; and
- retain reasonable transaction records to enable them to respond to potential inquiries from government agencies and law enforcement bodies.
As Taiwan applies the Howey test to securities token offerings (STO) (see question 1.1), any token offering within Taiwan should not fall under the definition of an ‘STO' under the Howey test. An STO that meets this definition may take place in Taiwan only if it:
- conforms to the STO regulations in Taiwan; and
- is licensed by the Financial Supervisory Commission (FSC) or is effected through a service provider licensed by the FSC.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.