November 2023
Teresa Huang and Lilian Hsu
To protect consumer rights and interests while avoiding stifling the development of the fintech industry, the Financial Supervisory Commission (hereinafter, the “FSC”) followed the instructions of the Executive Yuan in March 2023 to take on the role of the competent authority for virtual asset platforms with financial investment or payment features and to plan to enhance the regulation of domestic virtual asset platforms in a progressive manner.[1] In September 2023, the FSC announced the Guidelines for the Administration of Virtual Asset Service Provider (VASP) (hereinafter, the “Guidelines”), which serve as a reference for the compliance of operators in conducting their business. The Guidelines are highlighted below:
1. Regulatory targets
The regulatory targets of the Guidelines are virtual asset service providers (hereinafter, “VASPs “) that have completed the anti-money laundering (“AML”) compliance statement and engaged in the following activities: (Point 2 of the Guidelines)
(1) Exchange between virtual assets and fiat currencies, such as New Taiwan Dollars, foreign currencies, and currencies issued by Mainland China, Hong Kong, or Macau
(2) Exchange between virtual assets
(3) Transfers of virtual assets
(4) Custody or management of virtual assets, or provision of related management tools
(5) Participation in and provision of financial services related to the issuance or sale of virtual assets
Although overseas virtual asset platform operators are not the regulatory targets of the Guidelines, still if they have not registered under the Company Act and completed the AML compliance statement with the FSC, they are not permitted to conduct advertisement related to virtual assets or engage in solicitation activities related to the deposit and withdrawal of New Taiwan Dollars in Taiwan or to Taiwan nationals. (Point 1 of the Appendix of the Guidelines)
2. Rules for the business operation of VASPs
(1) Mechanisms for reviewing the issuing and listing/delisting of virtual assets
For the issuance of virtual assets, when issuers issue virtual assets through VASPs, issuers should prepare a white paper disclosing certain contents, and VASPs should make the link to this white paper publicly available. (Point 3 of the Guidelines)
For listing or delisting virtual assets, VASPs should establish review criteria and procedures for the contents of the white paper and the listing and delisting process for virtual assets. Such procedures should be incorporated into their internal control system. (Point 4 of the Guidelines)
(2) Required segregation of a VASP’s assets from its customer assets
VASPs must segregate legal currency or virtual assets received from customers for virtual asset transactions and collection and payment services from their own assets. In particular, if the assets received are legal currencies, VASPs should deliver these assets to a trust or obtain a full guarantee from a bank. (Point 5 of the Guidelines)
(3) Comprehensive internal regulations, systems, and mechanisms required of VASPs
VASPs must have comprehensive planning for internal rules, systems, and related mechanisms to protect consumer rights and maintain market trading order. Such planning includes formulating trading rules to ensure fair market trading mechanisms, planning information security management systems and information systems, and setting up complaint channels for consumers, among other measures. (Points 4-11 of the Guidelines)
3. Restrictions on the business operation of VASPs
(1) VASPs shall not issue stablecoins. (Point 3, Paragraph 1 of the Guidelines)
(2) VASPs are not allowed to engage in the trading of derivative financial products with virtual assets as their underlying assets(Point 12 of the Guidelines)
(3) VASPs are not allowed to operate virtual asset business with securities characteristics without permission (Point 12 of the Guidelines)
In addition to the restrictions explicitly stated in the Guidelines, VASPs should also be vigilant about whether the services they provide involve other regulated financial services, such as accepting deposits, providing investment advice, or other regulated financial services.
At present, the FSC’s regulatory measures for VASPs in Taiwan are still in a developmental stage, and this trend can be inferred from the explanation of the Guidelines. For instance, Point 5 of the Guidelines only requires that VASPs should appoint a certified public accountant to prepare an annual report on assets held on behalf of customers. The report format is currently not specified and can be an audit, assurance, or agreed-upon procedure report. However, the explanation of this point notes that, in the future, it is not unlikely that a tiered management mechanism may be imposed, depending on the scale of operators, to require operators to obtain a certain level of assurance or audit opinion from the certified public accountant regarding the periodic checks on customer assets. Furthermore, there are still uncertainties in individual cases regarding how the boundary between VASP businesses and traditional financial services will be defined by the judiciary.[2] Therefore, in this stage of the ongoing development of regulations and instability of evolving practical opinions, VASPs are advised to keep tracking relevant legislative updates, announcements of the competent authority, and court decisions and opinions.
[1] The FSC’s newsletter dated September 26, 2023 and titled The Promulgation of the “Guidelines for the Administration of Virtual Assets Platforms and Trading Businesses (VASP)” by the Financial Supervisory Commission, https://www.fsc.gov.tw/ch/home.jsp?id=96&parentpath=0,2&mcustomize=news_view.jsp&dataserno=202309260005&dtable=News (Last Reviewed on October 19, 2023)
[2] Elva Chuang and Weke Chen, The Supreme Court of Taiwan Recognizes Virtual Currency with Economic Value as the “Deposits” or “Funds” Regulated by the Banking Act, at https://www.leetsai.com/fintech/the-supreme-court-of-taiwan-recognizes-virtual-currency-with-economic-value-as-the-deposits-or-funds-regulated-by-the-banking-act (Last Reviewed on October 19, 2023)
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