Elva Chuang
The Financial Supervisory Commission (“FSC”), as the authority in charge of money laundering prevention for enterprises handling virtual currency trading platforms and transaction business (hereinafter, the “Virtual Currency Enterprises”), prepared and released the draft Regulations on Money Laundering and Terrorist Financing by Enterprises Handling Virtual Currency Platforms and Transaction Business[1] on May 25, 2021 in reference to related recommendations released by the Financial Action Task Force (hereinafter, the “FATF”) on money laundering prevention after the Executive Yuan specifically designated the scope of the Virtual Currency Enterprises on April 7, 2021. The aforementioned draft has come into force on July 1, 2021 after the regulation pre-announcement procedure. The key points of the Regulations on Money Laundering and Terrorist Financing by Enterprises Handling Virtual Currency Platforms and Transaction Business[2] (“Regulation”) implemented on July 1, 2021 are as follows.
Scope of enterprises regulated by the Regulation
The enterprises regulated by the Regulation refer to those which are incorporated in Taiwan and engage in the following activities for others as their line of business: (1) exchanges between virtual currencies and New Taiwan Dollars and between foreign currencies and currencies issued in the Mainland area, Hong Kong or Macao; (2) exchanges between virtual currencies; (3) transfer of virtual currencies; (4) custody or management of virtual currencies or provision of relevant management tools; and (5) participation in, and provision of, financial services related to the issuance or sales of virtual currencies (see Article 2, Paragraph 1, Subparagraphs 1 and 2 of the Regulation). The specific essence of the abov five major activities regulated by the above Regulation is described below:
1. Operators that conduct the exchanges between virtual currencies and New Taiwan Dollars and between foreign currencies and currencies issued the Mainland area, Hong Kong or Macao: According to the descriptions of the Regulation, the types of business activities regulated under this subparagraph should refer to those who engage in the purchases and sales of virtual currencies for customers. Currently, platform operators that engage in the purchases and sales of virtual currencies may potentially be the targets of regulation under this Subparagraph (1).
2. Exchanges between virtual currencies:This subparagraph regulates those who help their customers engage in “cross-currency transactions” for others. Currently, several transaction platform operators have launched thevirtual currency Staking programs,[3] Defi mining,[4] or Cifi projects, which may all involve the “cross-currency transactions” regulated under this subparagraph, and the related platform operators that engage in the above activities should be the targets of regulation under this Subparagraph (2).
3. Transfer of virtual currencies: If the related platform operators provide virtual currency transfer services such as assisting Customer A to transfer a virtual currency (such as BitCoin) to Customer B through a transaction platform, such platform operator is the target of regulation under this Subparagraph (3). In addition, literally, this subparagraph does not exclude platform operators that assist with the cross-border virtual currency transfer business.
4. The custody and management of virtual currencies or the provision of related management tools: this subparagraph regulates the operators that provide virtual currency custodial services to customers, including operators that currently provide custodial management of virtual currencies, such as crypto asset management companies, custodians, etc. This subparagraph may also involve companies that provide the tools and technologies of the custody of virtual currencies. In addition, according to the descriptions of the Regulation, the so-called “provision of related management tools” refers to the provision of private key custody services to customers. As such, operators that provide non-custodial wallets (such as operators that simply provide cold and hot wallet products), may not fall within the scope of this subparagraph.
5. Participation in and provision of financial services related to the issuance or sale of virtual currency: According to the descriptions of this Regulation, the activities regulated under this subparagraph refer to the underwriting of virtual currencies. To wit, issuers of ICOs, STOs, and IEOs, and platform operators that provide underwriting services for ICOs, STOs, and IEOs are all regulated under this Subparagraph (5).
The Regulationcome into effect on July 1 this year. It is recommended that relevant Virtual Currency Enterprises should establish relevant internal mechanisms and information systems as soon as possible to timely respond to the requirements.
The Virtual Currency Enterprises regulated under this Regulation are required to set up internal control and audit systems for the prevention of money laundering and the combat against terrorist financing (stipulated under Articles 14 to 16 of the Regulation), and fulfill the obligations related to AML under the Regulation, including the implementation of procedures such as the verification of customer identity, continuous examination of customer identity (Articles 3 to 6 and 8 to 9 of the Regulation), retention of relevant records (Article 10 of the Regulation), and reporting of cash transactions above a certain monetary threshold (NT$500,000) pursuant to law, reporting of suspected money laundering or terrorist financing transactions (Articles 12 and 13 of the Regulation), etc.
The above provisions of the Regulation (except for the part concerning the real-name system for cross-border platforms in Article 7 of the Regulation) cameinto effect on July 1 of this year, and the FSC may impose fines ranging from NT$500,000 to NT$10,000,000 under the Anti-Money Laundering Law for violations of the above provisions. Therefore, related operators are advised to establish relevant internal mechanisms and information systems as soon as possible to timely accommodate the requirements of laws and regulations.
[1] FSC’s newsletter dated May 25, 2021 at: https://www.fsc.gov.tw/ch/home.jsp?id=96&parentpath=0,2&mcustomize=news_view.jsp&dataserno=202105250007&dtable=News, last visited on May 25, 2021
[2]FSC’s newsletter dated July 1, 2021 at: https://www.banking.gov.tw/ch/home.jsp?id=525&parentpath=0&mcustomize=lawnew_view.jsp&dataserno=202106300005 , last visited on July 1, 2021.
[3] Blockers, the Alluring “Staking Economy,” what is going on? , URL: https://blockcast.it/2019/05/13/what-is-staking-economy/, last visited on May 13, 2019.
[4] Confession of a farmer engaging in “liquidity mining” on DeFi: How did I lose $5,000?, URL: https://blockcast.it/2020/09/16/how-i-lost-5k-in-defi-yield-farming/, last visited on September 16, 2020.