Taiwan’s crypto scene is booming, but still needs a clearer regulatory framework to thrive
The world witnessed the explosive rise of blockchain last year, the popularity of cryptocurrencies, in particular, has reached a fever pitch. Under current regulatory frameworks, many aspects of cryptocurrency are still operating in murky waters. Yet, when it comes to regulating and policymaking, there seems to be little consensus on what is appropriate and what is not. Countries around the world have come up with their own playbook—Japan and Singapore have pursued a more open-handed approach, while the US and China have taken a more stringent stance.
Last year, the Chinese government’s move against cryptocurrency prompted an exodus of crypto exchange services and related businesses out of the country. China-born crypto exchange Binance recently relocated to Malta, seeking a fresh start in a regulatory environment much favorable for crypto businesses. Furthermore, a flow of capital and talent have diverted to neighboring markets like Japan, Korea, and Taiwan. But unlike the former two, Taiwan has not yet developed a clear framework to regulate cryptocurrency.
Over-regulation could bottleneck innovation. What is seen across the board is heavy-handed and inflexible regulatory actions driving industry players to more lenient markets. Having a more lenient regulatory environment has, in a way, become an appeal for blockchain companies overseas to land in Taiwan; however, lack of clear guidelines has hindered industry growth in that businesses would need to feel their way through as they go.
Recognizing that this is a window of opportunity to attract capital and more global players to set up shop, the government has shown stronger interest and eagerness to start the ball rolling over the past couple of months. On May 22, Taiwan formed a self-regulatory organization (SRO) and a parliamentary group, which aim to build trust and between industry incumbents, legislators, and policymakers and develop industry standards.
The tide is turning
The small island in East Asia made its name as an electronics and hardware manufacturing hub more than a decade ago. Carrying a heritage in manufacturing and traditional industries, the Taiwan market has always been considered as more conservative towards something as uncertain as cryptocurrency. Recently, however, it has emerged as a hotspot for blockchain and cryptocurrency—although still can’t be compared with blockchain hubs like Singapore or Silicon Valley, it is gaining more recognition.
It took sometime before the blockchain industry gained a more solid footing in the hardware-focused Taiwan. Ryan Terribilini, CEO at Formosa Financial, told TechNode the local blockchain ecosystem has been growing and developing rapidly over the past year. Terribilini was an early comer to the Taiwan crypto scene, who worked for currency exchange and remittance platform Ripple prior to Formosa Financial, a financial services provider for blockchain companies.
“I see a consensus forming that there needs to be some form of regulation, but what is not clear is what that will ultimately lead to,” Terribilini said. People participating in the ecosystem are currently policing themselves: they know how the game is played better than the Financial Supervisory Commission (FSC) does, he added.
“We want to make sure that Taiwan’s environment for blockchain industry is regarded as a positive environment, both locally and internationally,” and coming up with some standard guidelines is useful in that it sets the tone for the development.
The Taiwan Crypto Blockchain Self-Regulatory Organization (TBSRO), which formed in May, is led by legislator Jason Hsu, a big proponent of blockchain and crypto. The organization acts as an instrument to bring the industry together to decide on common guidelines. It is also a mechanism to minimize the need for excessive government involvement.
Taiwan is not the first to see self-regulation as a middle path to regulate blockchain and cryptocurrency. In March, after the $500 million Coincheck hack, 16 Japanese cryptocurrency exchanges came together and formed a self-regulatory body, the Virtual Currency Exchange Association (JVCEA). Cryptocurrency exchanges in South Korea are also moving towards self-governance. The Korean Blockchain Association has also developed a self-regulatory framework to assuage worries over money laundering, tax evasion, among other emerging issues.
The founding reception of the self-regulatory organization and the parliamentary coalition for blockchain was joined by over 200 industry leaders, including Binance founder CZ (1st row, 2nd from left) and Maicoin CEO Alex Liu (1st row, 5th from right) . Formosa Financial and Kyber Capital were in attendance as well. (Image Credit: Business Nex Media)
It is obvious that the overall sentiment in Taiwan is changing. In the past, the government has taken a hands-off approach in regulating new technologies. Even though it is still cautious about cryptocurrency, it is becoming more supportive. Apart from establishing a parliamentary coalition, which aims to unite the island’s lawmakers to build a better-defined regulatory framework, the National Development Council and Financial Supervision Commission both declared long-term support for the development of blockchain technologies.
Needing clarity in crypto regulations
Lack of clear regulations is one of the major roadblocks restricting the growth of the industry. Today, many crypto activities including ICOs are in a grey area in Taiwan because there is no actual regulation on cryptocurrency.
What is happening on the island now is allowing grassroots industry organization to gauge what the best practices and potential regulatory frameworks should be. It then will come down to the legislators’ ability to work with regulators to make sure everything is clarified for financial institutions and businesses.
Many financial institutions in Taiwan are also concerned about money laundering, Terribilini said. There’s currently no inclusion of cryptocurrency in money laundering laws—which makes banks very hesitant to work with blockchain companies. “Until there is regulatory clarity, the banks won’t support or participate in the ecosystem as much as they can,” he told us.
Even so, large exchanges in Taiwan are already actively working on building better trust mechanisms. “Running an exchange should require AML [anti-money laundering] compliance, so having a trust structure sets the bar for the industry and serves as a reference for regulators on policy making,” Nick Chang, the general manager of Taiwan’s largest digital asset exchange Maicoin, told TechNode.
Maicoin is a digital asset trading platform that matches user orders with partner exchanges outside of Taiwan. This year, the company branched out to MAX, a full-featured exchange service. The company said it has been and will continue to communicate with the government on AML, KYC (Know Your Customer), and ICO related policy making.
Having a clear policy in place will help exchange services better protect customers from financial fraud. On top of establishing a crime-reporting hotline with the law enforcement, Maicoin said it will continue to implement the latest KYC solutions to raise the difficulty for fraudulent activities. “We have seen some success, but we still seek more engagement from the government on this aspect.”
Once regulators have a clearer definition of what cryptocurrency is, then they can figure out how to regulate ICOs and other activities. At this stage, cryptocurrencies and the tokens issued through ICOs are still classified as commodities. However, Taiwan’s Central Bank recently signaled that regulating cryptocurrencies under the existing AML laws could take into effect as early as the end of the year (in Chinese).
ICO is an alternative funding method for businesses. Chang said the SMEs (Small and medium-sized enterprises)–the main contributor to the island’s economic growth–can benefit greatly from ICOs if was formally regulated.
Finding a unique niche
Many are racing to build the next favorite landing spot for blockchain companies. Perhaps for Taiwan, it is not about playing catch-up with established blockchain hubs, but more about filling a unique niche.
Taiwan has many advantages compared with financial hubs like Hong Kong and Singapore “primarily because it is a regional technology power in Asia,” Thomas Hu, founder and CEO of Hong-Kong based venture capital firm Kyber Capital, said in a written response to TechNode.
The island has a rich history in hardware and electronics manufacturing, which serves Taiwan particularly well as it requires a lot of hardware innovations, such as in mining chips, to develop new blockchain technology and applications. Specialization in hardware-software integration also gives Taiwan a leg-up.
Taiwan is home to some of the world’s largest semiconductor companies and chipmakers like TSMC and MediaTek. Its legacy in electronics and hardware has fostered a talent pool, Hu said, “many Taiwanese engineers and scientists are making important contributions to algorithms and system designs underpinning the crypto industry, especially in Ethereum.” Comparing with other markets, Taiwan is a place to hire engineers at a much more reasonable cost.
Founded in 2015, Kyber Capital invests in early-stage ventures that focus on blockchain applications, financial technologies, and new financial services. Kyber Capital is one of the early investors of Maicoin and CoolBitX, a Taiwan-based cryptocurrency hardware wallet company.
Aside from having a relatively lenient regulatory environment, Taiwan’s geographic location also makes it more appealing to overseas blockchain companies. Being in Asia, a multitude of crypto communities, finance, and tech centers are in the vicinity. Hu added that “its geopolitical ‘safe distance’ from Mainland China also creates a ‘safe harbor’ effect, attracting crypto talents and capital globally.”
Hu pointed out that although Hong Kong and Singapore have become known as global financial hubs, such status can hinder the industry’s development as industry incumbents might see little upside in adopting blockchain technology. Besides, what these cities lack is something that Taiwan has plenty: the tech talents that propel blockchain innovations. All in all, they serve a different function as financing platforms for blockchain and crypto companies who are seeking access to capital markets.
Gaining access to capital in Taiwan, in comparison, is more difficult not only because the market lacks the depth and breadth, but also because local VC firms and institutional investors are still very conservative. “These disadvantages are actually blessing in disguise, as successful startups are very lean and mean. We feel these are critical factors in surviving the increasingly fierce competition in the global crypto industry,” Hu said.
Although the crypto and blockchain scene in Taiwan is still nascent compared to its peers in Asia, it is seeing rising interest from crypto exchange services and startups overseas, including Binance who ran into regulatory roadblocks in Hong Kong and Japan.
“This is partially due to the relatively lenient regulatory regime in Taiwan and the willingness among local banks to service crypto companies, especially exchanges,” Hu said. The regulatory sandbox regulation is also a significant milestone. Lawmakers passed the Financial Technology Innovation and Experiment Act (more commonly known as the Financial Regulatory Sandbox) last December, which grants tech companies more leeway when experimenting with innovative financial services. Taiwan is the fifth to implement such financial sandboxes after Britain, Singapore, Australia, Thailand, and Hong Kong. The regulatory sandbox will likely attract more international blockchain and cryptocurrency companies to set up shop in Taiwan.
The crypto space is heating up as more capital pours in. “The technology hurdles such as blockchain scalability and crypto asset security are less worrisome than the issues of governance,” Hu said. The market needs to filter through the fluff and scrutinize the commercialization prospects of many ICO projects. More specifically, the industry needs to invest in infrastructure. The financial industry increasingly views cryptocurrencies as an emerging asset class and is looking for ways to gain more exposure, but existing trading and custody infrastructure adopted by many crypto industry players are still not up to speed to meet the safety requirements of legacy financial institutions.