Heading for the moon or oblivion?

In September 2021 there were an estimated two million cryptocurrency users in Taiwan.

Earlier I mentioned STOs, and I believe it important to understand STOs so that we can clearly differentiate them from the pure cryptocurrency market in Taiwan. By way of repetition, if any "virtual token" in Taiwan takes on the nature of a security (i.e., a security token) any offering of that security token is referred to as a "security token offering" (STOs) and subject to regulation.

The STO regulations were meant to create a reliable fundraising channel for new equity fundraising for Taiwan startups, however for reasons that remain unclear the FSC imposed overly restrictive STO regulations. The rules generally permit only professional investors, defined as those with assets of NT$30 million or more and sufficient "knowledge and trading experience," to participate in STOs and also cap the subscription amount per project at NT$300,000 (this subscription limitation basically rules out institutional investors as the sums are just too small for their investment strategies).

Then, as though icing the restrictive cake, STOs above NT$30 million must be conducted through Taiwan’s Fintech Regulatory Sandbox. The Taiwanese financial market is wary of the the sandbox’s reputation for red tape, with the no doubt unintended result that it is unlikely to be useful for STO fundraising.

There are also licensing issues and minimum capital requirements to overcome, and a further key problem is that investors must use NT dollars to purchase the token, thereby essentially excluding the global market and even though the FSC revised the regulations in January this year, to allow foreigners to participate in STOs this measure was seen as having little or no positive impact.

So, what of the cryptocurrency market in Taiwan which has continued to grow? In addition to the retail market, we now see active investment from large international banks such as Standard Chartered, BNY Mellon, Citibank, and UBS.

Does this signal that cryptocurrencies are here to stay, and are there opportunities for Taiwan to benefit, particularly in the Asian market? China is not a competitor as it has banned cryptocurrencies (this includes Hong Kong). Japan has its own huge industry, but it functions very much as a purely domestic market. Commentators have often sought to draw parallels the cryptocurrency markets in Singapore and Taiwan. However, in January this year, the Monetary Authority of Singapore told cryptocurrency exchanges not to promote their services to the Singapore public. So perhaps the way is clear for Taiwan to seize the opportunities that the lovers of cryptocurrency have touted? 

As noted above, since July 2021 cryptocurrency exchanges must adhere to the MLCA by, for example, complete know-your-customer (KYC) requirements to authenticate the identity of their clients, establish an internal control and audit mechanism, a reporting procedure for suspicious transactions and exchanges must report transactions greater than NT$500,000 conducted in cash.

The local crypto industry has in fact generally reacted positively to these regulations and there is even talk of wanting more regulation (provided it would firm up the continuation of the industry, allow it to attract more high-quality institutional investors and perhaps also have a benefit when applying for global licenses). As a non-Taiwanese but someone with a deep background in the global fight against financial crime and onboarding processes I put myself through the KYC process with one of the Taiwan exchanges and came away very impressed with the rigor and depth of the process, especially as it was an online non-face to face process.

We should be cautious of painting an overly rosy image of the Taiwanese cryptocurrency market. Scams have already occurred (and no brave person would rule out the possibility of more). Examples include:

• A January 2019 Ponzi scheme that amassed NT$51 million in investment from over 100 Taiwanese and Chinese citizens
• In May 2019, a Taiwanese based exchange had millions of dollars of Bitcoin hacked from its wallets because of hackers being able to penetrate an undisclosed loophole in the exchange’s safeguards
• A September 2021 scam that targeted individuals with substantial retirement savings and defrauded more than 100 investors of some NT$150 million.

Even with these scams, Taiwan does appear permissive of cryptocurrency retail investment and despite the FSC doing its job in warning investors of the risks of investing in cryptocurrencies it appears these warnings have done little to curb trading. 

But let’s be honest, there is still an "elephant in the room" on cryptocurrencies and I believe the events that have taken place just recently highlight what concerns many people, that cryptocurrencies remain something with no inherent value and lack government backing, such as fiat currencies (i.e., a government issued currency such as the NT dollar).

Some financial commentators have long compared crypto to a Ponzi scheme, though with a Ponzi scheme there is usually a central administrator "pulling the strings" (as no doubt was the case with the 2019 incident in Taiwan, noted above). These same commentators see the value of cryptocurrencies as simply what everyone has decided that it’s worth with the added concern that crypto tokens can be easily made. A recent Financial Times (FT) article highlighted that "there are now almost 20,000 cryptocurrencies out there" (i.e., in the international market and not just Taiwan), "making a mockery of the idea of digital scarcity".

Nevertheless, the same FT article still pondered whether despite the concerns of value and Ponzi scheme-like characteristics it would make makes sense to put a bit of money into cryptocurrency (a decision that some two million Taiwanese seem to have answered in the affirmative). The risk is that the investment could all go to zero, but that is a known risk. There is also the risk that by not investing the value of the cryptocurrency that it could go up multiple times and the investor misses out. But the FT raises a further issue by describing cryptocurrency as "a negative-sum game" which could lead to "billions lost in outright scams," and the impossibility of counting "the number of people who have been given false hope." It remains to be seen if investor confidence can be restored following the recent sharp selloff. The FT article concludes with the writer being unable to take "crypto seriously — either as an asset or as a form of money."

I have no real answer to these issues and concerns other than adhering to the long-quoted statement that as with any investment, only invest what you can afford to lose. Full disclosure: I have no cryptocurrency holdings (and even if I had available liquid assets, I am unsure whether I would invest in cryptocurrency). Certainly, this article is not and never was intended as positive or negative advice.

Whilst we must watch how the situation plays out, there is still a long way to go in Taiwan’s embrace of cryptocurrency, or if there is potential for it to become viewed as more mainstream (difficult in Taiwan’s otherwise traditional and risk-averse financial market).

One thing that is certain, however, is the eagerness of the current market participants to continue to encourage the growth of the existing market but also to innovate and become more attractive and lucrative for both the exchanges and their customers.

I for one will be watching with interest to see if Taiwan can really develop into Asia’s cryptocurrency haven.

Paul Shelton is a consultant with 30 years of experience in the international financial services and related industries with skills in all aspects of legal and financial crime compliance and regulatory relationship advisory and management.