Taiwan Proposes Draft “Virtual Asset Service Law”: Covering Stablecoins, Market Integrity and Navigating Innovation

Tags: regulation, stablecoin, taiwan

Key Takeaways:

• Taiwan will introduce a policy framework to regulate virtual assets, which is a key milestone in incorporating crypto into Taiwan’s financial ecosystem.
• The legislation seeks to establish a safe and regulated framework for digital assets, covering key aspects such as licensing, stablecoins, and market manipulation.
• Industry executives are cautiously optimistic about a change in regulatory approach, though a fully established legal framework remains uncertain.

Taiwan is taking significant steps to formalize its cryptocurrency industry. The Financial Supervisory Commission (FSC) recently issued a consultation draft of the law in a 60-day public consultation period, a watershed moment for the island’s handling of digital assets. This will require approval of the draft legislation, reflecting an effort to mitigate risks rather than merely capitalizing on market trends.

Establishing a Foundation: Licensing and Operational Management

The new regulatory framework would introduce comprehensive rules governing virtual asset service providers (VASPs). The drafted legislation contains major rules intended to establish a more orderly and safe atmosphere for the virtual asset service providers (VASPs) and their investors. A central component of the regulations would be the formation of a licensing system for the VASPs, which defines concrete prerequisites for companies in the crypto economy.

This licensing regime will ideally be comprehensive, covering areas such as:

• Financial prudence: Capital and stability requirements, as well as risk management.
• Internal controls and auditing: Establishment of strong systems to mitigate risk and ensure compliance.
• Protection of customers: Policies designed to safeguard investors’ assets and data (i.e. clear processes for custody accounts and withdrawals).
• Information disclosure: Transparency requirements to be able to give the users sufficient information about both the risks and the operations of the VASPs.

Such regulations seek to ensure that VASPs are operated in a highly professional, accountable manner to protect consumers and encourage confidence in the digital asset marketplace. It echoes a global trend, with other jurisdictions like the European Union and Hong Kong having either imposed, or working towards imposing, comprehensive licensing schemes on crypto firms.

The Regulation of Stablecoins and Market Integrity

The draft law also addresses the growing importance of stablecoins, which are digital assets designed to maintain a stable value relative to a traditional currency or asset. The new proposal outlines a framework for issuing stablecoins, including a licensing requirement and how ongoing supervision would work. This is an important move as stablecoins become an increasingly critical means of enabling transactions between different parts of the crypto ecosystem.

Apart from licensing and stablecoins, the Virtual Asset Service Law aims to tackle fraudulent activities and market manipulation within the crypto market. The law will ban virtual asset fraud and manipulation and will establish an audit system to monitor the market. These regulations are necessary to protect investors from scams and other forms of illegal activity that could undermine market integrity.

Embracing Innovation and Navigating Challenges

Although the “Virtual Asset Service Law” is rigorous as a regulatory framework, the law also recognizes the importance of nurturing the competitiveness of the crypto industry. The proposal makes room for the creation of regulatory sandboxes, which enable firms to test new crypto products and services in a controlled environment.

Nonetheless, the incorporation of crypto into the traditional financial system does raise some hurdles that regulators will need to tread carefully over. One of the core challenges is finding the right balance between regulation and innovation. Overly stringent regulations may stifle the crypto sector and drive innovation abroad.

In addition, the international nature of crypto presents unprecedented regulatory challenges. Because crypto assets can move easily across borders, regulators need to cooperate internationally to tackle issues like money laundering and tax evasion. Among the notable voices advocating for regulatory alignment was Brian Armstrong, Coinbase CEO, who emphasized the need for international cooperation to ensure consistent crypto regulations across jurisdictions.

An Attitude Change Celebrated by Industry Leaders

The proposed comprehensive regulation of crypto by Taiwan has been welcomed by industry heavyweights who for the last four years have found their sectors stifled by regulatory ambiguity. At a recent Crypto Inaugural Ball in Washington, D.C., attendees expressed optimism about the prospect of clear and permanent legislation that would provide regulatory clarity for the crypto industry.

The sense is that the relationship between the crypto industry and governments is changing. Public-private cooperation is critical to the stability of regulations, and companies ranging from USDC issuer Circle to Coinbase are having more open lines of dialogue with new administrations.

An interesting discussion revolves around meme coins and their potential role in the crypto ecosystem. They are dismissed as trivial by some, but the industry acknowledges their potential role in the broader crypto landscape. Innovation is often playful, but financial play at the consumer level without strong regulations in place comes with a consumer-protection warning.

A Future Outlook: Could it Become the Crypto and Blockchain Hub of Asia?

Taiwan’s crypto-friendly stance could attract crypto service providers and strengthen its position as a key player in the Asian market. Taiwan’s goal with the new regulations is to have a clear and regulated environment for digital assets which will allow investment opportunities, encourage innovation and ensure a safe and secure platform for crypto users.

Nevertheless, the success of Taiwan’s crypto ambitions will hinge on striking the proper balance between regulation and innovation, as well as working closely with other jurisdictions to combat the challenges presented by digital assets.

The Financial Supervisory Commission (FSC) said the draft will be submitted for the review of the Executive Yuan by the end of June 2025.