Token Economy in Taiwan: a Half-Time Review in 2019
Co-authored with 黃亞森 Arthur Huang, this was published in 0xMag in 2019 as a cover story. It was at the time a group of Taiwanese solution providers attending an exhibition in the states, and it is more like a flyer attracting crypto society seeing Taiwan. However, it is also interesting to review my own forecast and comments after several months.
[Forword] Taiwan played a critical part in the global semiconductor and technology industry. The island has never-stop innovation spirits, experience talents, and large industrial clusters covering semi-conduct, legal and accounting service, financial services including banks and insurer. Global-wide collaborations make a small island a vital partner in the entire industrial value chain. In my option, this island of Formosa, named in the 17th century, has set a clear roadmap to transcend with emerging technologies.
Development of Legal Institutions is the foundation to innovate and to revive
Taiwan has prudently embraced digital financial Services in solid paces.
With high penetration of Internet, cellphone, and credit card, and well-established infrastructure, Taiwan is a mature and ideal market for field-testing of the new business model. On the legal-institution ends, Taiwan adopted a prudent to promote digital financial services. In payment services, it has the Act Governing Electronic Payment Institutions; Existing Securities Exchange Act, along with Clauses of the Real Estate Securitization Act and the Financial Asset Securitization Act, could also apply to token and coins activities. In January 2018, Taiwan became a very first civil law jurisdiction support financial regulatory sandbox with the law passed by parliament, the Financial Technology Development, and Innovative Experimentation Act.
The new business model could be trail and be a pilot in the real world context but within a controllable boundary. We observe the services have been open up to non-bank market players gradually. Take remittance as an example, such business used to license only to the bank, and is trailed by two startups in the financial sandbox, and will soon be open-up as a permissible service by payment institutions, confirmed by the consultation paper issued by the Financial Supervisory Commission (FSC). Also, three virtual bank preliminary approvals were granted in July 2019. Those neo banks’ operations will highly support by emerging technologies and by the Retailer, Telecom, and Messenger.
Aside from Financial Services, National Development Council (NDC) recently established a Blockchain Alliance to promote the local development in the blockchain industry and shrink the gap between academia, the government, and the technology sectors.
Adoption: Security Token Offerings
STO will be grand tools to fundraising as SMEs plays a critical role in Taiwan’s economy
The FSC announced its regulatory policy toward STO. Firstly, concerning the well-known Howey Test in the U.S. securities context, the FSC issued an order to cover the so-called security token into the Securities and Exchange Act. It is specified that only token underlying with a distributed ledger or similar technologies to recognize and reconcile its value fall into such categories digitally. In Mid-September, the Taipei Exchange further announced operational details, including the criterion of exempt securities, token issuers, cybersecurity, and public disclosure requirement, and the two types of securities will be on-chain at the first phase: profit sharing and debt obligation.
It illustrates a much more transparent framework to follow while determining whether the token issued will be a security token. STO brings a new source of capital to the local capital market and implies a grand potential to further connect to other capital markets as DLT could offer 24/7 service in a multi-center clearing and settlement technologies. We expect that such a giant leap could assist those SMEs in raising funds in the global context, and more Taiwanese innovation will stand up in the worldwide stage.
Scam, Fraud & Money Laundering
It will be the challenges ahead before the achievement of the mass-public acceptance of cryptoassets. It shall be institutionalization and fraud and scams shall be eliminated
During 2017, the year of ICO, many startups get funded with their apparent promising projects. However, according to the study conducted by Satis Group, approximately 78% of ICO were identified as a scam. All the fraudulent acts derived from the cryptoassets ecosystem, like illegal deposit, pump and dump schemes, money laundering, Ponzi scheme, and hacking, which leads to a bunch of victims, are indeed the stumbling blocks of the development of cryptoassets and token economy. Besides, the volatility of cryptoassets, market speculation, and risk avoidance mindset hinders the public from accepting cryptoassets.
%%Therefore, in the conclusion of the KPMG Global White Paper, it pointed out that there are still many obstacles to overcome before cryptoassets become acceptable to investors. It is because of the lack of trust and scalability, “assets” such as Bitcoin cannot be regarded as a medium of exchange for professional investors, not to mention an asset that can store value. That’s why institutionalization is a necessary step to build up a scalable token ecosystem.
In June 2019, the Financial Action Task Force (the “FATF”) released its risk-based approach guidelines for virtual assets and its service providers, expand the regulatory scope from cryptocurrencies into entire cryptoassets spectrums, also its service providers, named VASPs. In addition to traditional businesses like exchange or wallet, the guidelines set forth detail approaches apples to all the entities involved in relevant activities. Upon this FATF guidance, we observe that VASPs, crypto exchanges, for example, currently join self-regulatory organizations, will be regulated in this context. Those service providers who only processed cryptocurrencies shall be registered and regulated like Payment services provider.
Taiwan rose to regular follow-up categories in the third round of a peer review of its anti-money laundering efforts, conducted by the Asia Pacific Group on Money Laundering (APG), demonstrate high effectiveness of cross-sector measures. Upon the foundation of the already amended Money Laundering Control Act, FATF guidelines are expected to incorporate into operational rules. With consider considering the market integrity and operational efficiency, and to avoid regulatory arbitrage, regulatory measures shall be cast in the risk-based approach or at tiers systems. The VASPs may be requested to establish a mechanism similar to traditional financial institutions, including its detection of abnormal activities, customer due to diligence measures, and relevant systems support such governance, risk, and compliance functions.
Such regulatory development applied to payment token at apparent, says Bitcoin and USDT, but will also apply to other types of cryptoassets. We observe that STO, as mentioned earlier regulation and AML rules, will be soon be integrated in Taiwan, as different tokens may be backed to different assets, or represented various services or rights. Therefore, it will be critical to establishing a fair and transparent framework to effectively identify and evaluate the risk of money laundering and form a complete abnormal token transaction pattern.
The consortium of Hardware and Software in the island
Microprocessor, Semiconductor, and software together create revolutionary potential
Beyond the capital market activities in ICO/ STO context, those manufacturers in industrial parks also play critical roles in the cryptoassets ecosystem. Considering payment token, or crypto-currency, representative by Bitcoin, uses the hash proof-of-work function. ASIC miner, designed by Bitmain, used microchip solely optimized for Bitcoin mining activities. ASIC microchip by TSMC, the global leader of semiconductor manufacturing companies in Taiwan. With end-to-end service offerings, Taiwan has world-renowned IC designing, manufacturing, and packaging companies. It shall be noted that in addition to the token issuer and crypto exchanges, it is also beneficial for Taiwanese companies to have another role in the cryptoassets ecosystem.
Vision and roadmap to be a Cryptoassets’ Island
We are watching crypto evolve. Alongside several other trends happening now, say cloud computing and platform economy, new business models and market participants may soon redefine the worlds, and cryptoassets may become new norms in upcoming years.
Cryptoassets have the potential to revolutionize the global financial ecosystem. The underlying technologies reduced friction and change the cost structure, and economic incentives led to the invention of cryptoassets. As institutionalization is the necessary next step for crypto and is required to build trust, facilitate scale, increase accessibility, and drive growth, we observe that Taiwan held a pioneer position in the global token economy. Our government prudently revised the regulation to allow more innovative digital financial services. Also, the physical assets supporting digital financial services, microprocessors used vastly in GPU and crypto-miners, are led by well-known companies in Taiwan.
There are many challenges during we institutionalize crypto. Lessons learned in the past may applicable, but the new paradigm will also be via cryptos. It also implies a much more integrated and comprehensive, or crypto-specific, capabilities that will be needed shortly.
