Stablecoin regulatory storm! Taiwan's Central Bank defines it as "equivalent to currency", VASP special law submitted for review.

The Finance Committee of the Legislative Yuan announced a special report on October 30, confirming that the draft of the “Virtual Asset Service Act (VASP)” proposed by the Financial Supervisory Commission has been submitted to the Executive Yuan for review. This bill will elevate Taiwan's regulatory level for virtual assets from the past registration system focused on Money Laundering prevention to a system that requires permits and is subject to strict regulations akin to Financial Institutions. Central Bank Vice President Zhu Meili stated for the first time that stablecoins have essentially become currencies.

VASP Special Law Upgrade from Registration System to Licensing System

(Source: Youtube)

According to the draft, VASP operators will need to apply for a license in the future and meet multiple thresholds including capital, business guarantee, internal control audits, and information security. The Financial Supervisory Commission has announced that it will implement eight sub-regulations to ensure financial soundness, fair trading, and investor protection. Commissioner Peng Jinlong explained at the committee meeting: “The spirit of the regulation is to incorporate virtual assets into mainstream financial standards to establish verifiable trust.”

The transition from a registration system to a licensing system marks a fundamental upgrade in the regulation of virtual assets in Taiwan. The registration system is a relatively lenient regulatory approach, where operators only need to register with the regulatory authority and commit to complying with anti-money laundering regulations to conduct business. Under this model, the entry threshold is low, but the regulatory intensity is also relatively limited. The licensing system, on the other hand, is entirely different; operators must obtain a special license in advance to operate, similar to the regulatory model for traditional financial institutions such as banks and securities companies.

The core requirements of the licensing system include capital thresholds, operating margins, internal control auditing mechanisms, and information security standards. The capital threshold ensures that operators have sufficient financial strength to bear risks, while the operating margin provides the last line of protection for investors. The internal control auditing mechanism requires operators to establish comprehensive risk management and compliance processes, and the information security standards prevent hacking attacks and data leaks. These requirements will significantly increase the operating costs and compliance burdens for VASP operators.

The eight subsidiary regulations announced by the Financial Supervisory Commission will further refine regulatory requirements. These subsidiary regulations may cover multiple dimensions such as customer asset custody, transaction matching mechanisms, market manipulation prevention, insider trading prohibition, financial reporting requirements, auditing systems, dispute mediation mechanisms, and investor education. The introduction of each subsidiary regulation will set new compliance standards for VASP operators.

This regulatory upgrade will lead to a reshuffling of market structures. Smaller players may exit the market due to their inability to afford high compliance costs, while larger players with ample funding and professional teams will gain a competitive advantage. In the long run, this consolidation is beneficial for the healthy development of the market, as it eliminates operators lacking strength and integrity, allowing investors to choose more reliable platforms.

Central Bank stipulates that stablecoins are currency and prohibited from earning interest

Stablecoins are seen as the products most likely to impact the payment system, thus the draft establishes a dedicated chapter for review by the Central Bank and the Financial Supervisory Commission. The draft defines stablecoins as “virtual assets linked to the value of a single or multiple fiat currencies, maintaining price stability.” This definition encompasses mainstream stablecoins such as USDT and USDC, as well as any future fiat-linked digital assets that may arise.

The Vice Governor of the Central Bank, Zhu Meili, stated for the first time on behalf of the Central Bank that stablecoins have essentially become equivalent to currency. This statement is extremely crucial, as it implies that the Central Bank regards stablecoins as part of its monetary policy jurisdiction rather than merely financial products. Issuing stablecoins domestically must be accompanied by sufficient reserves deposited with the Central Bank, and any future external transactions will also require prior approval. This requirement is similar to the deposit reserve system of traditional banks, ensuring that stablecoin issuers have adequate fiat reserves to support their issuance.

Four Core Requirements for Taiwan's Stablecoin Regulation

Full Reserve Requirement: Domestic issuance must be 100% deposited with the Central Bank.

Prior Approval System: Providing trading services requires dual approval from the Central Bank and the Financial Supervisory Commission.

Prohibition of Interest Payments: Clearly prohibits the payment of interest or returns to holders.

Overseas operators are also applicable: Overseas stablecoins must obtain approval from the competent authority to be listed in Taiwan.

Zhu Meili explained: “Stablecoins may become one of the tools for cross-border payments and foreign exchange transactions, and they have payment functions. If a bank run occurs, it may impact existing payment systems and financial stability, and should be regulated.” This statement reveals the central bank's core concern: the widespread use of stablecoins may threaten the status of legal tender and the effectiveness of central bank monetary policy.

To avoid currency substitution, the draft clearly prohibits paying interest or returns to holders, similar to the regulations of the EU's MiCA, and it also echoes Singapore's recent requirements regarding stablecoins. Authorities emphasize “preserving capital first, then discussing innovation.” This prohibition on interest payments will have a significant impact on the stablecoin market. Currently, many DeFi protocols offer interest on stablecoin deposits, with annual yields reaching 5% to 20%. If Taiwan prohibits interest payments, it may reduce the attractiveness of stablecoins in Taiwan.

The Central Bank also emphasized in response to comments from Kuomintang lawmakers Lai Shih-Pao, Ko Jui-Chun, and Democratic Progressive Party lawmakers Lai Hui-Yuan and Chung Chia-Ping that overseas stablecoins wishing to be listed in Taiwan must also obtain the consent of the regulatory authority. This means that overseas stablecoin issuers such as Tether (USDT) and Circle (USDC) must comply with Taiwan's regulations in order to legally provide services in Taiwan. In terms of the international currency market share, the New Taiwan Dollar has a long way to go compared to the US Dollar, Japanese Yen, and Euro, so regarding the New Taiwan Dollar stablecoin, we are still in the process of establishing a system, and we do not currently have a specific position on market scale.

Regarding overseas issuers, the Central Bank stated: “It is impossible to regulate only domestically without regulating overseas. Of course, this will not be an obstacle; we just want to express that this is a fair and consistent position.” This statement shows that Taiwan is attempting to establish a consistent regulatory framework both internally and externally to avoid regulatory arbitrage.

Cross-Border Platform Regulatory Challenges and Law Enforcement Dilemmas

Legislator Huang Shanshan raised a question indicating that about 80% of the trading volume of Taiwanese people is concentrated on offshore platforms, but no offshore operators have applied for VASP. Does this exclude offshore operators from coming to Taiwan? Peng Jinlong from the Financial Supervisory Commission stated that international operators willing to comply with regulations can apply for licenses, and the registration system is clearly defined, without explicitly excluding offshore operators; if they continue to operate for Taiwanese users without applying, they will face delisting and penalties.

80% of the trading volume is concentrated on foreign platforms, and this figure reveals the real dilemma of Taiwan's virtual asset market. Multiple international exchanges attract the vast majority of Taiwanese users due to their rich selection of coins, deep liquidity, and mature product lines. In contrast, local exchanges in Taiwan are limited by market size and regulatory uncertainty, leading to relatively slow development.

Peng Jinlong stated: “The penetration rate in Taiwan is still very low, because there has been no such legislation in the past, so this group of people must use overseas means to participate, which is why we need a special law.” One of the purposes of the introduction of the VASP special law is to attract large overseas platforms to operate in compliance in Taiwan, or at least to have them accept Taiwan's regulations. However, whether this vision can be realized remains questionable. For CEX global platforms, the cost-effectiveness of applying for special permits for a single market may not be high.

The inspection bureau has imposed fines exceeding NT$13 million on 11 businesses that violated Money Laundering prevention regulations this year. The Financial Supervisory Commission emphasized that in the future, a real-time reporting mechanism will be established between banks and VASPs to block the flow of funds to fraud groups. As of the end of September, businesses have helped intercept 623 fraud cases, with a total return amount exceeding 201 million. These figures indicate that the fraud problem in Taiwan's virtual asset sector is serious, and regulatory upgrades are necessary.

The National Police Agency reminds that platforms without permission often lack data retention obligations. The issues of false declaration of on-chain addresses and difficulties in accessing large transactions remain enforcement pain points. It is recommended to directly incorporate relevant retention responsibilities into the law and use the FATF's “travel rule” as a reference standard. The travel rule of FATF (Financial Action Task Force) requires virtual asset service providers to collect and transmit information about the sender and receiver during cross-border transfers, similar to the wire transfer requirements of traditional banks.

The core of the law enforcement dilemma lies in the cross-border nature and anonymity of blockchain. When users trade on overseas platforms, law enforcement agencies in Taiwan find it difficult to obtain transaction records and user information. Even if criminal activities are detected, it is challenging to investigate and punish. The VASP legislation attempts to address this issue by requiring overseas platforms to apply for permits in Taiwan or face delisting penalties, but the actual effectiveness of this implementation remains to be seen.

Taiwan's Regulations Aligning with International Standards

The Central Bank also emphasized in response to the opinions of lawmakers that Taiwan's stablecoin regulation is similar to the EU's MiCA provisions and aligns with Singapore's recent requirements for stablecoins. This strategy of aligning with international standards can protect Taiwan's financial stability while avoiding overly strict regulations that could push the market overseas. The EU's MiCA (Regulation on Markets in Crypto-Assets) and Singapore's stablecoin framework are both seen as more balanced regulatory templates.

The VASP special law is sent to the Executive Yuan for review, indicating that Taiwan's virtual asset regulation is officially upgraded, and the market structure will be reshuffled. For operators, this is both an opportunity and a challenge. Operators with strength and determination can gain market trust and greater development space through compliant operations, while those who only seek short-term arbitrage or lack professional capabilities will be eliminated. For investors, the regulatory upgrade provides better protection, but they may also face the cost of reduced choices and increased expenses.

In the long term, Taiwan's regulatory path may provide a reference for other Asian countries. Hong Kong, Singapore, Japan, and South Korea are all actively building regulatory frameworks for virtual assets, and as an important member of the Chinese-speaking market, Taiwan's experiences and lessons will be closely watched.