As China cracks down on the crypto field, Taiwan could be an alternative destination for crypto entities but can crypto thrive in Taiwan?
With news of a crypto crackdown in mainland China roiling the global crypto market, one might wonder if Taiwan would serve as a haven for crypto businesses. Not exactly, as it turns out.
In fact, whenever Taiwanese crypto lawyer Will Tseng’s clients ask him to suggest the best place to open a crypto firm, he recommends Singapore, where regulations are much clearer.
On July 1, Taiwan’s new anti-money laundering (AML) regulations for crypto entities came into effect. Eight cryptocurrency exchanges were chosen by Taiwan’s financial watchdog, the FSC, for the first stage of implementation, according to Kunchou Tsai, founder and managing partner at Taiwanese fintech law firm Enlighten Law Group.
Three of those eight entities have ceased operations in light of the new anti-money laundering (AML) requirements, Tsai said, which includes reporting transactions exceeding 500,000 New Taiwan dollars (around US$18,000) to the bureau of investigation (FIU).
According to Jason Hsu, a former Taiwanese lawmaker who campaigned to include virtual currency service providers in the list of financial institutions required to comply with the Taiwan’s Money Laundering Control Act, the crypto industry at large feels local regulations are too harsh.
Nevertheless, over the last year, various decentralized finance (DeFi) and blockchain firms have trickled into Taiwan. Crypto firms are setting up their engineering, sales and marketing teams in Taiwan and are employing local engineers, Hsu said.
Moving to Taiwan
In 2019, tech entrepreneur Leo Cheng reluctantly left Silicon Valley to join his business partners in Taiwan. At first, Cheng was nervous about losing networking opportunities and his colleagues in San Francisco.
“Then COVID-19 happened and none of that really mattered anymore,” Cheng said.
In June 2020, Cheng launched decentralized lending protocol Cream Finance in Taiwan’s capital Taipei. A few months later, Merrill Lynch alum and Taiwan native Kevin Tseng launched NAOS, a DeFi marketplace for loans backed by real-world assets. In the months since launching last December, NAOS has secured more than 2,500 corporate clients and $250 million in assets originating from the U.S., Mexico, India and Indonesia.
During the pandemic, around 2,000 special gold card employment visas were given out to expat tech entrepreneurs and developers to move to Taiwan, according to Hsu. It’s unclear how many were granted specifically to crypto developers or businesses. Hsu did not respond to a followup request for clarification.
“So you could say, perhaps about 500 to 1,000 blockchain and crypto related people here in Taiwan are from outside of Taiwan. A lot of them are from Silicon Valley,” Hsu said.
The rising influx of DeFi teams to Taiwan is a little surprising given the current lack of regulatory clarity for crypto businesses compared to other regional tech hubs like Singapore, and the fact that Taiwanese investors are not too bullish on cryptocurrencies.
In fact, after China’s financial regulators banned initial coin offerings (ICOs) and ordered cryptocurrency exchanges in mainland China to halt operations in 2017, Taiwan was slated to become a crypto hub. But the hype died down quickly, and despite Hsu’s own attempts at turning Taiwan into a crypto haven not much happened – until now.
“We’ve managed to attract a lot of blockchain and crypto talent. But now I think the question remains, are we able to keep them? Or are they going to move to somewhere else like Singapore, for better transparency of regulations or a more friendly environment?” Hsu said.
After mainland China cracked down on any direct connection between local banking institutions and crypto entities back in 2017, Taiwan saw a rush of activity and inflows of money, said Alex Liu, chief executive officer of Taiwan’s largest cryptocurrency exchange MaiCoin.
“In terms of the degree to which the regulators and the banks allow retail participation in the crypto market, actually, Taiwan’s much more permissive. So that’s why in 2018 especially, a lot of [initial coin offering] teams would come to Taiwan for fundraising,” Liu said, adding that MaiCoin, which is similar to Coinbase, has been allowed to operate without interruptions since 2014.
According to Enlighten Law Group’s Tsai, Chinese crypto firms made the move to Taiwan because of its proximity to the mainland and the shared language. But when the bear market hit in 2018 through 2019, investors and companies suffered big losses, Tsai said.
“In this time, we saw a lot of blockchain companies withdraw from Taiwanese markets,” Tsai said.
It didn’t help that the average Taiwanese investor is risk-averse, according to Will Tseng.
“They are not that familiar with crypto. Even if they buy, they sell fast because they think it’s very risky,” Will Tseng said.
Cheng agreed, adding that, in Taiwan, there’s a lot of money locked up in savings. In 2020, Taiwan’s gross savings rate was 39.3%.
“The population is very, very conservative. They tend to think that crypto assets are gambling tools, and there are people that lost a lot of money on bitcoin during the 2018 downturn,” Cheng said.
Meanwhile, scams were running rampant during the ICO craze, and already-conservative Taiwanese investors felt cheated by the projects and tokens that were on the market, according to NAOS’ Kevin Tseng.
“I think the Taiwan society is just generally very cautious about anything blockchain related because during the ICO era there were just a lot of scam projects,” Kevin Tseng said.
According to Liu, there are currently around 550,000 registered users on MaiCoin. Liu estimates there are about 2 million crypto users in Taiwan, including MaiCoin and its competitors.
“As a percentage of the population it’s still under 10%. That’s a relatively low penetration rate compared to South Korea, and even compared to our neighbor the Philippines,” Liu said.
A pandemic haven
In 2020, Kevin Tseng noticed a stream of DeFi projects trickling into Taiwan from other countries, but not for the reasons you’d think. The Taiwanese investors and regulators didn’t magically start embracing crypto, he said. For instance, NAOS does not serve Taiwanese users.
In fact, most DeFi platforms operating in Taiwan are outward-facing. Cheng says he has done “zero marketing” that targets the local Taiwanese consumer base.
“If you are somehow seen as a financial service, and you’re marketing to the local population, then you have more questions to answer. But if you’re just operating out of here on a decentralized protocol, then we just happen to be operating from here,” Cheng said.
Kevin Tseng believes the pandemic played a part in triggering the recent influx of DeFi teams.
“I think for those projects, Taiwan is sort of a silent place to be, where they can move in and have a high quality of life. So it’s more like a relocation for them instead of coming into Taiwan because of the vibrant crypto ecosystem. We don’t really have that yet,” Kevin Tseng said.
Until earlier this year, when cases spiked for the first time since the start of the pandemic, Taiwan was virtually undisturbed by COVID-19 and was lauded for its prompt and effective response to the crisis. In Taiwan, life continued as usual and that made it an attractive destination to lockdown-fatigued city dwellers from the western world.
Kevin Tseng added that Taiwan’s talented developers make it all the more attractive to projects looking to move in. In fact, earlier this year, Beijing-based bitcoin mining giant Bitmain was accused of illegally poaching engineering talent – 100 engineers to be exact– from Taiwan.
But just like local investors, interest from developers can also be sparse: talented Taiwanese engineers typically don’t want to go into blockchain, according to Kevin Tseng.
“I think they want to work for bigger corporations like the Microsofts, Googles or Apples of the world,” Kevin Tseng said.
But Hsu is certain the biggest deterrent to Taiwan becoming a regional crypto hub is its approach to regulation.
In April, Taiwan’s Financial Supervisory Committee (FSC) announced the new AML regulations, including Hsu’s amendment for virtual assets, will come into effect on July 1, 2021. But Hsu and Tsai agree the regulations may be too restrictive.
Before the new regulations came into effect, Tsai said they might be heavily debated. For instance, crypto mining companies must also comply with the new AML regulations, Tsai said, but mining firms don’t feel they are providing a financial service.
“So probably there will still be some aggressive theories for a period of time. The government will try to promote the idea that we are now regulated, but I think that it’ll take at least three months to six months to really enforce the new regulations,” Tsai said.
Shubao Ex, Joyso DEX and Starbit have already ceased operations. According to Tsai, the three entities are small to medium-size exchanges, with Shubao Ex being the largest in terms of volume and having technology support from Huobi Global.
“In my opinion, since their trading volume is small there is little profit for them to maintain the operation of the exchanges. The compliance costs might be too high for them or they probably do not have enough time to build an AML compliance program,” Tsai said.
One reason for the skepticism about the new regulations is the existing rules for security token offerings (STO) under Taiwan’s securities exchange law, according to Will Tseng. The STO regulations were so restrictive that there was only one STO case built since the regulations came into effect in 2019, Will Tseng said.
“Only professional investors can participate in the subscription,” the regulations said, adding that the limit per investment cannot exceed 300,000 New Taiwan dollars (around US$10,900).
The regulations also dictate that if the amount of funds raised via an STO is above 30 million New Taiwan dollars (around $1 million), the issuer must apply for the regulatory sandbox experiments in accordance with “Fintech Development and Innovation Experiment Regulations”
“It’s very ridiculous. I think the government made a mistake with these regulations. The Taiwanese government is very afraid of making policies for risky assets. It doesn’t matter how big the business is, they just want to cut off the risk,” Will Tseng said.
Despite slow and cautious regulations and the lack of interest in adoption inside Taiwan, Cheng is thrilled to see new developers and projects make Taiwan their home. Meanwhile, Hsu is still optimistic about Taiwan’s future as a crypto hub. He also believes institutional acceptance of cryptocurrencies like bitcoin around the world will encourage more investments locally.
“With more crypto and other FinTech companies coming out, the government really needs to think about how to make this industry more tech-friendly. In other words, you should allow tech companies to enable financial services, not restrict them,” Hsu said.