EDITORIAL: FSC needs to be careful on crypto

Taiwan has become more aware of risks involving cryptocurrencies since the collapse of the FTX exchange late last year, and is following in the footsteps of Singapore and Hong Kong in keeping a keener eye on the crypto sector.

Last week, the Financial Supervisory Commission (FSC) announced guidelines for crypto service providers and exchanges, 10 days after confirming that it oversees crypto-related investments and transactions nationwide.

It said it has received instructions from the Executive Yuan to oversee the crypto sector’s development in Taiwan. It is to focus on establishing a self-regulating mechanism for service providers that allows members of the sector to monitor their own legal, ethical and security standards, rather than acting as an outside regulatory agency that monitors and enforces those standards.

The guidelines include the disclosure of information by crypto service providers, the review procedure for the listing and removal of crypto products, the separation of assets between service providers and clients, and the assurance of transparency and fairness.

Preventing money laundering, protecting consumers’ interests, maintaining information security, promoting institutional auditing, and managing so-called “hot” and “cold” crypto wallets are also part of the guidelines.

As the commission seems to have no intention to establish special legislation on the crypto sector, but aims to focus on protecting consumers and preventing money laundering, its regulatory approach should allow the local crypto sector room for further development and innovation.

Except for the review procedure for the listing and removal of products, which could have a greater effect on the sector, other guidelines, such as information disclosure, asset separation and money laundering prevention, are all basic requirements that firms in the sector should implement.

Another reason that the commission does not want to act as a comprehensive regulatory body is that it is not easy to govern the crypto sector, let alone require cooperation from offshore service providers or exchanges to comply with Taiwan’s regulatory framework.

In general, it is welcome news that the regulator supports growth in Taiwan’s crypto sector and wants to help build the necessary ecosystem here, as it is an opportunity for the sector to build trust with the public and push its innovations toward the mainstream.

However, if the details of its guidelines, which are slated to be published by the third quarter of this year, are too cumbersome, it would likely stifle the development of Taiwan’s crypto sector and push local investors toward offshore crypto platforms, which would be contrary to the commission’s original intention of protecting consumers in devising a regulatory framework.

Moreover, as innovative blockchain applications and non-fungible tokens continue to emerge, the regulator does need to retain the flexibility of development in the sector and allow it to continue moving forward.

While doing everything at once is not an option for the commission, it must at least reserve the power to inspect domestic crypto platforms when things go wrong. It also has to work with crypto firms to establish a mechanism for consumer protection.

At the same time, the commission needs to ask foreign firms to comply with Taiwan’s consumer protection and financial regulations. Most importantly, it must continue to review and adjust its regulatory measures on a rolling basis to ensure the sector’s long-term development.