Taiwan -- Securities Classification Regulatory Overview

Taiwan's approach to classifying cryptocurrency tokens as securities is primarily governed by the Financial Supervisory Commission (FSC), which is the main financial regulator. The FSC adopts a "substance over form" approach, meaning the actual characteristics and economic reality of the token determine its classification, rather than simply its label.

While Taiwan does not explicitly use the U.S. Howey Test, its criteria for identifying an "investment contract" that falls under the definition of "securities" in the Securities and Exchange Act (SEA) are remarkably similar in principle.

1. The Legal Test Used (Howey Test Equivalent)

The FSC's framework for Security Token Offerings (STOs), outlined in the "Regulations Governing Security Token Offerings by Securities Firms" (often referred to as the STO Regulations), provides the clearest guidance on how a token is deemed a security. A token is considered a security if it meets the characteristics of an "investment contract" as interpreted under Taiwan's Securities and Exchange Act.

The key criteria that align with the spirit of the Howey Test are:

1. Monetary Contribution: An investment of money or assets by the investor.
2. Common Enterprise: The investment is made into a common enterprise or a collective project.
3. Expectation of Profit: The investor has a reasonable expectation of profits or returns from the investment.
4. Third-Party Effort: The profits are derived primarily from the efforts of a promoter or a third party, rather than solely from the efforts of the investor.

If a token embodies these characteristics, particularly the expectation of profit from the efforts of others, it is likely to be classified as a security under Taiwan's SEA.

2. Which Tokens Are Considered Securities

Based on the above test:

• Security Tokens (STOs): These are specifically designed to represent traditional securities (like equity, bonds, or interests in collective investment schemes) on a blockchain. If they meet the four criteria above, they are unequivocally classified as securities and fall under the FSC's STO regulations.
• Utility Tokens: Generally, if a token provides only access to a product or service within a network and does not carry investment characteristics or profit expectations based on third-party efforts, it is typically not considered a security. However, if a utility token is marketed with promises of future appreciation, profit-sharing, or is redeemable for cash based on the success of the underlying project (driven by the efforts of others), it could be reclassified as a security. The initial design and subsequent marketing are critical.
• Stablecoins: Currently, stablecoins are generally not treated as securities in Taiwan. The FSC is developing a separate regulatory framework for stablecoins, likely treating them more as payment instruments or e-money, potentially under the Banking Act or a dedicated regulatory regime. However, specific stablecoins that offer interest or are structured like an investment product could potentially be reviewed for security characteristics.
• Non-Fungible Tokens (NFTs): Most NFTs (digital collectibles, art) are not considered securities. They are generally treated as digital assets or collectibles. However, fractionalized NFTs or NFTs that are bundled with profit-sharing mechanisms, royalty streams, or represent an interest in a collective investment scheme could potentially be reclassified as securities.

3. Registration/Exemption Requirements for Token Issuers (STOs)

For tokens classified as securities (i.e., STOs), the following requirements apply:

• General Rule: STOs that are considered securities are subject to the registration and disclosure requirements of the Securities and Exchange Act. This typically entails filing a prospectus, providing audited financial statements, and undergoing a review process similar to traditional public offerings.
• Small-Scale STO Exemption: The FSC has provided a significant exemption for smaller STOs to foster innovation while maintaining investor protection. An STO can be exempt from the full public offering requirements if it meets specific conditions:
  • Total Offering Amount: The total offering amount does not exceed NTD 30 million (approximately USD 1 million, subject to exchange rate fluctuations).
  • Number of Investors: The offering is limited to professional investors, with a maximum of 30 professional investors.
  • Platform Requirement: The STO must be issued and distributed through an FSC-licensed securities firm operating an STO platform.
  • Filing Requirement: Even with this exemption, the issuer must still prepare an "offering plan" and file it with the FSC through the licensed securities firm for review. This is not a complete exemption from regulatory oversight.
• Larger STOs: Any STO exceeding the NTD 30 million threshold or targeting more than 30 professional investors (or general investors) would be subject to the full, stringent requirements for public offerings under the SEA, making them practically very difficult to conduct in Taiwan under the current framework.

4. Secondary Trading Rules

• Security Tokens (STOs):
  • Secondary trading of STOs is only permitted on FSC-licensed "security token trading platforms." These platforms must be operated by a securities firm licensed by the FSC to engage in such activities.
  • Trading is generally restricted to "professional investors".
  • The platforms must adhere to strict rules regarding investor protection, anti-money laundering (AML), custody, trading rules, and technology security.
  • Custody of the STOs must be handled by an institution approved by the FSC.
• Non-Security Tokens (e.g., Bitcoin, Ethereum, most Utility Tokens):
  • Trading platforms for non-security cryptocurrencies are not regulated under the Securities and Exchange Act by the FSC for licensing.
  • However, they are subject to Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) regulations. Virtual Asset Service Providers (VASPs) in Taiwan must comply with the "Regulations Governing Anti-Money Laundering and Countering the Financing of Terrorism for Virtual Asset Service Providers" and register with the FSC for AML compliance purposes.
  • The FSC is also working on a dedicated VASP licensing framework to further regulate these platforms beyond just AML, which is expected to introduce broader prudential and market conduct requirements.

5. Enforcement Examples

Taiwan's enforcement regarding cryptocurrency has largely focused on:

• Anti-Money Laundering (AML) Compliance: The most active area of enforcement has been ensuring that Virtual Asset Service Providers (VASPs) comply with AML/CFT regulations. The FSC frequently issues warnings and requires VASPs to register and implement robust AML procedures. Failure to comply can result in fines and directives to improve systems.
  • Example: In recent years, the FSC has required all virtual asset platforms to complete their AML declarations and has conducted checks to ensure compliance with identity verification (KYC), transaction monitoring, and suspicious activity reporting. Platforms found non-compliant could face administrative penalties.
• Unregistered Securities Offerings: While specific, high-profile crypto-native unregistered STO cases leading to criminal prosecution might not be widely publicized, the FSC has issued strong warnings against token offerings that possess securities characteristics but have not gone through the proper registration or exemption process. Any entity conducting an STO that exceeds the small-scale exemption without proper FSC registration would be in clear violation of the Securities and Exchange Act, which carries significant legal penalties, including fines and imprisonment for responsible persons, similar to unregistered traditional securities offerings.
• Fraud and Investment Scams: The police and other law enforcement agencies frequently investigate and prosecute individuals and groups involved in crypto-related investment scams that promise unrealistic returns, often involving Ponzi schemes or misleading marketing. While these are often prosecuted under general fraud statutes, the FSC would also step in if the tokens involved were found to be unregistered securities.

Specific Legislation and Regulatory Guidance URLs:

1. Securities and Exchange Act (證券交易法):

   • URL: https://law.moj.gov.tw/ENG/LawClass/LawAll.aspx?PCode=A0030005
   • Note: This is the foundational law for securities in Taiwan, defining what constitutes a security and outlining regulatory requirements.

2. Regulations Governing Security Token Offerings by Securities Firms (證券商經營證券型代幣業務管理辦法):

   • URL: https://law.moj.gov.tw/ENG/LawClass/LawAll.aspx?PCode=A0030095
   • Note: This is the primary regulation detailing the framework for STOs, including the small-scale exemption and platform requirements.

3. Regulations Governing Anti-Money Laundering and Countering the Financing of Terrorism for Virtual Asset Service Providers (虛擬資產平台及交易業務事業防制洗錢及打擊資恐辦法):

   • URL: https://law.moj.gov.tw/ENG/LawClass/LawAll.aspx?PCode=G0380231
   • Note: This governs AML/CFT compliance for all Virtual Asset Service Providers (VASPs) in Taiwan, regardless of whether the tokens are securities.

4. Financial Supervisory Commission (FSC) Website (English Section):

   • URL: https://www.fsc.gov.tw/eng/
   • Note: The FSC website is the official source for press releases, policy updates, and further guidance related to cryptocurrency and financial regulations in Taiwan.

Taiwan's regulatory approach is characterized by careful, phased implementation, prioritizing investor protection and financial stability while allowing for innovation, particularly in the small-scale STO market. The "substance over form" principle remains central to how tokens are assessed.