Taiwan government established Anti-Money Laundering Office in March 2017 and implemented international anti-money laundering standards. Such AML/CFT reforms included amendments of the Money Laundering Control Act (hereinafter the “AML Act”) and nearly 100 related rules and regulations. The amendment of the AML Act draws high attention, and it emphasizes that “The provisions governing financial institutions of this Act shall apply to enterprises handling financial leasing, virtual currency platform or transaction.” (Article 5) The amendment of this provision indicates that Taiwanese government has noticed that in order to implement the AML/CFT policy more effectively, it is necessary to include the virtual assets in the AML legal framework.
Though in 2018, the AML Act has included the virtual asset service providers as the subject to conduct AML/CFT procedures, the effective legal framework shall still be further established by subsidiary regulations. Consequently, Financial Supervisory Commission (FSC), the competent authority of Taiwan’s financial institutions and services, has proceeded the Draft of Regulations Governing Internal Audit and Internal Control System of Anti-Money Laundering and Countering Terrorism Financing of Virtual Currency Platform or Transaction (hereinafter the “Draft”) in April, 2021.
Basically, the direction of the Draft mainly follows the FATF Recommendations and guidance. Nevertheless, there are still some minor differences between the Draft and the FATF rules. The contents of the Draft include the provisions of the definition of “the virtual currency platform and transaction” and the regulations of AML/CFT procedures for such platforms and transactions. We further discuss these 2 highlights and the evolving problems of the provisions in the Draft as follows:
1. The definition of “the virtual currency platform and transaction”
According to Article 2 of the Draft, the definition of “the virtual currency platform and transaction” means the entity conducting the following activities for others: (1) Exchange between virtual assets and fiat currencies, (2) Exchange between one or more forms of virtual assets, (3) Transfer of virtual assets, (4) Safekeeping and/or administration of virtual assets or providing instruments enabling control over virtual assets, and (5) Participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.
The above 5 activities regulated in the Draft are almost the same with the definition provided by Guidance for A Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers, which was published by FATF (hereinafter the “Guidance”). However, there is a little difference in the definition in paragraph 4, which is “Safekeeping and/or administration of virtual assets or providing instruments enabling control over virtual assets”. In the Guidance, the corresponding definition is “Safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets”.
By observing the wording, we could find that there is a minor difference between two definitions. The Draft expands the definition by modifying the actions conducted by the virtual assets service providers. The wording is modified from “safekeeping and/or administration of instruments enabling control over virtual assets” to “providing the instruments enabling control over virtual assets”.
Such wording modification would raise the question that whether the providers of non-custodial wallet shall be deemed as the subject of the Draft, and shall hold the obligations regarding the AML/CFT procedures. Since the providers of non-custodial wallet merely provide the software or hardware of the wallet without safekeeping the private key for the customers, this type of virtual asset service providers could not even reach any personal information or transfer information. As a result, it would raise a question mark on whether such software developers and hardware manufacturers should be in compliance with the AML/CFT regulations.
2. AML/CFT procedures
The AML/CFT procedures regulated in the Draft are almost the same with the AML/CFT procedures which “traditional” financial service providers shall follow; for example, banking or securities and futures businesses. The procedures include the Know Your Customer (KYC) procedure, the requirement of record keeping and the currency transaction reporting (CTR), etc.
Among these requirements, there is one procedure drawing most of the attention; that is the Travel Rule regulated in Article 7 of the Draft. Article 7 of the Draft provides the regulation regarding the obligation for the service providers to acquire the senders’ and the recipients’ information during the process of the transfer of the virtual asset. This provision is deemed as the “Travel Rule” for the virtual asset service providers.
The FATF “Travel Rule” is a requirement that targets the anonymity of wire and crypto transactions in order to prevent money laundering. By following this rule, i.e., collecting and sharing sender and recipient data, you can detect suspicious users and avoid fraud. Initially, the Travel Rule only applied to banks. However, in 2019, the FATF extended this rule to crypto companies. As of 2020, the G20 and many other jurisdictions began to incorporate the Travel Rule into their local AML laws.
Though the Travel Rule has been adopted in several jurisdiction, the adoption still resulted in much confusion. The main concern for the application of the Travel Rule is that the virtual asset service providers shall have to overcome the anonymous feature in blockchain technology. While the physical banking accounts contain the required personal information, the virtual assets addresses are a randomly generated string of letters and numbers, making the users’ information anonymous. As a result, the adoption of the Travel Rule expects the virtual asset service providers to come up with approaches to overcome the difficulties in order to comply with the rule.
In the Daft, Taiwan’s FSC also adopts the Travel Rule. Recently, FSC invited several virtual asset service providers to discuss on the issue. It would be an important issue whether the virtual asset service providers could change their systems and models for the compliance.
While virtual asset industry is a global industry in essence, we must say that the direction of the Draft is worth the compliment. However, the influence of the regulation on Taiwan’s crypto industry is still under observation, especially in regard of the modification in the definition of the “the virtual currency platform and transaction”, and the adoption of the Travel Rule.
Coincidentally, the regimes across the straits are also restraining the development and circulation of the cryptocurrencies, which brought fatal impact to the crypto industries worldwide. In May 2021, China authorities announced new restriction and orders against cryptocurrencies and the industries, including crypto mining. Though it was not the first time China banned the transactions of cryptocurrencies, China government has severally forbidden financial institutions and payment companies from providing services related to cryptocurrency transactions. Under this new restrictive order, abovementioned institutions, including banks and online payments channels, must not offer clients any service involving cryptocurrencies, such as registration, trading, clearing and settlement.
Almost in the meantime, Hong Kong SAR Government promulgated that cryptocurrency exchanges shall be controlled by the licenses from financial regulators and only allowed to provide services to professional investors. Retail investors will not be able to trade cryptocurrencies in cryptocurrency exchanges. Hong Kong SAR used to be deemed as a free trade zone and safe harbor for crypto transactions and investments in the Greater China areas. However, this time the Hong Kong authorities simultaneously enforce new regulations upon the crypto industry. From a legal aspect, it might be the results of the abuse of cryptocurrencies and suspicious money laundering activities in the Greater China areas. Obviously, the regulatory bodies believe it is about time to enforce and regulate the crypto industry.
