In early 2022, when 31-year-old Wilson Huang gave CommonWealth Magazine an interview, he was urgently looking for engineers to keep up with the startup’s rapid growth.

Before FTX, the world’s second-largest cryptocurrency exchange in the world, filed for bankruptcy in November last year, Huang might not have been aware that the real challenge of this emerging financial industry is not technology but legal risk.

Taiwan’s first crypto-entrepreneur taken into custody

On December 21, 2022, prosecutors raided the Steaker offices and questioned Huang and four core executives. The Taipei District Prosecutor’s Office took Huang into custody on charges of violating the Banking Act by illegally raising funds and committing aggravated fraudulence. The offense carries a minimum sentence of seven years.

The once daring and energetic star of Taiwan’s crypto scene is now a prisoner.

Since the collapse of the blockchain platform Terra in 2022, several cryptocurrency platforms have gone bankrupt. The onslaught continued when it became known that FTX was facing a shortfall of US$8 billion. The Web 3.0 stars, who had become billionaires over the past two years, ended their meteoric rise with an abrupt crash to earth.

With assets worth US$ 60million under management, Steaker is Taiwan’s leading digital asset management company. It offers different schemes to generate income, allowing users to make purchases with Bitcoin, Ether, US stable coin and other crypto currencies.

FTX filed for bankruptcy protection on November 11, 2022. Steaker, which uses assets worth US$10 million for strategic transactions in FTX, began to restrict users whose investments were affected by the FTX bankruptcy to take out money. More than a thousand of these affected users set up a group, and several investors sued Huang for alleged fraud.

“Since the Steaker projects that I invested in had terms of three months or half a year, I couldn’t redeem them ahead of time. Running was not even an option,” says one investor who goes by the alias Xiao Wei. 

He had not even had time to digest the news of FTX’s asset failure when Steaker, which he considered a low-risk investment, also ran into financial trouble. “Initially I didn’t want to sue, because the Steaker team is in Taiwan; I wanted to wait and see.” But when Huang was detained, Xiao Wei pondered taking legal action.

All virtual asset platform operators are closely watching the Steaker case. “It is the first time that a digital asset management company is probably being indicted under the Banking Act,” one industry points out.

Why are crypto circles paying so much attention?

Most cryptocurrency operators thought they would not be stepping over the red line of financial regulations provided they did not touch the legal tender. Taiwan’s central bank and the Financial Supervisory Commission (FSC) have been treating cryptocurrencies as highly speculative virtual financial instruments but not as currencies. Now, however, it appears as if this red line has been redrawn.

FSC Chairman Huang Tien-mu (Source: Ming- Tang Huang)

Tighter oversight in the post-FTX-era

After several cryptocurrencies crashed in early 2022, the Executive Yuan put together a cross-ministry task force to discuss how the volatile industry should be regulated in the future. The task force includes officials from the FSC, Central Bank, Ministry of Justice, Ministry of Finance, Ministry of Culture, National Police Agency, Environmental Protection Administration, and the Ministry of Digital Affairs, which was formally launched in August last year. 

On December 5, FSC Chairman Huang Tien-mu said during a parliamentary questioning session that cryptocurrencies, as high-risk investments, will gradually be regulated with an eye to protecting investors by, for instance, requiring the separation of the assets of platform operators and the assets of their investors.

In its briefing after the December 15 board meeting, the Central Bank noted the lessons learned from the FTX collapse. “The tokenization of financial services has not changed the financial character of the activities,” it said, urging the FSC to regulate virtual asset management institutions.

In a written reply to questions submitted by CommonWealth Magazine, Central Bank Deputy Governor Chen Nan-kuang explained that the board’s stance is based on the proposed framework for the international regulation of crypto-asset activities, published by the Basel-based Financial Stability Board (FSB) in October of last year. It means that when providers of cryptocurrency services engage in activities that resemble traditional financial services, they should be regulated based on the same principles.

The FSB coordinates the work of central banks and financial supervisory authorities to set effective regulatory, supervisory, and other financial sector policies to protect global financial stability. It is expected to decide on a timetable for the international regulation of cryptocurrencies in early 2023.

One week after the central bank’s board meeting, core executives of Steaker were questioned, searched, and detained by prosecutors. The domino effect triggered by the FTX debacle inevitably also affects Taiwan’s vibrant crypto asset industry.

Sense of crisis hits cryptocurrency circles

Taiwan’s cryptocurrency exchanges do offer some instruments for earning passive stablecoin income.

When Steaker restricted the amount investors could withdraw following the collapse of FTX, Taiwan’s financial regulators visited startups engaged in similar activities to gauge the risk related to their passive income instruments. The key question is whether these startups would have enough liquidity to pay their customers if a large number of them wanted to redeem their investments.

With drastically tighter regulations on the horizon, some cryptocurrency startups have already decided to pull out of the market.

One digital asset management firm, which has been in business for five years, originally planned to launch a new brand in November of 2022. But after the successive failure of cryptocurrency firms, the launch was postponed indefinitely for fear of further crashes in the market.

In the future, the said business will not offer its digital asset management services to non-professional retail investors any longer, but only raise funds from certain institutional investors through privately offered cryptocurrency funds. This is because under the Banking Act, which stipulates in Article 29 “Unless otherwise provided by law, any person other than a bank shall not accept deposits, manage trust funds or public property under mandate or handle domestic or foreign remittances”, raising funds from an ”unspecified majority” (aka the general public) could constitute a crime.

“For retail investors, the choice of products will be limited in the future because the risk that businesses need to shoulder is increasing,” says the owner of the business, adding, “Advertising services with great fanfare on the Internet is also not very likely.”

(Source: Shutterstock)

No business allowed without commitment to fight money laundering

Attorney-at-law Tsai Kun-chou, leading partner with Enlighten Law Group, notes that in the wake of the Steaker incident, the firm has received many inquiries about the previously hardly noticed “Declaration of Compliance” with the Money Laundering Control Act and related laws and regulations that enterprises handling virtual currency platforms or transactions are required to sign. “No matter how the ruling [in the Steaker case] eventually turns out, the legal risk is rising,” warns Tsai.

For small startups, satisfying customer due diligence requirements pertaining to the Money Laundering Control Act such as ensuring that customers use their real names when opening accounts is already a heavy burden.

Reno Du, the founder of digital asset management enterprise Hooky Finance, has made detailed cost calculations. Banks only accept customer due diligence (Know Your Customer) reports from the big four international accounting firms (Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers), which means an expense of NT$400,000 per quarter. On top of that come annual audit fees of NT$2 million. Together with other costs incurred to ensure legal compliance, businesses need to spend at least NT$4 million per year.

If the SFC insists on implementing the various requirements stipulated in the Money Laundering Control Act regarding the monitoring of transactions, then tracking tools such as Chainalysis and CipherTrace must be used for blockchains so that the source and destination of every transaction can be tracked. This will again cost at least US$30,000.

“Before, you only had to hire engineers when starting a business, and costs stood at NT$10 million per year. Now you need to spend another NY$10 million on legal compliance; this makes doing business too hard,” laments Du. He officially closed his company after two years of operation on December 29, 2022, having returned all invested assets to his customers.

With a looming bear market, tightening global financial regulations, and rising legal compliance costs, the times of unfettered brutal growth in the cryptocurrency market have come to an end.

---

Have you read?

• Taiwan’s new Web3 upstarts 
• How Taiwan’s new crypto rich evade taxes 

Translated by Susanne Ganz
Edited by TC Lin
Uploaded by Ian Huang