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Taiwan is known as a hub for semiconductors and technology, but not finance. While neighboring Hong Kong has HSBC, and Singapore to its south has DBS, Taiwan’s financial sector — mighty on paper in its own right with approximately $1 trillion in financial assets on the books — lacks the global cachet of its neighbors. A culture of caution and conservatism has kept banks on the island mere paper tigers.

While Taiwan’s traditional financial sector might not have global might, instead, legislators are trying to create a FinTech niche for the island by establishing legal mechanisms for security token offerings (STOs) — a fundraising vehicle that melds blockchain, cryptocurrency, and integration with regulators.

STOs should not be confused with an Initial Coin Offering (ICO), which are infamously notorious for whitepapers that promised the world yet rarely delivered. An EY study from October 2018 analyzed the top ICOs that represented the majority of funding during 2017 and by the report’s publication date, only 29% of the ‘Class of 2017 ICOs’ had working products or prototypes, while 30% had lost substantially all value.

Instead, STOs can be thought of as something between an ICO and a traditional IPO. Unlike an ICO, STOs generally attempt to be compliant with securities regulation; unlike an IPO the administrative barrier is a lot lower which should make them appealing to startups that which to sell equity during a fundraise.

Taiwan’s Financial Supervisory Committee (FSC), the island’s financial regulator, is expected to publish its final set of rules regarding STOs by the end of June. Initially, the regulator took a total laissez-faire approach, with Kuomintang legislator Jason Hsu explaining in a 2017 blog post that it was effectively a “three no-policies”: the Taiwan government does not encourage, not prohibit, and not take responsibility for it.

Listen to the related podcast with Sam Reynolds: Taiwan Releases STO Guidance — Now What?

A lot has happened in the past two years. The ICO market went through total turmoil, with many countries banning or strictly legislating the market. If Taiwan was going to thrive in this industry, it was time to legislate. Many hoped that Taiwan’s conservative regulators would approach STOs and crypto with a less stringent set of rules than what they had applied to the traditional financial sector. FinTech could be an up-and-coming industry for the island, as its traditional industries of semiconductors and technology manufacturing slowed.

Although Taiwan’s FSC has invited industry stakeholders to provide input into the rulemaking process, the proposed laws presented thus far (the final laws are due by the end of June) haven’t been met with a positive reception: the regulator says the ceiling for STOs will be set at approximately $1 million (NT $30 million), which is more in line with an initial seed raise for startups rather than a Series A. Non-accredited investors will only be able to invest a maximum of $3,000 per project (NT $100,000)

“Financial regulations [in Taiwan] have historically been very conservative, and the proposed STO regulations are no exception,” explains Greg Buxton, a corporate transactional lawyer with Taipei-based Winkler Partners. “The regulations as currently proposed include limitations on amounts which can be raised using unregistered STOs as well as amounts available for investment by individual investors.”

Buxton agrees with Legislator Hsu that the ceiling needs to be raised to Hsu’s proposed $4.8 million (NT $150 million).

“Such a low limit creates unnecessary barriers to capital flows from individual professional investors,” says Buxton.

The FSC proposes to allow companies to raise more than the ceiling, provided they agree to enter the ‘sandbox’ where the FSC can apply an additional layer of scrutiny to monitor for risks. However, entry into the sandbox is a long process that takes between 4-6 months and the added red tape is likely to deter firms.

“The regulatory model should be adjusted to focus on a framework based on Reg-tech that promotes technological development instead of establishing a strict regulatory wall,” adds Jaime Cheng, corporate counsel at Lee Tsai & Partners in Taipei.

Waiting for Leviathan

Regulations are expected any day now, and the entire industry is in wait-and-see mode. The other benefit Taiwan would reap from clear regulations would be the island’s emergence as a trading hub. Trading volume for STOs is being driven offshore to hubs like Japan and Singapore, partially because of the SEC’s perceived hostility. While Taiwan already has an active digital asset exchange, MAX, owned by Maicoin, corporate infighting at cross-town rival Cobinhood, which resulted in the company being suspended by Taiwan’s corporate registrar, might encourage regulators to move with a heavy hand.

Or, it could do the opposite. The FSC has mentioned it would consider a dedicated security token exchange similar to the Taiwan Stock Exchange or the over-the-counter Taipei Exchange.

What’s Next

The FSC is scheduled to publish the final set of rules by the end of June, and industry stakeholders hope that the final set of rules will incorporate Legislator Hsu’s proposals for expanding the ceiling and allowing for unaccredited investors to have a bigger seat at the table. Regardless, optimism is abound that when this final rule book is published, and industry is given clarity, firms on the island will welcome STOs with full embrace.

“We expect that only when there is a clear and uniform regulation for STOs, will STOs become a widely popular alternative to the traditional stock market,” says Lee Tsai & Partners’ Cheng.