Major changes to Taiwan financial services – sandbox experiments, token offerings and internet banks

The Taiwan government has been actively promoting fintech development and there have been several major developments recently. The primary regulator of the financial services industry, the Financial Supervisory Commission (FSC), introduced the ‘regulatory sandbox’ in 2018 and several fintech experiments have been launched since. In June 2019, the FSC announced that it will regulate security token offerings (STOs) as ‘securities’. On 30 July 2019, the FSC granted internet bank licences to three consortia, which are led by Chunghwa Telecom, Line and Rakuten respectively. The competition between the different new technologies in the Taiwan market is expected to be the next hot topic.

Sandbox experiments

The statute governing regulatory sandbox experiments, the Financial Technology Development and Innovation Experiment Act (Fintech Innovation Act), was promulgated on 31 January 2018 and took effect on 30 April 2018. The regulatory sandbox allows approved applicants to be exempt from certain laws and regulations during a specific period or within a certain scope, fostering flexibility for innovative experiments.

The FSC jointly established the first fintech village in Taiwan – FinTechSpace – alongside the Taiwan Financial Service Roundtable (TFSR, the private wing of the FSC), with the aim of encouraging development in the local fintech ecosystem and accelerating innovation. FinTechSpace also provides programs such as ‘co-working space’, ‘entrepreneurship mentoring’, ‘digital sandbox’, and ‘global co-operation’.

On 1 May 2019, the FSC officially became a member of the Global Financial Innovation Network (GFIN), a network of the financial regulators around the globe as initiated by the Financial Conduct Authority, the UK regulator. The FSC joined two workstreams of the GFIN, ‘cross-border testing’ and ‘RegTech’, and will be working with other members of the GFIN for further developments on fintech regulation.

According to the FSC’s public announcement on 8 August 2019, the number of innovative experiments that have passed the review and have been approved by the FSC has reached six. According to the FSC’s public records, the first experiment was for a commercial bank to work alongside a telecoms operator in order to verify the identities of its customers, and then facilitate its lending and credit card businesses. The other experiments include facilitating money transfers of South-East Asian workers and adopting blockchain technology for inter-bank money transfers.

Security token offerings

The STO was lined up as the next big thing for the initial coin offering (ICO) in the blockchain ecosystem. The FSC made a public announcement on 27 June 2019, stating that ‘security tokens’ will be regulated as ‘securities’, as stipulated under the Taiwan securities laws and regulations, given that they have liquidity and concern investment-making.

Currently, the FSC plans to regulate STOs in two tiers, depending on the size of the STO. If the total amount of funds to be raised in an STO is no more than NTD30 million, the STO will be exempt from complying with the filing requirements under paragraph 1 of article 22 in the Securities and Exchange Act (SEA). On the other hand, if the total amount of funds to be raised in an STO exceeds NTD30 million, the FSC requires such an STO to apply for a sandbox experiment pursuant to the Fintech Innovation Act, and the STO shall be proceeded with pursuant to the SEA if the experiment is successful.

The major conditions, among others, for being exempt from the filing requirements under paragraph 1 of article 22 in the SEA are summarised as follows:

  1. The total fund size shall be no more than NTD30 million.
  2. The issuer must be a company incorporated pursuant to the Taiwan Company Act and shall not be a listed company.
  3. The investors are limited to professional investors. If the professional investor is a natural person, they may not subscribe to more than NTD300,000 in one STO.
  4. The issuer shall launch the STO on one single platform, and the platform shall ensure that the issuer meets the relevant requirements and produces the required prospectus for public review.
  5. If the platform issues the STO on its own behalf, the STO shall be reviewed by the Taipei Exchange before launching.
  6. The platform must obtain the licence of a securities dealer, with a minimum paid-in capital of NTD100 million and operation warranty bond of NTD10 million.
  7. The platform shall be the counter party for each trading of the security token issued in a STO.
  8. The trading in a STO may be conducted on only one platform.
  9. The amount of trading for each STO shall exceed 50% of its total issuance amount.

The FSC and Taipei Exchange are drafting the relevant rules and will further issue regulations/rulings on the STO.

Internet banks

The FSC allows traditional banks to provide their services online. For example, customers of traditional banks may access their account information and check real-time market data, as well as conduct online fund transfers via the internet. The FSC also allows the so-called ‘digital’ banks to offer traditional banking services via the internet while maintaining a physical presence with less paper requirements (such as no account passbooks). In 2018, the FSC decided to allow banks to operate via the internet with no physical presence and started accepting applications for internet bank licences, with the aim of allowing two fresh new players to launch internet banks in Taiwan.

Three consortiums submitted the applications. One is headed by a leading telecom operator in Taiwan, Chunghwa Telecom; another is led by Line, the most popular instant messenger in Taiwan; and the other is led by Rakuten, a famous Japanese e-commerce operator. Although the original plan was to issue only two licences for internet banks, on 30 July 2019, the FSC publicly announced that it will grant internet bank licences to all three consortia.

In the future, traditional banks with online access, digital banks with both a physical presence and internet access, and internet banks existing purely online will be competing with each other as well as other booming fintech businesses. Either way, there will be major changes to the Taiwan financial market and industry soon.