Priming Taiwan for Self-Regulatory Organization
What you need to know
The work of Taiwan's SRO is underway but thorny problems remain.
Unfortunately, in an unregulated space, scams and misunderstandings are rife, especially in as potentially lucrative an arena as cryptocurrency or token initial coin offerings (ICOs).
Some studies, albeit by groups with a vested interest in drumming up business in ICO consultancy, have claimed that as many as 80 percent of ICOs are scams. Others, in this case by The Wall Street Journal, estimate it is a more conservative 20 percent. Either way, the depth of peril is clear.
Such assertions, along with reports of multi-million-dollar scams, such as the Modern Tech scandal that swept up tens of thousands of would-be investors in Vietnam, the Superior Coin debacle in Taipei, or the frequent actions by the U.S. Securities and Exchange Commission to freeze assets of illegitimate ICO companies, damages confidence in the industry and inhibits its ability to mature.
From a regulatory perspective, such shady dealings raise concerns on how to protect the interests of “retail investors” (those who are not professional investors), as well as institutions concerned about falling foul of anti-money laundering controls.
How do we protect these investors and the reputation of the wider industry? The easiest answer is to just ban ICOs and label all cryptocurrency activity as illegal, even if just as an interim measure, as looks to be the case in China.
Yet such draconian actions stifle opportunities for innovation and growth. Many governments, including that of Taiwan, are embracing the innovation opportunity, while trying to figure out the role of cryptocurrencies, ICOs, cryptocurrency exchanges, and more. Meanwhile, the recently launched SRO concept in Taiwan is focusing on developing frameworks for how exchanges and ICOs are to operate.
Below are some of the reasons for the formation of SROs and key questions and challenges surrounding the work of the SRO in Taiwan:
Origins and structure
Given the massive knowledge gap between most regulatory bodies and those working in the industry, the best way to start working on these problems is to ask those directly involved, i.e. the private sector. Without any formal regulations in place, a self-regulatory organization (SRO) offers a means for the industry to protect itself from being destroyed by scams, bad actors, and the purely self-interested. As we are in the middle of birthing a new industry, the SRO can be thought of, if carried out correctly, as the next step towards legal industry regulations. As a sheriff in the Wild West, as it were.
An SRO can come in many forms, but basically the idea is to allow the industry to set “quality bars” for how the industry should conduct itself. They also allows for national-level discussions and development. Japan and South Korea are currently pioneering successful SROs. Groups in both countries have attracted several hundred members (both local and international companies), which have agreed a mutual goal of establishing industry codes of conduct.
In Japan, the Japan Virtual Currency Exchange Industry Association launched in April this year. Comprised of an initial group of 16 crypto exchanges that have already registered with and been licensed by Japan's Financial Services Agency, the Japanese SRO has the power to create and enforce rules, as well as set fines.
As for ICOs, Tama University in April issued a government-backed report composed by companies (interestingly these are primarily banks and large insurance companies), legal and tax/accounting specialists, and overseen by a member of Japan's parliament.
The proposals aim for greater commitments on how ICO funds will be distributed, know your customer (KYC) criteria for ICO participants, disclosure rules regarding whether white paper goals have been met, and restrictions on insider trading, to name a few. Japan's FSA is set to deliberate on the proposals set out in the document before drawing up related laws.
This situation differs significantly from the work being undertaken in Taiwan, where the SRO is proceeding parallel to, rather than in step with, government and regulators.
That Japan's SRO is formed of cryptocurrency exchanges poses a danger that Taiwan would do well to avoid, namely that the rules that govern ICOs are drawn up by exchanges more interested in trading, and profiting from, tokens and cryptocurrencies than they are in galvanizing a broad base of blockchain industry participation.
The risk is that the ICOs that the SRO criteria permits are those who can afford to pay. As an industry participant, the views of both parties need to be considered. Taiwan has an opportunity to create a “best practices” approach when developing standards for both exchanges and ICOs. Especially as the goal should be to promote people from all over the world to launch an ICO from Taiwan - not causing Taiwanese to launch an ICO in a different country.
Benefits
An SRO offers three major benefits: market education to new entrants, a standardized code of conduct which signatories are expected to follow, and a platform for market participants to actively discuss and develop solutions to problems. Market education is very important as there aren’t any formal channels to receive information on ICOs. Most information comes from blogs on the internet, paid for media website, or personal recommendations.
A secondary and potentially more important in the long-term, element of market education relates to companies themselves. It’s very easy for someone to enter the blockchain space, all you really need is a website. Having an SRO is a great way for quality players in the industry to understand quickly who is “safe” to work with, allowing the necessary synergies to blossom quickly.
The best way to know how to regulate an industry is to experience the industry. Currently there aren’t any global agreements for how cryptocurrency and blockchain companies should be regulated, though organizations such as the G7 have pledged support for "appropriate" regulation while adopting a "wait and see" approach. An SRO allows for the industry to try different methods and work together towards solutions. With industry organization comes mass-scale communication and understanding of industry-wide problems and opportunities.
Regulatory interaction
It is as yet unclear how Taiwan's Financial Supervisory Commission (FSC) and other regulatory bodies in Taiwan will view the SRO. One of the most successful components for the SRO is wide-scale industry buy in. To get the needed participation, the views and leadership of the SRO cannot be viewed as favoring any one company or industry clique.
Scope of work
The SRO will focus on how exchanges and ICOs will operate in Taiwan to promote more inclusive growth and development. The specifics haven’t been revealed yet.
Enforcement limits
It is important to note that regulations are still pending; the SRO is only the beginning. Market and social norms have strong effects on societies, especially when reputation risk is high. With the establishment of an SRO, fraud, tax evasion, and money-laundering are all labelled bad acts. And if someone engages in these activities, the rest of the industry can state that the problem was with a specific person or company and does not pose a risk to the wider industry.
Challenges and goals
The major challenges the SRO faces is real industry participation. Beyond the guidance for cryptocurrencies and ICOs, what are the other important concerns for blockchain development? Are these companies and groups included in the SRO? Will all segments of the industry adopt the SRO policy? Who is leading the SRO? The industry? The government? Is it genuinely bipartisan? The ultimate outcome that any SRO can achieve is greater market attention and participation.
Community involvement
A calendar is now available for blockchain events in Taipei. As for the SRO, there are meetings in Taipei every two weeks. If you would like to join the meetings, please feel free to contact me. Otherwise, what would you like to see Taiwan's SRO achieve, or what questions might you have about its work? Please email me at BlockGuardianTW@Gmail.com and I will gladly answer your questions.
Read Next: Legislators Get On Board Taiwan’s Blockchain Bid
Editor: David Green