FSC Suggests Local Cryptocurrency Exchanges Separate Assets

• By Kao Shih-ching / Staff Reporter

The Financial Supervisory Commission (FSC) has proposed that local cryptocurrency exchanges should keep their digital currencies separate from the ones owned or deposited by clients, in an effort to regulate the market and protect investors in the wake of the collapse of FTX.

FTX filed for bankruptcy protection in the United States, claiming it had secured $740 million worth of crypto assets – a small portion of the billions that were likely lost. Many clients are concerned they won’t be able to recover their money.

FSC Chairman Thomas Huang (黃天牧) told a meeting of the legislature’s Finance Committee that the commission, which focuses on tackling money laundering on exchanges, would tighten regulations on asset seperation and investor protection.

Virtual assets such as cryptocurrencies are not financial products like traditional ones and global financial regulators continue to assess whether virtual assets are at risk of spreading the crypto crisis into mainstream financial markets, Huang said.

The FSC may require local cryptocurrency exchanges to keep their holdings separate and not mix them with their users’ funds, so as to prevent consumers from being affected in the event of an exchange failure, the commission stated.

It is not clear if a special industry law should be established, Huang added.

Wayne Huang (黃耀文), CEO of XREX Inc (鏈科), which provides cross-border blockchain payment solutions, said he agreed with the commission.

He noted that any decently-operating cryptocurrency exchange should have separated the currencies and stuck to the principle of separation. An exchange that secretly uses its clients’ cryptocurrencies to finance its own investments or activities is committing a crime, he stated.

The former CEO of FTX and founder of FTX Sam Bankman-Fried has posted on Twitter that “poor internal tagging of bank-related accounts” meant he was substantially out of his users’ edge. In other words, Bankman-Fried implicitly admitted that it used client funds but claimed it was just an accounting error, Wayne Huang said.

He believes that cryptocurrency exchanges that function as a centralized system need to be regulated by government, so as to protect investors and allow the government to be the lender of last resort for exchanges.

Accounting firms are hesitant about auditing cryptocurrency exchanges as they lack the experience or talent to do so, according to Wayne Huang. He added that a plan must be developed by the government in order to increase governance.

Regulators in Singapore, the UK, and the US are following this path, Liu added.

“The fall of FTX shows that doing nothing is no longer an option for the FSC, which has a responsibility to take care of local investors,” Liu said. “Taiwanese regulators should present offshore platforms such as FTX and Binance with an ultimatum: comply with the protection of the Taiwanese consumer and finance, or stop serving the Taiwanese.”