Blockchain and FinTech as Taiwan’s emerging stars

To a modestly technology-literate person, the terms of blockchain and FinTech are, at best, cloudy and curious. The development of this last generation of technologies and applications is difficult to grasp as they are multidimensional, cross-domain and multifaceted in their very nature. 

As definitions are not the aim of this contribution, we can sum up blockchain’s main advantage in two words: transparency and trust. “This transparency creates trust among the parties and as a result, it reduces operational costs.” says Dr. Kung Chen, Professor at the Department of Management Information Systems at National Chengchi University, Taiwan. Simply put, blockchain is a technology that opens outstanding and unlimited possibilities for FinTech, a notion that can be summarised as the use of computer and smartphone programs to support or enable banking and other financial services.

Blockchain and finance, the ideal association?

Interestingly, the operating uses of blockchain are manifold and, theoretically, limitless. It allows encrypted, decentralised storage and money transfers. This can create an end-to-end digital value chain that promises innovative applications and greater efficiency, not least in asset tokens. 

As stated earlier, the main advantage of this technology is that it ensures a certain level of trust among several parties that are separated by time and distance, thanks to the transparency of the process. Blockchain has obviously captured the interest of the financial and banking domains that have used Letters of Credit (LC) to ensure trust and transparency for their clients and service suppliers across the world for centuries. Yet, in 2022, most LC is still conducted through paper-based receipts that need to travel a long way to be signed by the contractors. 

This way of conducting business wastes time, consumes reams of paper, and lacks efficiency. On the other hand, blockchain can save between 90% and 98% of the required time to seal the process while ensuring a free, transparent, and reliable data flow between the interested parties in a financial contract. Coupling blockchain with Artificial Intelligence (AI) software, recognising scriptural written characters, for example, can potentially complete this framework and incline towards a hyper-personalisation of financial services to the clients’ benefit. Banks and consultancies are currently developing a technological framework known as ABCD – AI, Blockchain, Cloud and Big Data – to transfer all operations online, from consultations and analyses to prevision and digital transfers.

Blockchain has the potential to truly revolutionise the everyday experience of online banking service users. It could enhance security by inducing a consensus-based architecture, thereby reducing the need for data intermediaries such as transfer agents or messaging systems operators. It could implement transparency by instigating mutualised standards and protocols to craft a single shared network. It could build up trust by setting up transparent and immutable ledgers and making it easier for different business parties to operate. 

Blockchain could also ensure privacy by providing market-leading tools for granular data privacy across every layer of the software stack, allowing selective sharing of data in business networks. Finally, blockchain could safeguard high performance, as private and hybrid networks are engineered to sustain hundreds of transactions per second and periodic surges in network activity. Put simply, blockchain can solve three of the financial system’s worst inefficiencies: the antiquity of the processes, the overwhelming centralisation of the system making it resilient to change and its exclusionary tendency, denying access to billions of potential users.

The outbreak of COVID-19 during the first half of 2020 has had enormous effects on saliency and the potential use of blockchain. As drastic health measures were instituted worldwide, in-person meetings were transferred online, and offices were emptied in a matter of days. Additionally, COVID revealed that global supply chains based on paper and shipping do not function effectively when people are unable to work from their offices. 

In many ways, the COVID pandemic represented a call to action for banks and corporations to invest in digital strategies able to respond to global disruptions. Moreover, the pandemic irremediably accelerated the transition to virtual, remote means and online applications for everyday life uses. A majority of people across several generations have – in the absence of an alternative, most shops and restaurants having been shut for a few months – learnt how to order groceries, food or tech products online since the beginning of the pandemic. Many of them have also had to understand how online meeting applications such as Zoom, Microsoft Teams and Cisco Webex function to be able to keep on with their professional activities. In other words, a majority of the world’s population is much more computer and smartphone-literate than it was two years ago, and, likely, changes in consumption habits such as online banking, delivery applications and virtual meetings are caused by COVID are here to stay. According to Taiwan’s Trade Government Agency (TTGA), the penetration of online transfer by phone is between 85% and 90% of all the users of smartphones, or nine million people. Thus, in this far greater pool of Information and Communication Technologies (ICT)-literate and online-capable people,  the new possibilities offered by blockchain are expected to have significant resonance in the years to come.

Taiwan’s evolving framework of regulations

So far, blockchain and FinTech are relatively lightly controlled by the government. Given bureaucracy’s inherent slowness and the period indispensable to framing, developing and passing new bills at the legislative level, it is no surprise that the public sector is usually late to adapt to new technologies. Suppose the lack of regulation can sometimes profit certain industries. In that case, innovation is a field in which companies can benefit from institutional and legal clarity that allows them to generate novel projects. Tax incentives, for example, as present in Articles 23-1&2 of the Statute for Industrial Innovation, provide motivation for investing in blockchain and FinTech. 

The Taiwanese legal environment on the blockchain is notably very vague on such important questions as Intellectual Property Ownership (IPO), data protection, financial regulation and taxation. For example, a definition of IPO as related to blockchain activities in order to ratify ownership of authors more efficiently and facilitate transactions through smart contacts is still to be drafted. With regards to financial regulations, Taiwan’s Financial Supervisory Commission (FSC) has no rules regarding financial transactions made through blockchain and is expected to draft a new regulation to establish a safe environment for experimentation related to innovative financial technologies. Interestingly, Taiwan shares with Switzerland the characteristic of having a “sandbox” policy when it comes to innovation, meaning that the overall system is designed to test, optimise, and, thus, enable the identification of potential problems before they escalate. 

With regards to this relative legal vacuum, it is worth noticing that, in this instance, it is the private sector that encourages the government to implement regulations. This dynamic is because previous laws passed by the Legislative Yuan have benefited the service industry overall, especially in the fields of online payments and cryptocurrencies. Even though no law strictly regulating blockchain has been implemented, the public sector has eyed flexible ways to ensure that the direction of the jungle does not entirely rule the sector. 

Such is the Taiwan Blockchain Alliance (TBA), an ad-hoc group of researchers, financial experts and policymakers aimed at providing the government with expertise and consultation on how to manage the business of blockchain and FinTech. By building a platform between the private sector and the government, this alliance aims to enable two-way information exchanges, encourage international cooperation, promote field application and talent cultivation, and create a sound industrial development environment. Lastly, as blockchain’s applications will spill into other domains, such as agriculture, logistics, health and energy, TBA aims at drafting basic regulation optimisation and field use of this innovative technology. An early success was the framing and adoption of the Money Laundering Act in mid-2021. The government required that all crypto-asset trading platforms have to complete verification and comply with financial regulations. This ensured that blockchain, cryptocurrencies and FinTech cannot be used as mediums for money laundering.

Bright perspectives for Taiwan: the Swiss factor

As Taipei Mayor Ko Wen-Je affirmed recently, the stated goal is that “Taiwan makes the most of its capabilities, skills and resources to serve as a world-class blockchain incubation centre.” Taiwan’s ability to attract investment from foreign countries will work in its favour. Taiwan’s potential in the blockchain and FinTech domains could be complementary to other countries’ strengths in the field of banking, finance and investment. 

In this regard, Switzerland could be a good example to follow in developing and implementing regulations on blockchain and FinTech activities. Ventures such as the Zug Crypto Valley and strong regulations to safeguard the integrity of the Swiss financial center are instances from which Taiwan can take pointers. In addition, the renowned quality of Switzerland’s financial system is already a huge asset for FinTech companies and a great incentive for Taiwan’s firms to collaborate with the alpine country. In many ways, it is not unreal to imagine that Taiwan’s two rising stars – blockchain and FinTech – will be stepping stones to the island’s greater collaboration and association with the outside world and perhaps with Switzerland.