Multiple banks in Taiwan have had their cryptocurrency custody applications rejected! Warning accounts become obstacles

Several Taiwanese financial institutions, including private banks and pure online banks, have completed negotiations with their partnered VASPs over the past year to prepare applications for virtual asset custody pilot programs to the Financial Supervisory Commission (FSC), but have been repeatedly rejected. The FSC’s reason is “too many warning accounts,” and they require banks to significantly reduce the number of warning accounts before they can successfully apply.

Current Situation of Multiple Rejected Applications

According to the Commercial Times, several financial institutions—including private banks and pure online banks—have, over the past year, completed discussions with their VASP partners and initially prepared to submit applications to the FSC for virtual asset custody pilot programs, only to face repeated refusals. The FSC’s stated reason is “too many warning accounts.” Regulatory authorities demand that these banks drastically lower their warning account numbers before their applications can succeed.

This “must reduce warning accounts before applying” threshold is extremely unfair to banks actively serving the crypto industry. The reason these banks have many warning accounts is largely because they provide banking services to crypto businesses. Among users of crypto exchanges and VASPs, some are involved in scams or money laundering. When these accounts are reported or frozen, the banks providing services are flagged with warning accounts. However, this does not mean the banks themselves are problematic; it reflects the industry’s characteristics.

The FSC’s logic is: “Having so many warning accounts indicates poor risk control or involvement in high-risk activities, so I cannot allow you to expand your crypto business.” The banks’ dilemma is: to reduce warning accounts, they must cut back or even exit crypto-related banking services, which in turn eliminates the business motivation and customer base for applying for crypto custody licenses. This contradictory requirement—“must give up existing business to apply for new business”—puts banks in a difficult position.

Three Barriers to Applying for Cryptocurrency Custody

Warning Account Requirement: Must significantly lower warning accounts below an unspecified “red line” set by the FSC

Capital and Technology: Need to establish comprehensive systems such as cold wallets, HSMs, insurance, etc.

Pilot Qualification: Even if approved, it’s only a pilot; a review is required after six months

KGI Bank as the First to Launch with $20 Million Exposure Limit

Currently, the FSC has approved three banks—Union Bank, KGI Bank, and CTBC Bank—to officially pilot virtual asset custody. Cathay United Bank has also been approved to join. The initial focus is on Bitcoin (BTC) and Ethereum (ETH), the two main assets. KGI Bank announced the launch on February 5, 2026, becoming a focal point in the industry.

KGI’s custody system uses fully offline cold wallet technology, combined with HSM (Hardware Security Module)-based cold storage devices, ensuring assets are isolated both physically and digitally. Additionally, KGI is the first in Taiwan’s virtual asset custody banks to complete insurance coverage, introducing an international insurance mechanism. KGI’s General Manager, Lin Su-zhen, emphasized that the core principles are “stability, safety, and compliance” in promoting virtual asset custody.

The combined maximum crypto asset exposure of the three approved banks is about $20 million USD (approximately NT$650 million). The pilot period is six months, during which they must submit comprehensive operational reports to the FSC, covering internal controls, anti-money laundering measures, and customer complaint handling. The $20 million USD limit is very conservative. At current Bitcoin prices (~$66,000), this only covers about 303 BTC. For Taiwan’s overall crypto market (estimated at billions of dollars), this quota is negligible.

This highly conservative pilot scale indicates that the FSC remains very cautious about crypto custody. It’s more of a “proof of concept” rather than full commercialization, aimed at testing whether banks can securely custody crypto assets under strict regulation and accumulating experience for future full opening. However, this small-scale pilot offers limited commercial appeal for banks and may only serve as a strategic position or experience-building effort.

Far Eastern Bank’s Contradiction: 97% of Crypto Flows but No Application

In October 2025, Far Eastern Bank publicly stated that it handles 97% of Taiwan’s virtual asset transaction flows, making it the dominant bank for crypto deposits and withdrawals. In the “fiat trust” market for virtual assets, Far Eastern’s market share is even more dominant. Despite managing such a large volume of crypto flows, Far Eastern has not applied for the virtual asset custody pilot program.

This contradiction is highly ironic. As Taiwan’s dominant crypto flow provider (with nearly 97% market share), Far Eastern should have the strongest motivation and capability to apply for a crypto custody license, given its large customer base and technical infrastructure. But because of its 97% market share, Far Eastern’s warning account count is likely the highest (serving the most crypto users). This makes it difficult to pass the FSC’s “warning account threshold.”

Far Eastern faces a strategic choice: continue maintaining its 97% market share and accept the inability to apply for custody, or actively reduce crypto flows and warning accounts to qualify for the license. Both options have pros and cons. Maintaining the status quo means giving up new revenue streams from custody but preserving its existing market position. Applying for the license could open new business opportunities but would require sacrificing some existing customers and income. Currently, Far Eastern appears to prefer the former, possibly because it values the certainty of its current business over the uncertain prospects of custody services.

The Dilemma of Warning Accounts Rising from 66,000 to 150,000

According to FSC statistics, the number of warning accounts in Taiwan’s banks surged from 66,000 in early 2022 to 150,000 in early 2024—more than doubling in two years, with over 30,000 new warning accounts in 2024 alone, setting a record. However, since January 2025, the FSC has implemented a “monthly control” mechanism: if a bank’s warning accounts exceed its deposit account share or the industry average, it is placed under observation. This measure has finally contained the growth of warning accounts.

The increase from 66,000 to 150,000 warning accounts reflects the rampant rise of scam crimes in Taiwan. Warning accounts are those reported or verified to involve fraud, money laundering, or other crimes. Once flagged, these accounts are frozen and cannot be used. The 150,000 warning accounts represent only the tip of the iceberg, as many scams go unreported or undetected.

In September 2025, the number of warning accounts first showed a negative growth. FSC Chairman Peng Jinlong attributed this to the effectiveness of AI-based anti-fraud models introduced by banks. However, over-sensitivity of AI has also caused new issues, such as wrongful account freezes of salary transfer, tuition, and mortgage payments, leading to increasing public dissatisfaction. The FSC has proposed four improvement directions: optimize AI accuracy, set up 24-hour unlocking hotlines, introduce risk-based grading, and share cases through banking associations for cross-bank cooperation.

Transition Period Before Legislation by End of 2026

Taiwan’s “Virtual Asset Service Law” draft has been submitted to the Executive Yuan and is expected to be enacted by the end of 2026. Once enacted, it will provide clearer legal frameworks for stablecoin issuance, VASP regulations, and bank virtual asset activities. During the transition period before the law comes into effect, the FSC is gradually opening participation through “pilot plans,” but the “warning account threshold” creates dilemmas for banks eager to embrace crypto.

Should they reduce crypto flows to lower warning accounts or continue deepening their market presence but be excluded from new business opportunities? The answer may only become clear once the law is enacted and the regulatory framework is more complete. For Taiwan’s crypto industry, the opening of bank crypto custody services is a key step toward compliance and mainstream acceptance. If the warning account issue continues to hinder progress, Taiwan risks falling behind competitors like Hong Kong and Singapore in global crypto regulation.