Asian jurisdictions have been cautious in developing legal frameworks around virtual currencies, but the volatile market and relentless evolution of cryptos are pushing regulators to act
The cog that turned the regulatory machinery in India to regulate cryptocurrencies, or virtual currencies (VCs), was the circular dated 6 April 2018, issued by the Reserve Bank of India (RBI), prohibiting the banks and financial institutions from dealing or providing services to people dealing in VCs. So far, the regulatory position regarding trading and investing in cryptocurrencies in India fit broadly under two categories: First, the position followed with the issuance of a prohibitory circular by the RBI; and second, the position advent with the pronouncement of a decision by the Supreme Court that struck down the said prohibitory circular of the RBI, being unconstitutional.
Before April 2018, the crypto industry in India remained fairly unregulated, posing a potential impact on the effectiveness of monetary policy, along with risks and concerns about consumer protection, market integrity and systemic safety associated with dealing with digital currency. However, the issue of how to deal with VCs has been lingering with the RBI since June 2013, when in its financial stability reports of 2013, 2015 and 2017 the regulator has consistently raised concerns about legal and operational risks associated with VCs, and has also issued public warnings about the risks associated with VCs.
Between 2013 and 2018, there was a significant rise in the value of many cryptocurrencies, and rapid growth in initial coin offerings (ICOs). This caused wariness with the regulators, triggering the constitution of an inter-disciplinary committee in 2017, comprising the Special Secretary (Economic Affairs) at the Ministry of Finance, and representatives from the departments of Economic Affairs, Financial Services, Revenue, Home Affairs, Electronic and Information Technology, and from the RBI, NITI Aayog, and the State Bank of India, to examine the regulatory and legal structures and suggest measures for dealing with VCs.
The report submitted by the committee recommended issuance of a clear warning through public media, stating that the government does not consider cryptocurrencies as either coins or currencies, to warn investors to offload such currencies, and to recommend action against those who, despite warnings, indulge in buying or selling, or offering the platform for trading of cryptocurrencies. However, the committee clarified that there is no restriction to using blockchain technology for purposes other than creating or trading in cryptocurrencies.
On 2 November 2017, an inter-ministerial committee was set up to examine the pros and cons of banning and regulating cryptocurrencies. While submitting a draft bill known as the Crypto Token and Crypto Asset (Banning, Control and Regulation) Bill, 2018, the committee recommended regulating private cryptocurrencies. The committee believed that banning cryptocurrencies would be an extreme measure, and therefore advised regulatory tools for regulating VC exchanges to permit the sale and purchase of private VCs.
This aided the advent of regulation of the crypto industry in India, though an about face to the recommendations of the inter-ministerial committee in the form of total prohibition, by introducing the circular dated 6 April 2018, issued by the RBI, that prohibited banks, financial institutions and online payment system providers from dealing in VCs or providing any services to people dealing in such currencies with immediate effect.
In this way, the oxygen support to various VC exchanges in India was removed, since access to banking services in the modern economy is essential, especially in light of the restrictions on cash transactions under the Income Tax Act, 1961.
The crypto industry challenged the prohibitory circular, under the aegis of the Internet and Mobile Association of India, before the Supreme Court. Another inter-ministerial committee was constituted by the government, which, by its report submitted in 2019, recommended bolstering the prohibitory circular with the law and completely banning private cryptocurrencies through legislation, namely, the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019. At the same time, the bill also contemplated the creation of a digital rupee as legal tender by the government in consultation with the RBI.
On 4 March 2020, the Supreme Court struck down the prohibitory circular issued by the RBI, terming the total prohibition as disproportionate, while emphasising that this was done even though VCs are not banned by the government, in effect sending the functioning of VC exchanges comatose by disconnecting their lifeline, i.e., interface with the regular banking sector.
The present position
After this tug of war, the position in India today is that there is no law or policy that prohibits trading or investment in cryptocurrencies, but the question that concerns investors is the uncertainty of such a position in future. This is especially in the light of the impending ban with a new bill being introduced in the Indian parliament, namely the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. The contours of the bill are not yet available in public, but the expectations are that this bill will take forward what was set in the draft legislation of 2019, which proposed to ban cryptocurrencies in India.
The 2019 bill gave a very loud and broad definition of cryptocurrency as “any information, code, or token which has a digital representation of value, and has utility in a business activity, or acts as a store of value, or a unit of account”, and sought not only to prohibit or ban the trade of cryptocurrencies but also to penalise the mining, holding, selling, issuing, transferring or use of cryptocurrencies as punishable with a fine or imprisonment up to 10 years, or both. The purports of the new 2021 bill are:
(1) To create a facilitative framework for the creation of an official digital currency to be issued by the RBI; and
(2) To prohibit all private cryptocurrencies in India, but allow for certain exceptions to promote the underlying technology of cryptocurrencies (i.e., blockchain and distributed ledger technology) and its uses.
The bill seeks to create a central bank digital currency to be issued by the RBI, which will be a digital form of Indian rupee, backed by the RBI and having the same value as fiat currency. It is speculated that the bill will be one of the world’s strictest policies against cryptocurrencies. If the ban becomes law, India will be the second major economy, after China, to make the holding of cryptocurrencies illegal, even though China has not penalised the possession of cryptocurrencies.
The bill is slated to be introduced in the lower house of the parliament very soon, and being at the receiving end of the onslaught, this has rightly left many investors and traders anxious. The government has tried to alleviate concerns by giving signals that there will not be a complete blanket ban, and a window will allow and encourage experimentation and exploration of emergent technology underlying cryptocurrencies for research or teaching.
The government has acknowledged that the technological innovations underlying crypto assets can improve the efficiency and inclusiveness of the financial system, and are advantageous in controlling fraud and maintaining privacy. However, what has bothered the government and the RBI is the host of other issues regarding consumer and investor protection, money laundering, tax evasion, the threat to the existing monetary or credit system, and terrorist financing.
One cannot doubt the justification of government concerns regarding risks associated with the unregulated use of VCs due to their anonymity, layering, lack of backing by tangible assets, and volatility. But it would be disproportionate to impose an absolute ban while ignoring certain advanced benefits of VCs, like more efficient cross-border payments and better record keeping, especially when cryptos are going mainstream with widespread applications. The US and European countries have also chosen to embrace and regulate private cryptocurrencies while orienting towards mitigating specific risks.
A total ban would also make the trade illegal and push the industry underground, which would entail a rise in black marketing, abuse and exploitation. It would also force crypto-holders to take their wealth offshore. It is also impractical to ban cryptocurrencies as they exist on the internet, and it is almost impossible to implement a ban in the digital world.
Letting the RBI issue its own central bank digital currency is an effective idea from the perspective of monetary sovereignty, but the International Monetary Fund (IMF) recently indicated that public money and private money could co-exist and complement each other.
According to the IMF, this system offers significant advantages, including innovation and product diversity, which the private sector will provide, and stability and efficiency, as ensured by the public sector. The IMF argues that if countries move to a central bank digital currency, they should consider leveraging private currencies.
At this point, the opportunity to have a dual monetary system must be seized by India, and many other countries.
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At the time of writing this article, cryptocurrencies are currently not accepted as currencies in Taiwan. Since 2013, the positions of both the Central Bank of the Republic of China (Taiwan) and the Financial Supervisory Commission (FSC) have been that Bitcoin should not be considered a currency, but a highly speculative digital virtual commodity. The FSC has since 2014 ordered local banks not to accept Bitcoin or provide any services related to Bitcoin.
Other than that, no laws or regulations have been officially promulgated or amended to specifically deal with cryptocurrencies, except for:
(1) the regulations governing tokens with the nature of securities, which are commonly called security tokens, and their offerings, commonly called security token offerings (STOs); and
(2) the anti-money laundering (AML) related regulations for “virtual currency platforms and trading business”.
The core regulatory issue regarding a token offering, such as an initial coin offering (ICO), is whether a token offering would be considered an offering of securities under Taiwan’s securities regulations. For this purpose, the FSC expressed its view, in 2017, that if an ICO involves the offer and issue of securities, it should be subject to Taiwan’s Securities and Exchange Act (SEA).
In other words, if a token offering is considered involving the offer and issue of securities (so the tokens offered are considered security tokens), it would be considered an illegal fundraising activity in violation of the SEA, unless the STO regulations are followed.
Security tokens and STOs
In July 2019, the FSC officially issued a ruling designating cryptocurrencies with a certain nature as securities (i.e., security tokens) under the SEA. According to the 2019 ruling, security tokens refer to those that:
(1) utilise cryptography, distributed ledger technology or other similar technologies to represent their value that can be stored, exchanged or transferred through a digital mechanism;
(2) are transferable; and
(3) encompass all of the following attributes of an investment:
(i) Funding provided by investors;
(ii) Providing funding for a common enterprise or project;
(iii) Investors expecting profits; and
(iv) Profits generated primarily from the efforts of the issuer or third parties.
The FSC and the Taipei Exchange (TPEx) jointly worked on a set of regulations governing STOs, which was finalised in January, 2020. The STO regulations are differentiated by the threshold of NT$30 million (US$1 million). For an STO of NT$30 million or less, the STO may be conducted in compliance with the STO regulations.
An STO above NT$30 million must first apply to be tested in the financial regulatory sandbox and, in case the experiment has a positive outcome, should be conducted pursuant to the SEA. Certain key provisions of the STO regulations include:
(1) The issuer must be a company limited by shares incorporated under the laws of Taiwan, and not a company listed on the Taiwan Stock Exchange or TPEx, or traded on the Emerging Stock Market.
(2) The issuer can only issue profit-sharing or debt tokens without shareholders’ rights.
(3) Only professional investors are eligible to participate in STOs. Where a professional investor is a natural person, the maximum subscription amount is NT$300,000 per STO.
(4) The platform operator should obtain a securities dealer licence, have a minimum paid-in capital of NT$100 million, and provide an operation bond of NT$10 million.
(5) Total offering amount of all STOs on a single platform should not exceed NT$100 million.
(6) Pursuant to the STO regulations, some other requirements and restrictions include those regarding trading (secondary market), real-name basis, New Taiwan dollar only, etc.
It is our understanding that, at the time of writing this article, although there have been discussions regarding the issuance of security tokens, such as those related to carbon credits, there have been no STO programmes launched due to the relatively stringent restrictions under the STO regulations, such as the qualifications of the STO issuer, eligible investors and amount limits, etc., as well as other compliance costs that may be incurred for launching any STO project.
Although there is no STO platform operator in Taiwan, there have been crypto platform or exchange operators providing services in relation to cryptocurrencies, which are not security tokens. As indicated above, as long as no security tokens are involved, there are no laws or regulations specifically dealing with the trading of cryptocurrencies, so there currently exists no required licence in Taiwan for operating crypto platform or exchange operators.
From the perspective of AML, the latest amended Money Laundering Control Act (AML Act), which took effect in November 2018, has brought the virtual currency platforms and trading business into Taiwan’s AML regulatory regime. However, the government had made no further progress in implementing the amended AML Act until the AML ruling was issued.
In April 2021, Taiwan’s Executive Yuan (the cabinet) issued a ruling (the AML ruling) to interpret the scope of enterprises of virtual currency platforms and trading business under the AML Act, which is expected to take effect on 1 July 2021. The scope described under the AML ruling covers those who engage in the following activities for others:
(1) An exchange between virtual currency and New Taiwan dollars, foreign currencies, or currencies issued by mainland China, Hong Kong or Macau;
(2) An exchange between virtual currencies;
(3) Transfer of virtual currencies;
(4) Custody and/or administration of virtual currency or providing instruments enabling control over the virtual currency;
(5) Participation in and provision of financial services related to the issuance or sale of virtual currencies.
According to the authors’ experience and understanding of local practice, it is generally expected that, following the issuance of the AML ruling, the FSC might set out clearer or more detailed regulations under the AML Act in relation to the crypto industry.
The regulations would cover the operators’ obligations regarding know your customer, record keeping, suspicious activity reporting, continual monitoring, etc. Therefore, it is recommended that the relevant market players continue to pay close attention to new developments, including the above-mentioned AML-related regulations to be further set out by the FSC.
DeFi and NFT
New applications of cryptocurrency and blockchain technology such as DeFi (decentralised finance) and NFT (non-fungible tokens) have been hotly discussed in Taiwan in the past couple of years.
The government does not seem to have any official view on the rise of DeFi activities. However, from a local perspective, the classification of any DeFi activities should be determined on a case-by-case basis, and laws such as those relating to banking, trust, and futures would need to be reviewed for checking and ensuring Taiwan law compliance.
Market players might wish to argue that under a DeFi structure there is no centralised business operator that should be held liable for any activities, illegal or not. But from a legal perspective, this should be more of a factual or evidential matter, meaning we cannot rule out the possibility that any person who initiates or subsequently plays a major role in a DeFi project or program might still be considered the real actor, with respect to any potential legal consequences.
NFTs have been commonly structured to represent digital artworks, music works, collectables, baseball or basketball cards, photo albums, etc. While recent discussions tend to focus on what an NFT holder actually owns or obtains, the classification of any NFT or its offering should also be examined on a case-by-case basis.
Although there might be various ways of structuring an NFT – e.g., what is the underlying asset, the extent to which the NFT would be linked to the underlying (digital) asset, the rights and obligations of the parties participating in the offering, and of the NFT holders, etc. – it is suggested that the rights and obligations of the participating parties (NFT issuers, NFT platform operators, and/or service or technology providers, etc.) be clearly identified or stipulated in the terms and conditions to the extent possible, especially from the perspective of copyrights.
Also, notwithstanding the nature of any NFT being non-fungible and unique, we still cannot completely rule out the applicability of financial law (e.g., securities regulations) due to its possible nature of investment.
Finally, it is also unclear whether the DeFi and NFT market players would fall within the scope of the above-mentioned AML-related regulations. This creates an uncertainty for the future development of such emerging activities from a regulatory viewpoint.
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Interest in cryptocurrencies and digital assets in Thailand has seen a significant surge due to the strong bull cycle in the first half of 2021. While the market has experienced contractions, starting halfway through May 2021, it has done little to dampen Thailand’s renewed interest in the up-and-coming investment class, which has driven regulators to closely examine ways to address legal ambiguities and protect investors.
Thailand was among the first jurisdictions in Asia to issue legislation that specifically addresses cryptocurrencies and digital assets. Having taken effect in May 2018, the Digital Asset Act became the primary piece of legislation to regulate the offering of digital assets and other business activities involving them. In particular, the act states that those seeking to conduct initial coin offerings (ICOs) in the country must first register with the Securities and Exchange Commission (SEC), and the ICO must be held via an SEC-approved ICO portal, an electronic system provider that facilitates the offering of digital tokens, which will be responsible for performing due diligence on the tokens and the qualifications of issuers, ensuring the completeness and accuracy of the documents involved, and the same for the potential investors. The act also provides clear definitions of the different types of digital assets and various licensing requirements for exchanges, brokers and dealers to operate in the country legally.
Regulations surrounding cryptocurrencies and digital assets have, of course, evolved since 2018, and other regulatory bodies, namely the Bank of Thailand (BoT), have taken more interest in the way they are governed. Nonetheless, ambiguities still exist, and regulators are still in the process of developing a framework that effectively addresses the complexities.
Q: What are the main concerns for companies and individuals in Thailand seeking to invest in cryptocurrencies?
A: Thailand has seen the emergence of several players in the local market, namely crypto exchange Bitkub, which, due to the growing interest in crypto investments, was ordered by the BoT to increase its capacity before onboarding new clients, in the same way as a traditional bank would be required to be able to service a majority of their customers at the same time. Nonetheless, challenges with regard to regulatory ambiguities and hindrances still abound.
An example of this is the proposed introduction of new know your customer (KYC) requirements in May 2021 by Thailand’s Anti-Money Laundering Office (AMLO), which would effectively force digital exchanges to halt their online account creation process and shift to an in-person-only setup, where potential customers must verify their personal details using their Thai national ID card, which contains a smart chip, and must attend in person to verify using a smart card reader – similar to the machines used to read chip-credit cards.
While the new requirement intends to mitigate instances of money laundering and fraud, it will create additional hurdles for digital exchanges and those seeking to use their services. It begs the question of how those who are not physically in Bangkok, or foreign nationals whose passports will not contain the same chips, will be able to create accounts or conduct transactions.
Another requirement worth examining is one from the SEC, which mandates that token issuers submit extensive data management reports daily that must contain a list of investors and their transactions. The rationale behind this is to monitor the purchasers’ business activities and mitigate the likelihood of any malicious activities taking place. However, this may be disadvantageous to many token issuers and potential exchange hosts, as they will have to allocate significant amounts of resources to comply with these requirements.
Of particular concern to foreign residents are the restrictions imposed by the BoT with regard to the movement of funds out of the country. While cryptocurrency funds can be brought into one of the larger exchanges in Thailand as a fiat off-ramp (means of exiting the crypto market), repatriating or transferring large amounts out of the country is heavily restricted by the BoT, and will require the owner to seek approval from the bank, on top of incurring duties and taxes.
Q: Digital assets called non-fungible tokens (NFTs) have become increasingly popular for buying and selling digital artwork. What is your take on Thailand’s approach to regulating NFTs?
A: NFTs are slightly different from what people commonly associate with cryptocurrencies. They are a unique type of cryptographic token representing ownership of a unique digital item. Each token contains a distinct set of information or attributes that makes it irreplaceable and impossible to swap in the same manner as other digital files. In contrast, it is easy to swap and trade standard cryptocurrencies and most digital tokens. NFTs come in various forms, namely artwork and other assets, and can be traded in the same way as financial instruments.
NFTs are growing in popularity around the world, and Thailand is no exception to this. While no specific regulations exist surrounding NFTs, Thai regulators have been examining the implications of rights granted to a holder of an NFT, particularly concerning ownership rights, intellectual property rights, and access to royalties. Given its novelty, no legal frameworks currently exist surrounding their governance, and legal discussions are now underway as to whether NFTs should be considered securities or intellectual property.
Nonetheless, the existence of regulations surrounding asset-backed tokens, particularly real estate-backed tokens, may explain how NFTs may be treated in the future, given that these are also seen as property.
Under the Emergency Decree on Digital Assets, 2018, real estate-backed tokens are considered investment tokens and subject to the SEC’s supervision. It means that issuers of real estate-backed tokens must fulfil many of the same requirements as regular coin issuers, albeit ICOs cannot be used to fund the development of a real estate property in the same way that ICOs are used to fund digital projects. How the regulators will treat these digital assets remains to be seen.
Q: What are the upcoming regulatory developments surrounding cryptocurrencies in Thailand, and what should investors be aware of?
A: The BoT and the SEC are currently drafting regulations on capital gains from cryptocurrency transactions. These may be of interest to market participants as this would have implications on taxes, which are currently calculated based on the value of each particular transaction. The BoT has also recently issued guidelines for regulating financial services involving stablecoins (cryptocurrencies where the price is pegged to a reserve asset), particularly Thai baht-backed stablecoins, which is classified as electronic money under the Payment Systems Act of 2017. This issuance was made in anticipation of an upcoming regulation on central bank digital currencies (CBDCs) issued by the BoT.
In addition to this, the BoT may also issue a new KYC manual, specific to CBDCs, to prevent issues surrounding fraud and other malicious activities. On the other hand, stablecoins that central banks do not issue, such as asset-backed stablecoins and algorithmic stablecoins, are currently being discussed among stakeholders.
Token issuers and investors alike should take note of anticipated regulations surrounding accounting standards and how cryptocurrencies will be treated in a financial context. While no announcements have been made yet regarding the spirit of the upcoming regulations, it is expected that cryptocurrencies will be treated as property, and will be subject to the same valuation methodology as other properties.
An SEC announcement on 30 May hinted at possible licensing requirements for token issuers involved with decentralised finance (DeFi), in response to the launch of DeFi yield farming platform Tuktuk Finance, operated by Bitkub. As with other token issuers, the SEC mandates that the issuance of digital tokens involved in DeFi would be required to comply with the requirements of the Digital Assets Act of 2018, particularly concerning the disclosure of information and the offering through a licensed portal.
The regulator has seemingly misunderstood how DeFi as a decentralised system actually works. Key protocols, including the verification of transactions, are governed by pre-coded smart contracts in DeFi platforms that automate many of the processes involved in transactions. While regulations have yet to be developed around DeFi, it is expected that regulators will look into supervising fiat on and off-ramps, given that would be the only part of the technology that can be regulated.
Nonetheless, creating holistic regulations will require regulators to bear in mind the need for flexibility in facilitating new forms of digital transactions and virtual assets that will not hamper the growth of the industry, while also protecting investors and supporting their demand. While numerous guidelines have been made across different jurisdictions on digital assets and transactions involving them, the sheer decentralised nature of DeFi will prove to be a challenge not only for regulators in Thailand, but all over the world.
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