Governments across the region are being forced to clear the regulatory air on virtual currencies as they can no longer afford to ignore their popularity
Authorities across the world are wary of cryptocurrencies because of the ability of any person mining, holding or transferring a cryptocurrency to do so with complete anonymity.
The prospect of recognizing and allowing cryptocurrencies as a form of currency involves a host of issues, including legal and regulatory challenges. From a purely operational standpoint, cryptocurrencies may meet some of the characteristics of currency. However, the acceptance of cryptocurrencies raises larger questions of supervision and regulation, stability and protection of value for users, impact on financial and other sectors, and potential misuse for money laundering, fraud, funding of terrorism or other illegal activities. There have been several incidents of trading of fake currency, fraudulent and fake exchanges, diversion of bitcoins by exchange, and other malpractices.
Every facet of an economy of any country is intricately linked to its monetary system, its stability and continuity. The monetary system and policy of any country involves balancing several factors. Central banks and government machinery play a very important role in maintaining such stability by adopting various measures, e.g., regulating bank rates, controlling monetary liquidity, controlling credit limits, foreign exchange, devaluation, demonetization, printing currency, targeted government spending in priority sectors, modifying tax rates and structures, imposing restrictions on imports through import duties, safeguard duty and a host of other steps.
This article confines its focus to the regulatory and legislative response to the burgeoning cryptocurrency industry in India, and regulatory concerns over the decentralized nature of cryptocurrencies.
Reserve Bank of India
The Reserve Bank of India (RBI) is the central bank for India, responsible for operating the monetary policy framework of the nation, ensuring the stability of prices, managing public debt, issuance of bank notes, regulation of financial institutions and credit systems. The RBI exercises its regulatory and supervisory powers over the Indian banking and financial sector, primarily through the Banking Regulation Act, 1949 (Banking Act), the Reserve Bank of India Act, 1934 (RBI Act) and the Payment and Settlement Systems Act, 2007 (PSS Act), and associated rules, regulations and guidelines.
The RBI has adopted a cautioned approach towards cryptocurrencies. It issued a press note dated 24 December 2013, warning holders and traders of virtual currencies against the financial, legal and security-related risks associated with such currencies. Similar press notes were subsequently issued in February 2017 and December 2017, where the RBI reiterated that entities dealing in virtual currencies had not been authorized and would be doing so at their own risk.
Subsequently, the RBI issued a circular on 6 April 2018, prohibiting all entities regulated by the central bank from providing any services for, or facilitating, any person or entity in dealing with or settling virtual currencies. All regulated entities offering such services were given three months to exit such relationship with their clients.
The issuance of the RBI circular upended the cryptocurrency industry in India, and effectively brought it to a standstill. The RBI circular essentially prohibited all entities regulated by the RBI from dealing in virtual currencies in any manner whatsoever. The circular did not impose any legal sanctions on, or prohibit, the usage of virtual currencies, but restricted the use of regulated banking channels for dealing in virtual currencies.
Supreme Court of India
The RBI circular was challenged before the Supreme Court on the following grounds, among others: (1) lack of jurisdiction of the RBI under the Banking Act, the RBI Act and the PSS Act to prohibit trading in virtual currencies through virtual currency exchanges, since a cryptocurrency does not constitute “legal tender”, but constitutes goods or commodities; (2) the RBI circular imposed a total prohibition, vide subordinate legislation, of an activity not declared to be illegal, if violative of the Constitution of India, which guarantees to all citizens the right to “practise any profession, or to carry on any occupation, trade or business”; and (3) the RBI circular being manifestly arbitrary and imposing disproportionate restrictions.
On 4 March 2020, the Supreme Court delivered its judgment in Internet and Mobile Association of India v Reserve Bank of India, in a writ petition filed by the Internet and Mobile Association of India, an industry body representing the interests of the online and digital services sectors.
The court observed that virtual currencies fall within the regulatory purview of the RBI, in light of the fact that virtual currencies cannot simply be regarded as goods or commodities, and that virtual currencies have been accepted as valid modes of payment in certain jurisdictions.
The central bank has wide powers to operate the currency and credit system of the country and regulate financial systems, and the responsibility to address all issues that could be perceived as a potential risk to India’s financial systems. Since virtual currencies were likely to affect activities that the RBI does have the power to regulate, the RBI had the power to issue the RBI circular.
According to the Supreme Court, the RBI circular did not impose a total prohibition on the use of, or trade in, virtual currencies, but merely directed RBI-regulated entities to not provide banking services to entities or individuals who traded or engaged in providing services that facilitated the trading of virtual currencies. It rejected the contention that the RBI, by imposing restrictions over regulated entities, cannot thereby paralyse the functioning of virtual currency exchanges in India, which did not come within the RBI’s regulatory purview.
On the issue of “proportionality”, the Supreme Court observed that: (1) the RBI had not produced any empirical evidence of having found cryptocurrency exchanges to adversely affect the functioning of RBI-regulated entities; (2) an inter-ministerial committee of the central government constituted in 2017 had been of the opinion that a ban on virtual currencies might be an extreme measure, as virtual currencies were banned only in a few jurisdictions; and (3) the “Crypto-token Regulation Bill, 2018” recommended by the inter-ministerial committee provided for the regulation of virtual currency exchanges and brokers where sale and purchase of crypto-assets would be permitted.
The Supreme Court noted, however, a complete volte-face in the committee’s stand in its report submitted in February 2019, when it proposed the introduction of the Banning of Cryptocurrency and Regulation of Official Digital Currency Act, 2019, which recommended a ban on the generation, holding, selling, dealing in, trading, using and disposal of cryptocurrencies in India. The Supreme Court set aside the RBI circular on the ground of “proportionality”.
The Supreme Court has upheld the RBI’s jurisdiction to regulate virtual currencies or cryptocurrencies. It has also upheld the RBI’s power to prohibit any of the entities regulated by it from dealing with cryptocurrencies in any manner. However, before exercising such power to create a complete prohibition on cryptocurrencies, the RBI will have to justify the damage caused by such currency on the monetary system, or the functioning of the RBI or its regulated entities.
The Crypto-token Regulation Bill, 2018, provided for the sale and purchase of digital crypto-assets at recognized exchanges. However, the subsequent Banning of Cryptocurrency and Regulation of Official Digital Currency Act, 2019, which is pending in the parliament, provides for a complete ban on the generation, holding, selling, dealing in, using, trading and disposal of cryptocurrencies in India – such activities being punishable with a fine, or with imprisonment extending up to 10 years, or both.
In fact, a writ petition seeking a ban on the sale and purchase of, or investment in, cryptocurrencies in India is presently pending before the Supreme Court, on the grounds that cryptocurrency is used for various illicit activities such as money laundering, financing terrorism, tax evasion, etc., and that trading in cryptocurrency permits users to bypass know-your-customer (KYC) norms.
The Indian government’s disposition towards cryptocurrencies appears to remain hostile, while it does not seem to be averse to employing distributed ledger technology (DLT) and blockchain for ushering in a digital era in India’s economy.
The inter-ministerial report of 2019 notes that DLT could lower KYC-related costs and improve access to credit, and recommends that the Department of Economic Affairs, the Ministry of Finance as well as other regulators like the RBI, the Securities and Exchange Board of India and the Insurance Regulatory and Development Authority take necessary measures to facilitate the use of DLT in their respective sectors.
What remains to be seen is whether the central government will adopt a balanced, light-touch approach towards regulation of cryptocurrencies, akin to the ones adopted by countries such as the US, UK, Japan and Singapore, or whether its future actions will sound the death-knell for the cryptocurrency industry in India.
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The days of South Korea as the “wild west” of digital currencies are no more. On 5 March 2020, the National Assembly passed a suite of bills to amend the Act on Reporting and Use of Specific Financial Information, bringing digital currencies out of the legal grey zone. By adopting a wide-ranging set of definitions for critical terms such as “virtual assets” and “virtual asset business”, the amendments seek to provide a comprehensive regulatory scheme for digital currency.
While the law will not come into effect for another year, during which the finer points of the regulations will come, this development is a major inflection point. With its strong market-based economy centred on the latest technology, South Korea is one of the world’s most significant markets for digital currency and blockchain companies. Now, with a solid regulatory framework, South Korea is set to emerge as a promising jurisdiction for digital currency legal work based on transparency, clarity and predictability.
Arguably the most important part of the amendments is the definition of “virtual assets” and “virtual asset business”. The South Korean legislature adopted a broad definition for each of the terms, leaving enough room for future development in technology that may give rise to new and innovative forms of virtual assets and related businesses.
The amendments largely followed the definition of “virtual assets” set out by the Financial Action Task Force, the international organization dedicated to combating money laundering and terrorism financing. Under the amendments, a “virtual asset” is defined as an “electronic certificate with an economic value that may be traded or transferred electronically”. This definition encompasses not only digital currencies such as bitcoin, but also any electronic assets that may emerge in the future, whether or not they are blockchain-based.
The major exception to this definition is an electronic certificate that cannot be exchanged with money, goods or services, or a certificate of which the issuer restricted the exchange with money, goods or services. The electronic versions of the previously existing asset classes, or electronic certificates that were not intended to serve as real-life currency, are also exceptions. Accordingly, electronic versions of stocks, promissory notes or letters of credit are not considered virtual assets. Nor are currencies and items used in videogames.
The amendments also provide a comprehensive definition of a “virtual asset business” as any operation that is engaged in: (1) buying or selling virtual assets; (2) trading one virtual asset with another; (3) transferring virtual assets; (4) storing or managing virtual assets; (5) agency/brokerage/intermediary services for any of the above-mentioned; or (6) any other transaction highly likely to be used in money laundering or terrorism financing. Under this definition, a virtual asset business is not only the token issuer or a digital exchange, but also wallet services and dApps (decentralized applications).
These statutory definitions require further refinement through presidential decree, as the statute leaves much room for the executive branch to make further clarifications. For example, the presidential decree sets out the precise type of transaction “highly likely” to be used in money laundering.
Duties and obligations
Under the amendments, a virtual asset business must register with the Financial Intelligence Unit (FIU) of South Korea’s Financial Services Commission. In order to register, the virtual asset business must certify that it has an adequate information security management system (ISMS) and does banking under its real name. Further, persons who were convicted of financial crimes in the past five years cannot register as a virtual asset business. (In case of a corporation, registration may be denied if such a person is the designated representative or an officer.)
The amendments also impose an anti-money laundering (AML)/know your customer (KYC) requirement to a virtual asset business, similar to other financial institutions. A virtual asset business must maintain a statutory required level of record keeping as to its client’s transactions and must report any transaction that is reasonably suspected to be in furtherance of money laundering or terrorism.
Persons with an unregistered virtual asset business are subject to a penalty of up to five years of imprisonment, or a fine less than KRW50 million (US$41,000). Failure to keep the registration information current is subject to a penalty of up to three years imprisonment, or a fine less than KRW30 million.
The amendments further impose duties on the financial institutions and banks that do business with a virtual asset business. The financial institution may impose its own requirements for AML/KYC, and may refuse to open or maintain an account of the virtual asset business that fails to comply. The financial institution must also ensure the virtual asset business is banking under its real name, and independently monitor whether the virtual asset business is a high risk for money laundering or terrorism financing.
Also significant is the specific provision in the amendments that claim jurisdiction over an action outside of South Korea, taken by a virtual asset provider, that causes an effect domestically. This extraterritoriality provision potentially gives South Korean regulatory authorities a wide remit in international enforcement of business dealing with digital currency.
The amendments’ requirements for KYC/AML call for a significant investment in compliance infrastructure. Currently, only four South Korean digital currency exchanges – Bithumb, Upbit, CoinOne and Korbit – can meet these requirements.
Critics of the amendments have claimed that they would practically shutter mid-sized digital currency businesses that cannot afford to keep up with the compliance requirements. In the next year, until the law comes into effect, there will be a significant demand for establishing the compliance framework for the larger exchanges in South Korea, while the mid-sized businesses will have to be merged or acquired.
The amendments’ provision for extraterritorial application offers a potential for white-collar enforcement defence. As the South Korean economy is increasingly having a global impact, the willingness of South Korea’s regulatory authorities to take action against multinational businesses has also increased. The Fair Trade Commission’s record-breaking antitrust fine against Qualcomm is a recent example.
Because digital currency business is under-regulated globally, South Korea’s financial regulators may be incentivized to take an active stance against overseas digital currency businesses to the extent that they market to South Korean investors.
Critics also alleged that the amendments’ stringent requirements may drive businesses out of South Korea and into the arms of digital currency havens like Malta. Yet there is a clear benefit in creating a stable and predictable environment that protects investors from predatory businesses – businesses that the South Korean digital currency market certainly saw before.
One potential benefit is that creditors may be able to leverage the South Korean legal framework to trace a digital asset of a recalcitrant debtor. Recently, the operator of a massive international child pornography ring that operated out of South Korea was apprehended because the criminal received payments in digital currency, which was traced through a digital currency exchange in South Korea that kept customer information. A creditor chasing an elusive debtor may be able to do the same, especially as South Korea is emerging as a major hub for digital currency business activity.
South Korea is finally implementing a regulatory framework for digital currency and digital assets. This major development will both produce potential turmoil, as certain businesses struggle under this new framework, and new opportunities, as regulators establish a stable environment, increase transparency of digital transactions, and extend their reach across the world.
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At present, cryptocurrencies are widely used as a means of exchange for goods and services, as well as being a tool for raising funds and another option for investment, for example, by raising digital tokens in exchange for cryptocurrencies.
Although cryptocurrencies are not a lawful currency, and do not have legal tender status in Thailand, there was a case in 2018 in which a Thai fintech company successfully raised funds from the public by using digital tokens, and Thai laws and regulations had not been enacted to govern such activities at the time.
This development with respect to cryptocurrencies and digital tokens could have potentially affected both the general public and financial stability, causing the Royal Enactment on Digital Asset Businesses BE 2561 (REDA), 2018, to be promulgated, which has been effective from 14 May 2018 onward, and aims to regulate the offering of digital assets and businesses undertaking digital asset-related activities in order to be equipped to facilitate and support the technological innovations driving the economy and society, including protecting against any schemes designed for deceiving the general public.
The REDA regulates digital assets, i.e., cryptocurrencies and digital tokens, and is mainly divided into the governing of the offering of digital tokens and the governing of digital asset business operators, in which the main authority in charge of supervising the REDA is the office of the Securities and Exchange Commission (SEC).
A cryptocurrency is defined as a type of electronic data unit built on an electronic system or network, which is created for the purpose of being a medium of exchange for the acquisition of goods, services or other rights, including exchanges between digital assets. A digital token is defined as a type of electronic data unit built on an electronic system or network for the purpose of specifying the right of a person to participate in an investment in any project or business, or to acquire specific goods, services or other rights under an agreement between the issuer and the holder.
Currently, there are certain recognized cryptocurrencies in Thailand that an offeror of digital tokens, or an operator of a digital asset business, can accept as consideration for transactions, e.g., Bitcoin, Ethereum, Ripple and Stellar.
Offerings of digital tokens
The offering of digital tokens is one of the ways to raise capital from the public, whether raising a fiat currency or cryptocurrency. A public offering of digital tokens is commonly known as an initial coin offering (ICO). The offering of digital tokens is permitted by issuers that are limited or public limited companies, incorporated under the laws of Thailand, and the tokens must be offered through an approved ICO portal.
Prior to an offering, an issuer is required to obtain approval and submit a registration statement and prospectus to the office of the SEC. In this regard, if there are any false statements, or failures to disclose material facts, in the registration statement and prospectus, there will be civil and criminal liabilities for the issuer, the directors, and the executives who certify such documents.
The SEC will consider granting approval for an offering of digital tokens that meets certain requirements, including that they must be qualified, e.g., being investment or utility tokens and having in place an enforceable smart contract comprising a business plan and mechanism for exercising rights under digital tokens by the holders.
The approval of a public offering of digital tokens is subject to certain conditions, including that it can only be offered to a limited group of qualified investors, for instance, specific institutional investors or accredited investors. In the case of an offering to retail investors, digital tokens can only be offered for up to THB300,000 (approximately US$9,200) per person, and shall not exceed four times an issuer’s equity, or shall not exceed 70% of the total offering size, whichever aggregate amount is higher.
The SEC also provides a private placement regime for the offering of digital tokens to certain groups of investors, e.g., offering to only qualified investors, or offering to only a limited amount of investors, or offering only up to a limited offering size within a specified timeframe, in which a deemed approval would be granted from the SEC and the offeror would thereby be exempted from filing a registration statement and prospectus with the SEC.
In addition, the offering of digital tokens must be done through a business operator known as an ICO portal. The eligibility criteria and obligations for an ICO portal include: Being a company established under the laws of Thailand; having minimum registered capital as prescribed by SEC regulations; establishing issuer due diligence and product screening systems; examining issuers’ business plans and source codes of smart contracts; conducting know-your-customer (KYC) and customer due diligence (CDD); and providing suitability tests for retail investors.
Currently, there are a few approved ICO portals in Thailand, including Longroot, T-BOX, and SE Digital. In this regard, if digital tokens are issued for the purpose of the issuer receiving a cryptocurrency, such a cryptocurrency must be obtained from, or deposited with, digital asset business operators licensed under the REDA.
Digital asset business operators
The REDA also regulates business operators who are intermediaries for digital assets. These intermediaries are mainly classified into three types, namely, digital asset exchanges, digital asset brokers, and digital asset dealers. A digital asset exchange is a centre or network established for the purposes of trading or exchanging digital assets, which operates by matching orders, or arranging for a counterparty, or providing a system, or facilitating a person who wishes to trade or exchange digital assets in being able to enter into an agreement or match an order, in the normal course of business.
A digital asset broker is a person who provides services, or holds themselves out to the public as available to provide services as a broker or an agent for any person with respect to the trading or exchange of digital assets in the normal course of business, in consideration of a fee or other remuneration. A digital asset dealer is a person who provides services or holds themselves out to the public as available to provide services with respect to the trading or exchange of digital assets, for their own account, in the normal course of business, outside of digital asset exchanges.
Any person who wishes to operate a digital asset business is required to establish itself as a Thai company and be granted a licence from the Minister of Finance on the recommendation of the SEC. In this regard, entities that will be granted such a licence shall be required to have the characteristics as prescribed in the Ministerial Regulation issued under the REDA.
In addition, licensed digital asset businesses are required to comply with the rules, conditions and procedures set out by the SEC, which include, among other things, having adequate sources of capital to cover business operations, risk management, segregating client assets from their own assets, and conducting KYC and CDD.
Furthermore, digital asset business operators are subject to anti-money laundering laws in order to prevent the wrongful exploitation of digital assets as a channel for money laundering.
Similar to securities law, the REDA imposes offences with respect to unfair trading relating to the purchase, sale or exchange of digital assets taking place in any digital asset exchange, such as false dissemination, insider trading, front running and market manipulation.
The lists of digital asset business operators licensed by the SEC can be accessed at here.
Although the laws and regulations concerning cryptocurrencies in Thailand are in their initial stages, growth in their number and developments with regard to areas of rules are definitely to come in the near future. The Bank of Thailand (BOT) allows financial institutions to offer services in relation to cryptocurrencies, or investment in cryptocurrencies, by testing and developing such services under a regulatory sandbox programme.
The BOT may consider prescribing rules for securities purposes in order to cover risks of commercial banks, and their consolidated group digital assets, in relation to conducting or being involved with the digital assets in the future. In addition, many areas of digital assets involve other areas of law, for example, electronic transactions, payment systems, or data privacy, in which relevant regulations need to be observed and complied with in the order for services in relation to digital assets to be provided in Thailand.
As for cross-border cryptocurrency service providers, practical guidelines should be implemented and providers should seek advice from legal experts with regard to issues of concern, and for specific questions on permissible marketing activities and the nature of services allowable to be provided in Thailand.
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