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
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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