Cryptocurrency: The Development of Thailand’s Regulatory Framework

Cryptocurrency is not a new asset class, rather it is one that has exponentially risen in popularity in recent years. With such growth in users, governments internationally are seeking to create regulatory frameworks which protect consumers in this new financial system.

The SEC has drafted two new proposals which would change the way cryptocurrency is traded in Thailand. Both of these changes are expected to come into effect Mid-2023.

What is cryptocurrency and why is it difficult to regulate?

Bitcoin, the most famous of cryptocurrencies, was invented in the aftermath of the global financial crisis. While regular currency (known as “fiat”) requires a third party (banks, the government) to be traded, cryptocurrency allows peer-to-peer transactions, using blockchain technology. In short, it allows users to eliminate financial institutions in their transactions. It has notably been used by the public in trading digital artwork and purchasing event tickets through NFTs. Traditionally, these third parties provide regulatory oversight to transactions, while blockchain technology stores such information in the public domain in a decentralized manner.

Raising consumer risk awareness

Current legislation is adapted from other capital markets, which use KYC identification (Know your customer) and conduct suitability tests (knowledge test and risk assessments) to provide appropriate products and services to traders. The SEC has determined that trading crypto is relatively easy, compared to similar high-risk products in other capital markets.

Consequently, the first draft notice proposes that cryptocurrency brokers and trading center operators (such as Bitkub and Kraken) must display the following warning before consumers use the service: “Cryptocurrencies are high risk. You may lose the entire investment amount.” They must also notify the user of their investment suitability test results and risk assessment.

Ready-to-use utility tokens

The second draft notice regards ready-to-use utility tokens.

Ready-to-use utility tokens are defined by the SEC as tokens with the right to acquire goods, services, or specific rights that are readily available for usage. These are split into two categories, group 1, and group 2, differentiated by use.

Group 1 tokens?have a consumer purpose. These include the aforementioned NFT’s, or non-fungible tokens (which means each is unique and cannot be replicated). Coachella, one of the largest and most famous music festivals in the world, used NFT’s to offer 10 lifetime passes to consumers.

Group 2 tokens?can be used as proof of rights documentation, such as land titles, tax invoices, and other certificates.

While there are many types of digital tokens, these two groups are considered special by the SEC as buyers are able to verify the nature of the goods and services and can immediately use them upon receiving the token. This puts them at lower risk of information asymmetry in the market and thus requires less investor protection. However, as speculation trading in the digital asset market as a whole increases, the SEC deems it necessary to protect this class of cryptocurrency too.

Group 1 Utility Tokens cannot be listed on any digital asset exchange. The following Group 2 ready-to-use utility tokens are also prohibited from being listed:

Type of Token

Tokens that provide access to products on distributed ledger chain technology (DLT), including those on centralized and decentralized finance platforms

?  Axie Infinity’s SLP Token (Smooth Love Potion) which is awarded for completing levels and can be used to purchase items for user’s NFT’s.

?  Brave Browser’s BAT (Basic Attention Token) which can reward users for viewing advertisements.

?  Using the BNB coin to pay for trading fees on decentralized exchanges such as PancakeSwap.

Tokens on Exchanges that are usually used to pay transaction fees or discounts on such fees

?  Binance’s BNB coin

?  Crypto.com’s Cronos coin.

Governance Tokens (that is, those that give the owners of the token voting rights on the platform’s operations)

?  Uniswap’s UNI token

?  Curve DAO’s curve token

?  Aave protocol’s AAVE coin.        

?Group 1 tokens are waived from regulatory requirements and supervision on digital token offerings and related business operations, so long as they are not used as a payment method. This is in accordance with the Bank of Thailand’s guidelines regarding digital tokens.

Group 2 tokens can only be listed on digital asset exchanges with the SEC’s approval. Issuers must submit a filing prospectus and offer the tokens through a digital token offering service portal.