07 August Understanding Digital Assets from a Thai Regulatory Context
By Mr. Kunal Sachdev (Regional Legal Adviser) and Ms. Thamonwan Na Nakara (Legal Adviser)
After several rounds of draft circulations and public hearings, on 13th May 2018, the Emergency Decree on the Digital Assets Businesses B.E. 2561 (2018) (the “EDDAB”) and the Emergency Decree on the Amendment to the Revenue Code B.E. 2561 was published in the Official Gazette with the objective of regulating digital asset businesses and imposing levies on income derived from digital asset transactions.
The two regulations apply stringent compliance requirements on operators of digital asset businesses for anti-money laundering and terrorist financing, KYC procedures and data privacy. However, the implementing process is still in nascence as the cryptocurrency framework under the EDDAB requires the further issuance of subordinated regulations, by the Ministry of Finance and the Securities and Exchange Commission (“SEC”), to provide the relevant procedural and licensing regime.
In light of these significant developments in the Thai cryptocurrency domain, we propose to look at how “Digital Assets” are being classified under the EDDAB.
Digital Assets (Coins and Tokens): What is the difference?
Despite cryptocurrencies having entered the mainstream for close to nearly a decade, what cryptocurrencies are and the various sub-classifications thereof are still widely misconstrued. How regulators have classified various digital assets may not only have an impact on a blockchain project’s financial forecasts but also put in place regulatory red tape that may hinder the issuance/generation of a digital asset. Using the definitions contained in the EDDAB and the draft subordinated regulations, mentioned below is an overview of the differences between the various forms of digital assets.
Cryptocurrencies as Digital Assets:
Under the EDDAB, Digital Assets are put into two broad categories, being “Cryptocurrencies” and “Digital Tokens”.
“Cryptocurrencies” or “Coins”
The first category of Digital Assets under the EDDAB are “Cryptocurrencies” and is defined as an electronic data unit built on an electronic system or network for the purpose of being a medium of exchange for the acquisition of goods, services, or other rights, or an exchange between Digital Assets, including other data units as specified by the SEC. The general term is utilized to capture “Coins” as understood by the blockchain community. A “Coin”, like Bitcoin for example, is a cryptocurrency which operates independently of any other platform. In layman’s terms, a coin has its own blockchain. A cryptocurrency can be referred to as “Crypto coins” or “Altcoin” (colloquial reference to a class of coins launched after Bitcoin). Examples: Bitcoin, Namecoin, Peercoin, Litecoin or Dogecoin.
The second category of Digital Assets under the EDDAB are “Digital Tokens” and are defined as an electronic data unit created on an electronic system or network for the purposes of (i) designating the rights of a person to participate in an investment in any project or business; or (ii) designating the rights to acquire specific goods, services or other rights under an agreement between the issuer and the holders, including other units specifying certain rights, as permitted by the SEC. Digital Tokens under the Thai regime are further classified into two sub-categories.
(i) Digital Token for Investment:
The first sub-category under the draft subordinate regulations to the EDDAB is the “investment token” (or “security token” as generally understood by the blockchain community) and is defined as a form of an electronic data unit created for the purpose of designating the right of a person to participate in an investment in any project or business. Since the ICO boom in 2017, securities regulators discovered that certain tokens have characteristics resembling securities – such as (i) acquisition of rights in underlying assets; and (ii) rights to revenue or profit sharing without engaging in day-to-day operations). In the United States the test for whether an instrument is a security is the Howey Test (outlined in the case of SEC v W. J. Howey Co.). Similar litmus tests are used by regulators around the world to determine if an instrument is security. We expect that the Thai SEC’s subordinated regulations (to be issued later this year) will provide greater clarity on the threshold for Thailand.
(ii) Digital Token for Utilization:
The second sub-category under the draft subordinate regulations to the EDDAB is the “utility token” and is defined as an electronic data unit which is created for the purpose of designating the right of a person to acquire goods, services, or any other similar rights under a specific agreement. In its simplest form, a utility token is a store of value intended to be used in exchange for a product or service.
While the classification of Digital Assets is certainly important, the intrinsic nature of Digital Assets is such that a single coin or token over time can evolve beyond the regulatory definitions and distinctions between coins, utility tokens and investment tokens. By way of example, ‘Ether’, the Digital Asset used to power the Ethereum blockchain, not only functions as a medium of exchange (like Bitcoin/Altcoins), but also qualifies both as a utility and security token.
Notwithstanding the above, classification of Digital Assets under the EDDAB demonstrates a balanced understanding of the cryptocurrency world by Thai regulators and is a significant step toward legitimizing the digital asset markets and welcoming a new asset class that may power the infrastructure of tomorrow. As cryptocurrency enthusiasts and blockchain developers become aware of their rights and obligations under the new laws, Thailand is poised for a bright future in the digital age.
Should you be contemplating conducting an ICO or generally have concerns about how the two new digital asset laws could impact you, please do not hesitate to contact DFDL (www.dfdl.com).
This article is solely for informational purposes and is not intended to constitute legal advice. Legal advice should be obtained from qualified legal counsel for all specific situations.