Thailand Provides Legal Regime for Securities-Type ICO Tokens

A view of the Royal Palace in downtown Bangkok. Thailand's digital asset decree is awaiting publication in the Royal Gazette.
A view of the Royal Palace in downtown Bangkok. Thailand’s digital asset decree is awaiting publication in the Royal Gazette.

Bangkok, THAILAND – While U.S. Securities and Exchange Commission (SEC) chairman Jay Clayton has repeatedly stated publicly that existing securities laws are sufficient to cover initial coin offerings (ICOs), the issuance of digital tokens in a company in exchange for more liquid cryptocurrencies such as Ethereum, Thailand has gone another route, to formally distinguish between ICO tokens which are more like securities and those which are more like currencies. The Digital Asset Decree, which is currently pending publication in the Royal Gazette, but which has been approved by the Thai Securities and Exchange Commission (TSEC), classifies tokens into two distinct categories, a utility token, more akin to a cryptocurrency which is used as a medium of exchange, such as Bitcoin or Ethereum and a security token, that gives holders the right to participate in an investment or to receive specific goods. And while the U.S. SEC’s Clayton has remarked that all the ICOs he’s ever seen are “securities” and thus should be governed by existing securities laws, Thailand avoids the issue completely by providing an entirely separate regime with which to navigate its burgeoning crypto economy, even amending its tax law so it can extract some revenue in the process.

Archari Suppiroj, director of fintech and Thailand's Securities and Exchange Commission speaking at a Outreach Asia event in May, 2018.
Archari Suppiroj, director of fintech and Thailand’s Securities and Exchange Commission speaking at a Outreach Asia event in May, 2018.

The TSEC is threading a fine line between protecting investors and fostering innovation. Speaking at last month’s TechSauce conference in Bangkok, TSEC director of fintech Archari Suppiroj said that if regulators make things too strict, companies and investors will go overseas and Thailand’s ability to provide any protection to Thai investors will be lost. But while Thailand may have managed to draft the Digital Asset Decree in record time, it draws on many of the burdensome regulations in existing Thai securities law, which companies without the resources may have wanted to avoid by performing an ICO.

A woman walks in front of the main price board at the Stock Exchange of Thailand in Bangkok. Traditional securities firms are getting onboard digital currencies and ICOs.
A woman walks in front of the main price board at the Stock Exchange of Thailand in Bangkok. Traditional securities firms are getting onboard digital currencies and ICOs.

Thailand’s new Digital Asset Decree lays out rules for businesses that want to operate as a cryptocurrency exchange, broker or dealer, with the requisite capital requirements. The Decree also formalizes the process for an ICO that’s not dissimilar to the current process to issue debt or equity, including a business plan and audited financial statements. Think of it as an initial public offering of stock, but the diet version. And while these regulations and capital requirements will go some way to protecting retail investors’ interests, they may have the unintended effect of discouraging more innovative but less well-organized or capitalized startups from taking part in the process in Thailand.

A general view of the central business district illuminated with lights in Singapore. The country has positioned itself as one of the top blockchain and cryptocurrency destinations for companies, talent and funds.
A general view of the central business district illuminated with lights in Singapore. The country has positioned itself as one of the top blockchain and cryptocurrency destinations for companies, talent and funds.

But perhaps the most challenging aspect of the Digital Asset Decree is the 15 percent withholding tax taken on profits that although can be credited against an individual’s full-year income tax bill and from that perspective can be viewed of as an inconvenience, may be sufficient to push traders and investors offshore to countries such as Singapore, where no such taxes exist. In addition to the 15 percent tax, under existing tax laws in Thailand, trading digital assets also attracts a 7 percent VAT, for individuals trading through regulated cryptocurrency exchanges.

So while the comprehensive regulatory framework is to be welcome from the perspective of retail investors, given the relatively high tax burden as well as the close resemblance to existing securities laws, it is unlikely that Thailand will overtake the other cryptocurrency hubs in Asia such as Singapore, South Korea and Japan.