Since July, Thailand and its Securities and Exchange Commission (SEC) have voiced their intent to legalize the local initial coin offering (ICO) market and open it to startups. On Dec. 1, 2018, however, Cointelegraph reported that the Thai SEC declared Thai-related security token offerings (STOs) in international markets to be illegal and said that it will take appropriate legal action against companies that attempt to distribute STOs created in Thailand to overseas markets. Tipsuda Thavaramara, the deputy secretary of the Thai SEC, reportedly said:
“The regulator will have to consider how to deal with STOs for issues such as share ownership, voting rights and dividend. At the moment, we have not decided whether STOs fall under the SEC Act or the Digital Asset Act, but it depends on the STO’s conditions and the details in its white paper.”
The government’s initial stance toward the approval of STOs in the local market contradicted the Thai SEC’s plans to legalize ICOs and allow companies to raise capital from investors in the public market. This month, the Thai SEC reportedly approved the launch of the country’s first ICO portal, with plans to approve an ICO project in the near future. Archari Suppiroj, the director of the fintech department at the SEC, said that the launch of the ICO portal could lead to the approval of STOs in the local market:
“The next step is for an issuer to offer security tokens in the primary market.”
Importance of STOs on foreign investment
Andreessen Horowitz, billionaire investor Peter Thiel’s Founders Fund and several more major venture capital firms have funded security token projects throughout the past year, betting largely on the value security tokens with high liquidity and fungibility can bring. Josh Stein, the CEO of Harbor, which raised $28 million from Andreessen Horowitz, said that no major regulators and government agencies that the company has engaged in discussions with in the past several months have expressed a negative sentiment toward well-structured security tokens. He said that, primarily because STOs are strictly regulated investment vehicles that are fully compliant with local regulations, governments are generally open toward regulating the security token market. Placing an emphasis on the absence of legal boundaries between STOs and global financial regulations, Stein said:
“There’s a misconception that there’s a regulatory problem or that somehow the regulations need to change. They don’t. You need to comply with rules around the world. If the compliance doesn’t work, nothing else can happen. We have talked with a number of regulators in the U.S. and around the world. No one has given us negative feedback and no one has signed off on it, but our fundamental opinion is that we’re complying with the rules.”
Assets that are represented by STOs are real-world assets that are tangible and can be approved by the authorities. Security tokens merely offer a cryptographic representation and a proof of ownership, which, as a result, increase the liquidity and fungibility of the physical asset. Traditional assets, like properties and artwork, can be represented by tokens using a cryptographically encrypted blockchain network, allowing investors to obtain ownership of certain assets by purchasing tokens. Security tokens enable investors to purchase a portion of an asset without having the pressure of wholly acquiring it. One of the major reasons cryptocurrencies have appealed to millennials since early 2017 is the ability for young investors to invest a small amount in digital assets. With real estate and many other physical assets, it is not possible to do so.
Even when security tokens are utilized in complex deals, it is possible for the issuer to freeze trading on a certain security token asset upon the request of the government and move back to paper. While it leads to administrative expenses and reputational exposure, the government and the security token operator can cooperate to create a physical version of the security token if an issue were to arise. With no major regulatory boundaries and with significant benefits in liquidity, fungibility and transportability, investors that have been involved in the traditional financial sector — like Hong Joon-ki, the CEO of over-the-counter (OTC) cryptocurrency exchange Cumberland Korea — have said that, eventually, various assets like artwork, real estate, sports teams and hedge funds will be tokenized:
“The global cryptocurrency sector will rapidly change to security tokens at an exponential rate. Venture funds, hedge funds, sports teams, artworks, real estate, and a variety of real world assets will be tokenized on the blockchain. Currently, the majority of financial institutions entering the cryptocurrency sector with the backing of institutional investors are driven by the potential of tokenized assets and security tokens. These institutions are expanding their operations rapidly by working with cryptocurrency researchers and blockchain technology startups.”
State of Thai regulation
Despite the shifting trend toward security tokens and the rising interest in tokenized assets in the global market, the current regulatory landscape of Thailand’s cryptocurrency market was nowhere close to permitting the distribution of regulated security tokens less than three months ago. In July, the Thai SEC officially legalized registered ICOs, allowing companies to run token sales with guidance from the SEC. At the time, the Bangkok Post reported:
“The SEC will allow seven cryptocurrencies, used for initial coin offerings (ICOs), to be traded as trading pairs. They are bitcoin, ethereum, bitcoin cash, ethereum classic, litecoin, ripple, and stellar. […] All market participants, including ICO issuers, digital exchanges, brokers and dealers involved with digital asset transactions, are required to register with the SEC within 90 days of the effective date. […] The participants must also receive the Finance Ministry’s approval to conduct digital asset business.”
The implementation of a new policy regarding the legalization of regulated and registered ICO projects portrayed the willingness of the Thai government to facilitate the growth of local cryptocurrency startups, as long as their operations are in compliance with existing regulations. More importantly, the decision of the Thailand SEC to facilitate the needs of blockchain projects to conduct ICOs showed the intent of the government to help lay the groundwork for ICO and STO projects in the future. Conceptually, security tokens are similar to registered ICOs in the sense that both are cryptographically encrypted assets that operate under the guidance of the Thai SEC, given that only registered companies that meet the SEC’s criteria can run a token sale and that the sale is limited to accredited investors. The open-minded approach toward ICO by the Thai government may translate to optimism toward security tokens, particularly because security tokens pose less threats to investors in the public market and to the government, since the authorities can exercise relatively strong control over security tokens.
Based on the policies the Thai government has implemented since early 2018, the roadmap of the government seems to be to address every major problem from the ground up, beginning with the basics. In May, the Thai authorities waived a 7% taxation rate for individual cryptocurrency investors, relieving pressure from investors who invest through local digital asset trading platforms. In the following month, the Thai SEC released a framework for legalizing registered ICOs. Then, in August, the government approved seven cryptocurrency companies to operate legally in the country, officially giving them the ability to sustain their operations without facing banking- and regulation-related issues. If the government determines that basic issues in the cryptocurrency exchange market, ICO market, and taxation are addressed and sufficient investor protection is imposed, then the government could shift its attention to emerging sectors within the broader cryptocurrency space, including security tokens.
Overall, Thailand is continuing to see some progress and changes in the local market in terms of regulation, adoption and growth. Merely eight months ago, ICOs were completely banned in Thailand, registered or not. With the G-20’s lead on cryptocurrency regulation, Thailand and other regions in Asia are expected to regulate their respective digital asset markets with stricter policies, and as a result, the Thai government could eventually get to security tokens in the long term. But, in the near term, it is fairly unlikely that the Thai government will allow retail investors or individual investors to be involved in security tokens as of yet, especially during a period in which the United States, Japan and South Korea have yet to make any major move to adopt security tokens.
China’s ban on STOs
On Dec. 1, less than 24 hours after Thailand issued a warning against security tokens, China imposed a blanket ban on security token offerings. Huo Xuewen, chief of Beijing’s Municipal Bureau of Finance, said in a roughly translated statement:
“The ICO model is being left behind for a new concept called STO. I want to issue a warning to anyone considering running an STO in Beijing. Don’t do it in Beijing — it is illegal. You can only engage in such activities with approval from the government. You will be kicked out if you do it.”
Seven days following the release of Xuewen’s statement, the People’s Bank of China (PBoC) officially imposed a blanket ban on security tokens. At an internet finance forum in Beijing, Pang Gongsheng, the deputy governor at PBoC, explicitly described that the act of offering security tokens is illegal under existing laws in China. A rough translation of Pang’s statement reads:
“The STO business that has surfaced recently is still essentially an illegal financial activity in China. […] Virtual money has become an accomplice to all kinds of illegal and criminal activities.”
China has firmly opposed security tokens because of the country’s strict capital controls and laws that make it difficult for foreign investors to purchase properties in the country. The purpose of a security token is to increase the fungibility and transportability of a physical asset. Only China-based companies operated by Chinese individuals can purchase properties, and as such, security tokens in China offer less benefits.
The value security tokens could bring to Thailand
Although foreigners are not allowed to purchase land in Thailand, they are allowed to purchase apartments and condominiums, and obtain long leases for land. For a foreign citizen to purchase a condominium in Thailand, regardless of the value of the property, minimal paperwork is needed to prove the investor’s identity. For such deals, security tokens could simplify the process of settling payments and proving ownership through a digital piece of evidence that can also exist in a physical form. Throughout 2018, Thailand has not been as aggressive as other major economies in Asia — such as Singapore, Hong Kong and South Korea — in appealing to cryptocurrency startups and bringing in talent for its blockchain sector. With practical regulatory frameworks in place and by allowing the creation of a new industry in security tokens, Thailand could obtain an edge over the rest of the cryptocurrency sector in Asia.
For now, Thailand and its financial authorities may not be ready to properly legalize the distribution of tokenized assets — at least to foreigners — and based on various factors, security token offerings will likely remain restricted in the near term. But, in the long term, Thailand may move toward supporting STOs, as hinted by Thai SEC Director Archari Suppiroj.