The financial losses suffered by investors following the collapse of crypto lending firms such as BlockFi and Celsius prompted the Securities and Exchange Commission (SEC) to issue rules back in February 2022 restricting “digital asset business operators” (i.e. crypto businesses licensed under Thailand’s Emergency Decree of 2018 on Digital Asset Businesses) from offering services that generated financial returns on deposited digital assets on behalf of their customers. Such services may be referred to as “earn products”, since they allow customers to earn interest on their digital assets and are an example of a general category of crypto products and services known as “decentralized finance” or “DeFi”. The SEC has now recently issued new rules that clarify and expand on the earlier restrictions on earn product offerings by regulated businesses in Thailand.
Originally, the SEC restricted digital asset business operators from using customers’ digital assets to generate returns for them; including depositing digital assets with a third party who then lends those assets to another third party. The new rules leave such restrictions in place but distinguish other means of generating a return for investors that do not fall within the scope of the restriction.
Also, in an attempt to restrict the unauthorized expansion of global crypto firms into the Thai market, local digital asset business operators will also be prohibited from advertising Earn Products offered by third parties or soliciting their customers for such products.
The upcoming rule, which was published early last month, is the latest restriction issued by the SEC following the cryptocurrency advertising requirements it issued last year. The new rules are expected to take effect on 30 August 2023.
Regulating decentralized finance
The continued development of new rules and regulations signals the SEC’s recognition of both the potential value and risks offered by decentralized finance; which ideally, uses automated and decentralized technology to deliver traditional financial products and services, including lending and financial instruments, that normally relies on intermediaries such as regulated financial institutions. However, critics have stated that DeFi simply replaces such intermediaries with new intermediaries in the form of crypto firms, which are by and large non-regulated start-up businesses.
In any case, since the beginning of crypto regulation in Thailand in 2018, Section 31 of the Emergency Decree had already prohibited digital asset business operators from using customer funds for purposes beyond the scope of their licenses and SEC regulations, although there were never originally any rules that specifically prohibited or regulated earn products. However, due to the development of earn products by global crypto firms, the SEC has issued regulations to clarify the rules and to supervise the development of earn products and related services.
Under the new rules, digital asset companies in Thailand will still only be able to invest their customers’ digital assets with a digital asset fund manager licensed by the SEC in order to offer an earn product, as was established under the February 2022 regulations.
Earn products that do not use customer funds
However, SEC regulations distinguish other means of generating a return for investors which may not necessarily involve using a customers’ digital assets in the first place.
The new rules allow digital asset business operators to continue developing blockchains that use a “proof-of-stake” mechanism, such as creating ERC-20 tokens based on the Ethereum blockchain. Development of blockchains similar to Bitcoin that generate tokens by mining, also known as “proof-of-work,” would still be permitted under the upcoming rules.
Moreover, earn products can still be offered as part of sales promotion initiatives among digital asset operators, albeit under guidelines mandated by the SEC. Generally speaking, such promotions should not try to entice the audience to invest in the earn product; however, an earn product that does not require investing customers’ funds to generate returns, such as airdrop marketing campaigns, will still be allowed. Furthermore, digital asset operators can still offer educational and factual information about DeFi.
Nonetheless, the new rules will prohibit activities that support or promote third party earn product services, likely due to concerns by the SEC around global crypto firms using Thai subsidiaries to peddle earn products among Thai consumers without oversight. While the SEC has recognized that DeFi and earn products can offer value to digital asset owners and investors in Thailand, it is likely that the SEC wishes to protect investors in the country amid the number of digital asset lenders that have collapsed over the last year.
What should digital asset business operators in Thailand do next?
While the new rules will not constitute a total ban on earn products in Thailand, it will likely have bearings on the business activities offered by digital asset business operators in the country. This includes marketing initiatives and services offered to local crypto investors.
As the new rules will come into effect next month, it is important for digital asset operators to comply with the upcoming regulations and carefully review their practices to ensure they fall within what is permitted by the SEC. None-compliance could result in hefty penalties and even suspension of operations.
If in doubt, Silk Legal can help review your processes as a digital asset business operator and advise you on how to comply with the upcoming rules. Contact us at [email protected] for more information.