Rapee quiets crypto hype

Rapee quiets crypto hype

The departing SEC chief says digital assets are strictly for specialists

SEC secretary-general Rapee Sucharitakul: 'The digital asset market is a place for specialists'. (Photo by Patipat Janthong)
SEC secretary-general Rapee Sucharitakul: 'The digital asset market is a place for specialists'. (Photo by Patipat Janthong)

After several months of supervising Thailand's digital asset market, the outgoing Securities and Exchange Commission (SEC) chief insists that the virtual asset class is suitable only for specialists and that setting a minimum standard is among the main pillars for bringing checks and balances to the digital sphere.

The hype surrounding digital asset investment in 2017 led to many people jumping on the bandwagon and thinking it was a new investment trend, SEC secretary-general Rapee Sucharitakul told the Bangkok Post in an exclusive interview.

The price of bitcoin reached a fever pitch that year, rocketing to nearly US$20,000 per coin on strong demand and speculative investment worldwide, with some countries such as Japan accepting the cryptocurrency as a legal payment method.

The digital gold rush saw an abrupt U-turn in 2018 when the price of bitcoin fell by more than 70%. A move by China's central bank to tighten rules governing Chinese bitcoin exchanges and the US's imposition of civil penalties on cryptocurrency startups selling staged ICOs (initial coin offerings) were among several factors contributing to the rout.

The digital asset market is a place for "specialists" who know how to ply the trade of the virtual asset class, Mr Rapee said, noting that ordinary people lack sufficient investment knowledge to become players in such a specialised market.

"There is always a cycle of [hype for] every investment asset," he said. "Less than 10 years ago, there was hype over [French] red wine Chateau Lafite because there was strong demand from China. This resulted in counterfeits of the wine label and people were scammed because they were not [wine] specialists. There were many wine mutual funds issued, which later went broke across the board."

But the digital asset market still has growth prospects and could reach maturity because the asset class can generate returns for investors, Mr Rapee said.

"If a market does not deliver any return, it is impossible for such a market to grow," he said.

Although some observers say any asset can be tokenised, the key is whether such assets can provide sustainable returns apart from the initial returns generated from speculation, the SEC chief said.

And while disintermediation and efficiency are hallmarks of cryptocurrencies, it remains unknown whether these virtual currencies can garner more confidence and acceptance in the future, he said, as price stability and asset-backed information are still holding back credibility.

ONE PORTAL APPROVED

The SEC has approved a licence for an ICO portal, but the licensee must demonstrate that its operating system is fully ready and functional for overseeing ICO offerings, Mr Rapee said.

The regulator declined to reveal the licensee's name, saying only that the company has to undergo a regulatory procedure with the Commerce Ministry if it's a foreign firm.

Under the royal decree on digital assets that took effect on May 14, 2018, there are four types of secondary business intermediaries: digital exchanges, brokerage firms, dealers and token portal service providers, also known as ICO portals.

Exchanges, brokers and dealers are required to apply for licences from the Finance Ministry, while ICO portals must be approved by the SEC.

ICO portals help screen ICOs, conduct due diligence, prove smart contract source codes and verify the know-your-customer process.

ICO portals are required to look after ICO offerings for at least a year, and ICO portals must have minimum registered capital of 5 million baht.

There will be no amendment to the existing digital asset royal decree, Mr Rapee said, but additional regulatory announcements and a required minimum standard for digital asset operators will be issued.

"Parts of our regulatory process are aimed at providing information and setting up a minimum standard," he said.

CHECKS AND BALANCES

The Stock Exchange of Thailand (SET) and the SEC have talked about the bourse's interest in the digital asset market, but the discussion has centred on the initial phase, Mr Rapee said.

The SET will have to prepare its own operating system for the digital asset trade, and the bourse must undergo the same process for licence acquisition as other licensed digital asset exchanges, he said.

The bourse is not expected to focus on ICO offerings, but it could be geared towards securities token offerings. STOs involve asset-backed tokens and are more compatible with the business of SET-listed companies, Mr Rapee said.

Regarding the scandal in which US$190 million in cryptocurrency has been locked away in an online black hole after the death of the founder of Canada's largest digital asset exchange, Mr Rapee said the episode would serve as a case study reiterating the importance of having a minimum standard to regulate digital trade.

The case also highlights a lesson for trading in an unregulated market, where there is no minimum security standard and such trade is solely based on individual trust, he said.

"We do not have a prescriptive regulation [on digital asset exchanges' operating systems and customer accessibility], but we require them to have a system where there are checks and balances," Mr Rapee said. "[Operators of digital asset exchanges] have to exhibit their operating systems, and the SEC will verify whether they have adequate checks and balances."

Operating systems of the four licensees already approved by the SEC meet the market regulator's minimum standard, he said.

BITCOIN FUNDS

Based on current mutual fund regulations, only ultra-accredited investor mutual funds and private funds are allowed to invest in debt instruments and other financial instruments, including investments made in bitcoin or bitcoin exchange-traded funds (ETFs), Mr Rapee said.

These funds are allowed to invest in cryptocurrency ETFs registered on indices of regulated exchanges and can issue digital asset ETFs based on mutual fund regulations, Mr Rapee said. But they are not permitted to invest in cryptocurrency ETFs registered on unregulated exchanges, he said.

For retail and accredited investor mutual funds, it's expected that these funds will be able to invest in an investment unit of a collective investment scheme (CIS), including ETFs, with bitcoin as a reference, starting in April, according to the SEC.

A CIS has to be registered with the SET or foreign bourses that are members of the World Federation of Exchanges.

Direct investment in bitcoin, however, is prohibited, according to the SEC.

The investment limit is varied for each investor group based on risk exposure. For instance, a retail mutual fund has the most stringent investment limit, while accredited investor and ultra-accredited investor mutual funds are given more room for investment proportion.

Securities firms interested in opening a digital exchange can do so, but the SEC will not count digital assets as the company's liquid assets. Capital reserves will thus decrease equally to the investment amount in digital assets.

Securities companies can acquire stakes in digital asset exchanges, but such investments will not be counted as corporate liquid assets based on the SEC's regulatory standard, Mr Rapee said.

The only risk that securities companies could experience is investment risk as a shareholder, he said, since the investment proportion made in a digital asset exchange is not counted as part of capital reserves.

"An analogy is that we do not prohibit securities companies to invest in a tower," Mr Rapee said. "Such an investment is classified in the company's balance sheet as an asset, but the SEC does not consider this as an asset in terms of capital reserve requirements, because it is not liquid."

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