Thai SEC to Reconsider Regulatory Control on Non-Fungible Tokens

While the Metaverse^[1] is Fast Becoming a Global Concept, Non-Fungible Tokens ("NFTs") are also part of the latest digital trends worldwide. Despite the Thai government's stance in relation to the current non-regulatory control upon NFTs according to the SEC Notification No. KorThor. 18/2564 (2021) re: Criterion, Conditions and Measures for Digital Asset Business (No. 11) (“Notification”); nevertheless, the creation of NFTs in Thailand is becoming increasingly popular among the cryptocurrency investor market.

An NFT is a data unit stored in a blockchain, certifying a digital asset as unique and not interchangeable. Assets represented by NFTs come in many forms, ranging from works of art - including digital pictures, videos, artwork and music – to NFT virtual land in the metaverse, which is an ownable area of digital land on a metaverse platform. For example, current popular NFT land projects are Decentraland (MANA) and the Sandbox (SAND) etc.

At present, the Securities and Exchange Commission of Thailand ("SEC") has not yet announced a clear guideline regarding NFT regulations. Moreover, the SEC has imposed new regulations that prohibit digital asset exchanges from trading NFTs under the Notification.

The Thai government is seemingly unable to resist the growing trend of NFTs in Thailand's digital asset community because the market is continually and rapidly growing. Consequently, the SEC has announced guidelines to interpret the certain types of NFTs that are subject to legal compliance according to the SEC’s article re: Non-Fungible Tokens (NFTs) and the SEC’s supervision dated 6 January 2022.^[2]

Although NFTs are not defined under the Emergency Decree on Digital Asset Businesses B.E. 2561 (2018) (“the Emergency Decree”), their function as a coin which represents a holder's ownership or rights to some unique assets, such as art, music, pictures or collectables, resembles that of investment tokens and utility tokens, which may subject NFTs to the scope of a digital token^[3] as defined under the Emergency Decree. As a result, NFTs would be under the supervision of the SEC. Each NFT is expected to be assessed on a case-by-case basis in order to ascertain whether its nature and conditions fall within the scope of any specific types of digital assets under the Emergency Decree. For example, if an NFT is used for a fundraising purpose, the exchange on which it is listed would need to apply for and obtain a licence to offer trading services for the NFT.

Each NFT is expected to be assessed on a case-by-case basis in order to ascertain whether its nature and conditions fall within the scope of any specific types of digital assets under the Emergency Decree. For example, if an NFT is used for a fundraising purpose, the exchange on which it is listed would need to apply for and obtain a licence to offer trading services for the NFT.

However, there is also a form of NFT which is not regulated within Thai law. In the case where an NFT is the property itself which is inseparable upon the sale and purchase by an investor and it does not render any additional rights to the investor, as well as there being no objective to be utilised as a medium of exchange; such category of NFT would not be regarded as a digital asset as defined and regulated according to the Emergency Decree. For instance, an NFT which is developed and created by means of storing digital files on the Interplanetary File System^[4](IPFS) , and then producing digital currencies in order to facilitate the exchange of such NFT (which was produced from digital files). Once there is a transfer of such NFT to a transferee, the NFT as well as the coin would be transferred altogether as a whole to the transferee; and the NFT and coin cannot be modified or separated under any circumstance.

For NFTs which would be regarded as digital assets and thus regulated under Thai law, the exchange of such NFTs would be conducted via an NFT market place, which shall be permitted under the Digital Asset Exchange Licence by the Ministry of Finance and in compliance with the regulations imposed by the SEC. However, the SEC has recently stated that:“There is no NFT marketplace that has obtained a licence from the Minister of Finance in Thailand at present". In addition, Clause 39/1 of the SEC Notification No. KorThor. 18/2564 (2021) re: Criterion, Conditions and Measures for Digital Asset Business (No. 11) dated 11 June 2021, still prohibits NFTs from being traded or exchanged under Thai law.

As NFTs become more and more popular for investment by the general public, the SEC therefore intends to change its direction on the regulatory control of NFTs and use their best efforts to reconsider regulations governing the NFT marketplace to be in line with international regulatory guidelines. It appears that this year all relevant market participants need to keep an eye on the change of regulatory framework arising from the SEC's reconsideration of the abovementioned issues. This is intended merely to provide a regulatory overview and not to be comprehensive, nor to provide legal advice. Should you have any questions on this or on other areas of law, please do not hesitate to contact:

Nuttaros Tangprasitti
Partner                

Maychaya Phoraksa
Attorney-at-Law

• ¹ A virtual reality space in which users can interact with a computer-generated environment and other user
• ² The SEC Article was published on the SEC official's website dated 6 January 2022, which can be accessed at https://www.sec.or.th/TH/Template3/Articles/2565/060165.pdf .
• ³ “Digital token” under Section 3 of the Emergency Decree means an electronic data unit created on an electronic system or network for the purpose of: (1) specifying the right of a person to participate in an investment in any project or business; (2) specifying the right of a person to acquire specific goods, specific service or any other right under an agreement between the issuer and the holder, and shall include any other electronic data units of right as specified in the notification of the SEC.
• ⁴ “InterPlanetary File System” (IPFS) means a protocol and peer-to-peer network for storing and sharing data in a distributed file system. IPFS uses content-addressing to uniquely identify each file in a global namespace connecting all computing devices.