Update on the New SEC Regulations on Ready-to-Use Utility Tokens

1. Background
At present, Thailand’s Securities and Exchange Commission (“SEC”) regulates and oversees business operations and activities in relation to certain types of digital assets which exclude ready-to-use utility tokens. This is because the SEC deems that the risks of information asymmetry, liquidity and unfair trading among investors of ready-to-use digital tokens are less than other types of digital token offerings given the fact that investors may verify the nature of the underlying products and/or services that can immediately be utilised upon receiving such tokens.

Nonetheless, as ready-to-use utility tokens are now being traded in a speculative manner resulting in an increase of the abovementioned risks to investors, the SEC held a public hearing on the draft regulations pertaining to ready-to-use utility tokens and is now in the stage of finalizing them for the sake of mitigating such risks and enhancing the protection for investors.

2. Key Takeaways
The main points proposed by the SEC under the draft regulations are as follows:

Ⅰ. Types of Ready-to-Use Utility Tokens
Under the draft regulations, the SEC proposed to categorise ready-to-use utility tokens into two groups, as follows:
(a) Group 1 Ready-to-Use Utility Tokens
Group 1 Ready-to-Use Utility Tokens are plain-vanilla or uncomplicated utility tokens with the following specific characteristics:
(ⅰ) Utility tokens that grant the right to acquire specific goods and/or services for consumption purposes, such as digital vouchers, loyalty points, tokens with the right to redeem concert or movie tickets, and non-fungible tokens (NFT) of artwork, images, music, stamps or videos with certain rights of the holder;
(ⅱ) Utility tokens that can be used as a digital certificate or representation of rights, such as carbon credit, renewable energy certificate and digital transcript; and
(ⅲ) Utility tokens that are non-financial products and can only be traded through a particular exchange channel, such as a marketplace or a designated channel of an issuer and its partner.

(b) Group 2 Ready-to-Use Utility Tokens
Group 2 Ready-to-Use Utility Tokens are utility tokens which are not included in Group 1 Ready-to-Use Utility Tokens and have similar characteristics to a financial product, such as utility tokens granting the right to access the underlying products and/or services provided on distributed-ledger technology (DLT) and decentralised finance, exchange tokens, governance tokens, and tokens for a project providing digital asset-related services by way of Centralised Finance (CeFi).

Ⅱ. Proposed Regulations on Ready-to-Use Utility Tokens
(a) For Group 1 Ready-to-Use Utility Tokens, in order to not be an obstacle to normal business operations of business operators, the SEC proposed the new regulations which include the following:
(ⅰ) The offering of Group 1 Ready-to-Use Utility Tokens shall be exempt from supervision of the SEC;
(ⅱ) The services relating to Group 1 Ready-to-Use Utility Tokens shall not be considered digital asset business operations under the Emergency Decree on Digital Asset Businesses B.E. 2561 (2018), and therefore shall not be subject to the SEC’s licence requirement;
(ⅲ) The digital asset exchange operators shall be barred from listing Group 1 Ready-to-Use Utility Tokens on digital asset exchanges, and the digital asset brokers and dealers shall be barred from providing services in relation thereto; and
(ⅳ) The issuers of Group 1 Ready-to-Use Utility Tokens shall not stake the tokens unless it is for the purpose of voting, participating in specific events or receiving returns from specific events in the ecosystem, and the tokens shall not be used as a means of payment (MOP) as stipulated by the Bank of Thailand.

(b) On the other hand, with the aim of setting up a protection mechanism and to ensure that investors have adequate information to make their decisions, the SEC requires any issuer of Group 2 Ready-to-Use Utility Tokens who seeks to offer and list its tokens on a digital asset exchange to comply with certain obligations, which include the following:
(ⅰ) Obtaining approval from the SEC;
(ⅱ) Filing a registration statement with a draft prospectus to the SEC;
(ⅲ) Offering its tokens only via an initial coin offering (ICO) portal approved by the SEC; and
(ⅳ) Disclosing information pertaining to the tokens and the projects on an ongoing basis, such as annual report, financial statement, change of project whitepaper, including the rights and benefits of token holders.
Similar to Group 1 Ready-to-Use Utility Tokens, the issuers of Group 2 Ready-to-Use Utility Tokens shall also be subject to the requirements stated above in item (a)(iv).
Furthermore, under the proposal, those who receive Group 2 Ready-to-Use Utility Tokens at a discounted price or free of charge shall be prohibited from reselling or distributing such tokens during a silent period of six months.
In this regard, the SEC also prescribes the characteristics of utility tokens that shall not be deemed as MOP, which include Group 2 Ready-to-Use Utility Tokens that are used as gas fees or for cross-chain data transfer; and Group 1 Ready-to-Use Utility Tokens which its number to be exchanged for goods or services, or specific rights are clearly specified in the filing documents, among other things.

Ⅲ. Proposed Regulations on the Supervision of Digital Asset Exchange
In addition to the abovementioned regulations, the SEC also proposed regulations on secondary market regarding listing rules, trading rules and the supervision of market surveillance. These include requirements for digital asset exchange operators to execute an agreement and/or contract with the issuers who wish to list their digital tokens on digital asset exchanges and to disclose information in certain circumstances as prescribed by the SEC.

This is intended merely to provide a regulatory overview. It is not intended 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 contract any of the authors.

Authors