Two steps forward, one step back? Thai government eases tax rules for digital assets while tightening rules for custodians

The Thai Cabinet relaxed tax rules for digital asset investments on 8 March 2022 in a bid to promote Thailand’s growing crypto industry. In effect, this will provide exemptions on the 7% VAT levied on cryptocurrency trading on authorised exchanges while offsetting annual losses against gains for taxes imposed on cryptocurrency investments. The exemption is expected to take effect from April 2022 to December 2023 and apply to trades involving the upcoming central bank digital currency to be issued by the Bank of Thailand.

Though this move can be viewed by crypto investors in Thailand as relief, it has been supplemented by tighter rules on digital asset operators that take custody of clients’ digital assets. Having been in effect since 1 March 2022, the Securities and Exchange Commission (SEC) has argued that the new restrictions and requirements are necessary to prevent fraud and the misappropriation of investors’ finds, particularly given the rising popularity of Thailand’s crypto industry.

Under the new rules, digital asset operators will no longer be allowed to use their clients’ digital assets to benefit other clients, even as deposits or loans, unless they fall under digital asset investments supervised by a licensed digital asset fund manager or are classified as deposit into a commercial bank. Operators will also be required to reconcile clients’ assets every business day to certify that records of assets are updated and available for inspection by the SEC.

Additionally, the new rules require fiat currency withdrawals or transfers to “comply with the principles for decentralised approval authority, multi-sign approval authority, and check and balance [sic],”[1] and those valued between THB 2 million to THB 50 million will be required to seek approval from two authorised persons.

Operators have been given three to six months to make the necessary adjustments to comply with the new rules.

How will these affect digital asset operators in Thailand?

The easing of taxes on trades involving digital assets were primarily designed to benefit traders and investors; however, it also serves as a tacit signal that the Thai government is embracing the growth of the country’s crypto industry by not only by lowering the barriers to entry for interested traders, but also by giving platforms the opportunity to flourish by making digital asset trading more attractive. This also provides clarity over concerns surrounding whether crypto investors will be slapped with capital gains taxes in the same way other capital market instruments are.

The easing of taxes has also been complemented by the Cabinet’s approval of additional tax breaks for direct and indirect investments in start-ups, with investors being eligible for a 10-year tax break when investing for at least two years. In many ways, these policies incentivise the growth and use of digital trading platforms.

However, proponents of Thailand’s crypto industry have also expressed concern for the policies that have been released to safeguard investors. The latest enacted by the SEC may cause unintended consequences for the growth and maturity of Thailand’s crypto industry in the long run. In addition to past restrictions placed on digital asset operators, particularly the move towards clamping down on the use of digital assets as a means of payment, stakeholders in the crypto industry worry that crypto will be considered as another investment class rather than a disruptor that brings innovation to the fintech industry.

Having said this, the latest rules issued by the SEC will mean that services provided by digital asset operators in Thailand will be highly restricted to certain investment activities and trading. Other services commonly associated with decentralised finance, namely peer-to-peer lending, and other decentralised banking applications, may not be permitted unless regulations are introduced or amended to allow them.

Conclusion

The goal of regulators in Thailand surrounding digital assets is to strike a balance between protecting investors, nurturing the growth of an innovative industry, and ensuring the stability of Southeast Asia’s second largest economy. Based on many of the government’s moves thus far, it can be argued that Thailand has taken a middle path where both favourable and restrictive regulations have been simultaneously enacted, which has sent mixed signals to the crypto community.

Of course, regulations are not static, and changes are bound to take place. It would therefore be prudent for digital asset operators to remain cognisant of any regulatory updates that may bring significant changes in the same way the latest regulations have.

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[1] “SEC amends regulations on custody of clients’ assets in digital asset businesses to enhance investor protection,” Securities and Exchange Commission of Thailand, 2 March 2022, No. 32/2022 (https://www.sec.or.th/EN/Pages/News_Detail.aspx?SECID=9337&NewsNo=9337&NewsYear=9337&Lang=9337)