NON-FUNGIBLE TOKENS FROM THE PERSPECTIVE OF THAI LAWS

In principle, in offering NFTs that are digital assets under the Emergency Decree to the public, an issuer must be a limited company or a public limited company and its director, an executive, or a controlling person shall have certain qualifications and characteristics as specified by the SEC

Non-Fungible Tokens (NFTs) are assets that have been tokenized via block chain technology with unique identification codes and metadata that distinguish them from other tokens. Accordingly, unlike other fungible assets such as physical currency and crypto currency, NFTs can neither be exchanged nor traded equivalently.

In recent years, NFTs are exploding in popularity in Thailand as there is a growing interest from artists, creators, and investors, including business operators in selling, investing, trading, as well as operating the NFT marketplaces.

This Article, therefore, provides a regulatory overview of the supervision and protection of NFTs under various aspects of Thai laws.

Non-Fungible Token from a Perspective of Thai laws

I. Business Operations and Activities pertaining to NFTs

At present, the Securities and Exchange Commission of Thailand (the “SEC”) regulates and oversees the business operations and activities in relation to certain types of digital assets which are (i)crypto currency and (ii) digital tokens.

Under the Emergency Decree on Digital Asset Businesses B.E. 2561 (2018) (the “Emergency Decree”), “cryptocurrency” refers to an electronic data unit created on an electronic system or network to be used as a medium of exchange for the acquisition of goods, services or any other rights, or the exchange between digital assets, and shall include any other electronic data units as specified in the SEC notification, while “digital token” refers to an electronic data unit created on an electronic system or network for (i) specifying the right of a person to participate in an investment in any project or business(Investment token); and (ii) specifying the right of a person to acquire specific goods, services, or any other specific rights under an agreement between the issuer and the holder, and shall include any other electronic data units of right as specified in the SEC notification (Utility token).

Utility token scan be categorized into (i) not-ready-to-use utility tokens—digital tokens for which the underlying right to acquire specific goods or services cannot be utilized upon the offering date; and (ii) ready-to-use utility tokens—digital tokens for which the underlying right to acquire specific goods or service scan be utilized upon the offering date. Nonetheless, only the investment tokens and not-ready-to-use utility tokens have been supervised and monitored by the SEC at this current stage.

In light of this, whether or not the issuance and offering of NFTs be supervised and monitored by the SEC under the existing Emergency Decree and other relevant regulations would generally depend on as to whether or not the characteristics of such NFTs fall within the scope of “Digital Asset” described under the Emergency Decree. For example, according to the interpretation of the SEC, if the NFT is the asset itself, without providing any additional rights to the holder or being a medium of exchange for acquiring goods or services, and its underlying right cannot be separated from the token, it would not be considered as a digital asset under the Emergency Decree and thereby would not be subjected to the regulations stipulated therein.

In principle, in offering NFTs that are digital assets under the Emergency Decree to the public, an issuer must be a limited company or a public limited company and its director, an executive, or a controlling person shall have certain qualifications and characteristics as specified by the SEC. Moreover, an issuer shall(i) obtain an approval from the SEC; (ii) file with the SEC a registration statement for the offering of digital tokens and the draft prospectus; and (iii) offer NFTs only through the approved digital portal service provider (Collectively, the “Issuer’s Obligations”).

As to the business operators operating digital asset businesses as prescribed under the Emergency Decree and by the Minister of Finance (the “MOF”), the Emergency Decree provides that such business operators shall obtain an operating license from the MOF upon the recommendation of the SEC, and comply with certain regulatory requirements. In this regard, 6digital asset businesses that have currently been regulated by the SEC are (i) digital asset exchange; (ii) digital asset broker; (ii) digital asset dealer; (iv) digital asset fund manager; (v) digital asset advisor; and (vi) digital asset custodial wallet provider. Therefore, any business operations pertaining to NFTs that fall under the scope of digital asset and businesses as mentioned above (e.g. NFT marketplace) would also need to obtain a digital asset business license and comply with certain regulations in relation thereto.

To strengthen the protection for investors and to mitigate the risks posed by ready-to-use utility tokens, the SEC is now in the stage of finalizing the result of the public hearing of the draft regulations pertaining to ready-to-use utility tokens under which the SEC proposed that, among other things, an issuer of ready-to-use utility tokens must, except for the group of tokens intended for utilization and consumption purposes with certain characteristics as specified by the SEC and the tokens that will not be listed on the exchange, comply with the Issuer’s Obligations as required for an issuer of investment tokens and not-ready-to-use utility tokens.

II. Copyright Issues arising from NFTs

As most of the NFTs are associated with copyrighted works, such as literary works, dramatic works, artistic works, musical works, audiovisual works, or cinematographic works, it is important to note that copyright protection for such works exists automatically once they are originally authored and fixed without any registration or recordation required.

Generally, trading of NFTs that merged with copyrighted works would be made in the form of a license agreement (not a copyright transfer agreement) whereby the purchaser would acquire only the ownership of such specific token, but not a copyright of the underlying work. The author of such underlying work would remain as the copyright owner and be entitled to certain exclusive rights (e.g. right to reproduce the copyrighted work or to authorize its reproduction) as described under the Copyright Act B.E. 2537 (1994)(the “Copyright Act”) unless otherwise agreed by the parties.

In this respect, similar to a copyright infringement of a work which is a non-digital asset, if one falsely claims to have a copyright of the original work and registers such work as an NFT on a marketplace, or reproduces such work without any legitimate rights, such person shall be deemed to infringe a copyrighted work as prescribed in the Copyright Act.

III. NFTs and Insider Trading

There are no explicit provisions under Thai law which directly regulate insider trading in relation to NFTs.

Nonetheless, pursuant to Section 42 of the Emergency Decree, no person who is aware or in possession of the inside information related to a digital token offeror or the characteristics or particulars of digital tokens shall, except for certain exceptions described therein, (i)purchase or sell digital tokens or enter into a derivatives contract related to digital tokens, either for his or her benefit or for the benefit of any other persons; or (ii) disclose inside information to any other persons, either directly or indirectly and by any means, where such person knows or ought to know that the receiver of such information may exploit such information for purchasing or selling the digital tokens or entering into a derivatives contract related to the digital tokens, either for his or her benefit or for the benefit of any other persons. As such, for the time being, only NFTs deems as digital tokens per the term set forth in the Emergency Decree would be covered under this Section.

IV. Money Laundering in the NFT Market

As with works of art and other assets with volatile and subjective pricing, trading of NFTs is appealing to potential money launderers largely because they can be easily traded anonymously in the NFT marketplace and due tothe opacity that transactions with works of art can have.

According to Section 7 of the Emergency Decree, digital asset business operators and digital token portal service providers shall be regarded as financial institutions under the law governing anti-money laundering.By virtue of this Section, if any particular NFT is considered to be a digital asset under the Emergency Decree,digital asset business operators or digital token portal service providers operating business pertaining to such NFT would then be subjected to the regulations of the Thai Anti-Money Laundering Act B.E. 2542 (1999) and certain obligations stipulated therein (e.g. the duty to report of transaction to the Anti-Money Laundering Office in certain circumstances).

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.