SEC: ICO study finds high risk, indicating need for regulation

SEC: ICO study finds high risk, indicating need for regulation

A study on investment in initial coin offerings (ICO) indicates 95% of ICO investment is deemed a failure, with the remaining 5% reaping a considerably high return, says the Securities and Exchange Commission (SEC).

ICOs carry high risks with a high failure rate, indicating there is a need for this type of fundraising to have government supervision, said SEC secretary-general Rapee Sucharitakul, naming several sources for the study.

The success of ICOs as an investment is difficult to gauge because startups have no track records and can be disrupted by technological changes, causing extreme rates of failure, said Mr Rapee.

"The SEC has proposed a balanced regulatory framework for ICOs. We will open a specific ICO track called 'investment participation'. But first the scheme needs to be approved at the government level [by the Finance Ministry] to supervise digital currencies and the direction of the regulatory framework," he said.

The definition of "investment participation" refers to instruments representing rights, divided into units, each with highly standardised terms and conditions, where such instruments are issued for raising funds from the public and represent rights for holders to participate in pooled benefits from pooled contributions, which are collectively managed. Investors have no control over day-to-day operations.

ICOs see a company, usually a tech startup, issue digital tokens, typically in exchange for a cryptocurrency such as bitcoin or ethereum.

Tokens can be used to buy future services from the issuer or can be sold to ostensibly reap a handsome return.

ICO transactions are similar to crowdfunding, whereby the issuer presents a business model to investors, but the difference is in the raised funds, which are in the form of digital currencies using blockchain technology, and the deals are enforced using smart contracts.

Digital currencies are tradable assets, but they are not classified as legal tender, are currently unregulated and have a risk of price fluctuation, according to the SEC.

At present, there are many returns that can be derived from ICOs. These could be in the form of a utility such as a coupon used to buy products or services, the right to own a specific asset, or the right to receive revenue or profit-sharing without engaging in day-to-day operations.

Mr Rapee said the Ministry of Finance, the Bank of Thailand, the Anti-Money Laundering Office, and the SEC are closely discussing the ICO regulatory framework, which is expected to be concluded by next month, followed by establishing ICO regulations within the first half of this year.

Public hearings on the ICO regulatory framework, drafted by the SEC, recently completed its last round on Jan 22 after being extended twice.

Most of market participants have agreed with the SEC on regulating ICOs through an "investment participation" tract.

The track requires ICOs to be done through an ICO portal, which is required to originate in Thailand with minimum registered capital of up to 5 million baht.

But market participants have different opinions about the limitation of retail investors and the limitation of ICOs.

"The regulations may limit retail investors in the primary market, but will be unable to do such thing in practice, as they could invest in ICOs from the secondary market, which has a higher cost above the primary market," said Mr Rapee.

At present, there are five companies interested in becoming ICO portals and more than 15 ICO issuers preparing to issue digital tokens.

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