A huge flock of fund inflows and new traders moving into the cryptocurrency market has drawn a watchful eye from the regulator, eager to inform young, wide-eyed investors about their risky behaviour amid skyrocketing returns, but also limiting those who can partake in the digital asset market.
Thailand's cryptocurrency market has boomed during the past four months to about 500,000 investors, of whom 3% are younger than 20 years old.
This has the Securities and Exchange Commission (SEC) concerned as to whether these young adults have the knowledge and wisdom to invest in high-risk assets such as cryptocurrency.
A dramatic increase in the price of bitcoin last year made the allure of jumping into the cryptocurrency frenzy too attractive to ignore for many people. The bitcoin price jumped from US$3,000 in early 2020 to $33,000 by the end of last year, and even surpassed the $50,000 mark last month, with other cryptocurrency peers like ethereum and litecoin rising at similar rates.
"But cryptocurrency is a very high-risk investment because of high price volatility and no fundamentals for analysis. There are many new investors in the digital asset market. They do not understand risk very well, so they can face huge, unexpected losses," said SEC secretary-general Ruenvadee Suwanmongkol.
EASY COME, EASY GO
Although investors can obtain bitcoin and other cryptocurrencies through a process called "mining", where high-power computers solve complex puzzles to slowly obtain new cryptocurrencies, most simply buy them through digital asset exchanges.
There are over 300 digital asset exchanges around the world that allow you to open trading accounts, including seven in Thailand that are licensed and under the SEC's supervision.
Opening a trading account with a stockbroker requires investors to possess certain prerequisite qualifications to prove they are fit for stock trading, but opening a digital trading account is a cakewalk in comparison. Anyone, regardless of age, financial background or level of personal income, can apply through an online verification process.
Unlike traditional securities, buying cryptocurrencies is much easier as each bitcoin is divisible to eight decimal places, or 100 million pieces, allowing investors to own bitcoins in tiny fragments, investing as little as 10 baht.
Lured by the promise of easy gains from cryptocurrency trading thanks to the convenience and price surges during a bull market, many new retail investors have flocked to the cryptocurrency market, causing bottlenecks in the know-your-customer process and several temporary system shutdowns at local digital exchanges due to spikes in activity.
These system failures and the massive influx of investors into the digital asset market have alarmed the SEC, leading it to establish qualifications for cryptocurrency investors.
RISK OR REWARD?
According to SEC assistant secretary-general Jomkwan Kongsakul, no one knows what a reasonable price should be for any specific cryptocurrency. Sometimes prices swing up and down merely on the basis of the opinion of investment influencers such as Elon Musk. Public statements from the Tesla chief executive frequently cause the bitcoin price to swerve dramatically.
Cryptocurrency prices do not have ceilings and floors in contrast to equities. Prices fluctuating 20-50% per day is a common spectacle. Trading volume is based solely on supply and demand.
In the past three years (2018-2020), the size of global digital assets was $400 billion, $130 billion and $200 billion, respectively. But the market size this year, as of Feb 28, has ballooned to $1 trillion.
There are a few factors why bitcoin is attracting so much interest at the moment.
First, investors have been searching for assets offering higher returns in a low interest rate environment with ample liquidity in the global financial system.
Second, the continuation of quantitative easing programmes by the US Federal Reserve and other central banks around the world has caused the US dollar and other major currencies to weaken in an attempt to jack up inflation for an economic recovery. The aggressive money-pumping measures makes it plausible to invest in bitcoin as a hedge against the risk of impairment of various currencies.
Last but not least, the bitcoin price does not follow the price movement of traditional assets, so investors need to diversify to spread investment risks.
SEC STEPPING IN
According to a draft by the SEC for a key public hearing, the regulator may implement qualifications for cryptocurrency investors, such as having 1 million baht in annual income.
Investors with annual income below the specified threshold or those that fail the knowledge test can invest through a fund or invest in stablecoins, defined as cryptocurrencies designed to minimise price volatility that can be pegged to a cryptocurrency, fiat money or exchange-traded commodities.
The public hearing regarding investor qualifications is scheduled from Feb 25 to March 27, with the results then forwarded to the SEC's board of directors for further review and enforcement.
The hearing led to an unprecedented public response, with the SEC receiving 6,500 replies in five days, mostly disagreeing with the incredibly high income requirements that would effectively bar low- and middle-class Thais from investing in the cryptocurrency market.
The regulator has planned a meeting with digital asset exchanges on March 24 to gauge their perspectives before deciding on the new investment rules.
Ms Jomkwan said several regulators across the world are seeking to assist investors to reduce risks, such as Hong Kong, which is exploring a similar minimum investment requirement.
"I emphasise the greatest risk is ignorance about investment risks. Investing in cryptocurrencies could result in you losing your entire investment sum," she said.
The SEC not only looks after investors, but the entire trading ecosystem, with seven digital asset exchanges under its supervision. The exchanges must be strong and have the same standard platform as international peers -- convenient and safe for investors, without exorbitant trading fees.
Investors in overseas digital asset exchanges should be wary of scams and frauds, said Ms Jomkwan.
Zipmex chief executive Akalarp Yimwilai agrees that educating investors on digital assets before investment should be standardised to give them confidence and knowledge before they begin.
Zipmex, as a licensed digital asset exchange, has a responsibility to educate investors about the risks and rewards of digital assets, including providing information pertaining to terms of service to assess and test investors' knowledge before offering services, he said.
However, guidelines and qualifications set in the new cryptocurrency trading draft should not create excessively high barriers for traders wanting to invest in digital assets in Thailand, said Mr Akalarp.
He expressed his concern that if the current draft on financial requirements, such as having annual income of 1 million baht, goes into effect, it may drive investors into non-regulated markets, exposing investors to even higher risks.
These rules could also cause a large capital outflow, leading to a long-term negative effect and creating an obstacle to Thailand's goal of becoming a regional hub for digital asset investments, said Mr Akalarp.
MORE TO DIGITAL ASSETS
Although bitcoin and altcoins, defined as other alternative digital currencies to bitcoin, are the face of digital assets, these cryptocurrencies are just a single type of digital assets.
There are "investment tokens" and "utility tokens" whose prices are not prone to excessive fluctuation and have high potential to grow, in line with telecom technologies and increasingly digitalised lifestyles.
In Thailand, cryptocurrencies and ready-to-use utility tokens are regulated under the Digital Asset Emergency Decree.
In the future, initial coin offerings and trading of digital assets that function like securities, such as investment tokens and utility tokens that are not readily exchangeable for goods, will be regulated under the Securities and Exchange Act.
The SEC also just approved the issuance and trading of real estate-backed digital tokens this month.
Market players said the tokens could be the start for other kinds of digital assets in Thailand, but cryptocurrency traders may not be interested because of lower returns.
The public hearing on the SEC's draft for cryptocurrency investor qualifications continues until March 27.
Data from the hearing is slated to be processed and presented to the SEC's board of directors in April.
The SEC's board of directors set a schedule for a public discussion in the third quarter, aiming to create a policy mandate for the direction of the country's digital asset ecosystem.
With the future of cryptocurrency investing in Thailand undetermined, both investors and the regulator would be wise to monitor the evolving role of cryptocurrencies and digital assets in decentralising the global financial and capital markets.
Market regulators around the world and central banks' policies on cryptocurrencies, including the emergence of stablecoins and governance coins, could challenge cryptocurrencies' footing in the financial market in the future.