As more people and businesses invest in digital currencies, the Bank of Thailand (BOT) faces the delicate task of trying to balance financial stability and investor protection on the one hand while promoting innovation in financial services on the other.
Determined to push ahead, the BOT began piloting its own prototype digital currency scheme last year.
What is money?
A national currency, like the baht, has three functions in an economy: the medium of exchange, unit of account and store of value.
Digital currencies, in contrast, fail to fully meet these three functions, largely because their price is so volatile.
Different forms of digital currencies
Digital currency can be divided into two types.
The first is digital currency issued by each country’s central bank.
The second is private digital currency, often referred to as cryptocurrency. Cryptocurrencies are divided into two types: those not backed by stable assets (ie, Bitcoin and Ethereum) and those that are, generically known as stablecoin.
The BOT divides the stablecoin into three categories: fiat-backed, asset-backed and algorithmic coins.
In a bid to reduce price volatility of digital currency, issuers may opt to release stablecoins that are backed by the national currency, such as a baht-backed stablecoin.
A Bitcoin digital currency ATM shop in Marseille, southern France, on January 8, 2021. (Photo by NICOLAS TUCAT / AFP)
Benefits/risks of cryptocurrencies
One advantage of the cryptocurrency is that it offers options for financial services, such as raising funds, investing, or transferring money – especially cross-border transfers.
Another advantage is that they can be used for the settlement of digital assets.
Using smart contracts, cryptocurrencies could lead to more innovative financial products, according to the BOT.
However, there are a number of risks involved.
First, cryptocurrencies are not legal tender. Their price is usually highly volatile. Meanwhile the credibility of issuers or the issuance process has been questioned. They could also pose a threat to the stability of the financial system. Cryptocurrencies can be used for money laundering and other illegal transactions. Other risks include cybersecurity and consumer protection.
“Hence, those wanting to provide services involving baht-backed stablecoins are required to consult with the BOT for permission first before beginning any operations. This policy is in line with regulatory guidelines in other countries, such as the United Kingdom, Singapore and Japan,” said Siritida Panomwon Na Ayudhya, assistant governor of Bank of Thailand’s Payment Systems Policy and Financial Technology Group.
The photo shows physical imitations of cryptocurrency in Dortmund, western Germany, on January 27, 2020. (Photo by INA FASSBENDER / AFP)
How other countries handle cryptocurrencies
China has banned trade in cryptocurrencies issued privately, while Indonesia has prohibited the use of cryptocurrencies as a means of payment.
Japan, Singapore and the UK are regulating fiat-backed stablecoin. These countries provide protection for investors, monitor cybersecurity risks, and strictly enforce anti-money laundering rules.
The UK and Singapore are consulting with the public on how to best oversee cryptocurrency and other types of stablecoins.
The BOT is also open to comments and feedback as it considers what regulatory guidelines would be appropriate, Siritida said.
The Thai central bank is planning to issue its own cryptocurrency for use by the general public in the near future.
“The BOT sees the benefits of financial technology and is ready to embrace new innovations to improve financial services. The BOT is currently in the process of developing a retail central bank digital currency to meet the needs of the general public, make services more efficient in the business sector and increase access to financial services,” Siritida added.
A sign advertising the payment with Venezuelan cryptocurrency Petro at a store in Caracas, on December 28, 2019. The digital currency was created in 2017 to combat a financial blockade by the United States. (Photo by Yuri CORTEZ / AFP)
What others say
Cryptocurrencies fall in a grey area and investors should be aware of risks associated with them, warned Prinn Panitchpakdi, a former managing director at CLSA Securities (Thailand).
However, the popularity of the world’s most famous cryptocurrency has never been higher.
JP Morgan recently reversed its stance against investing in Bitcoin, while the world’s top entrepreneur Elon Musk has just invested $1.5 billion in the digital currency.
Bitcoin reached an all-time high of $62,000 after beginning 2021 at $29,000.
Asked about the volatility of Bitcoin, Prinn said: “Who knows, in the future there may be more investors turning to invest in cryptocurrencies. We really don’t know for sure.”
Proud Limpongpan, chief strategy officer at Thailand’s leading crypto-trading exchange Zipmex, said the number of investors using its services has jumped from about 30,000 last year to more than 100,000 this year. Some have just bought digital currencies to hold, while others are actively trading in the asset.
“The central bank’s latest move [prior consultation] has not spooked investors,” she said. “But they are being extremely conservative – which may come at the expense of innovation in financial services,” Proud said in response to BOT’s stablecoin regulation.
By Thai PBS World’s Business Desk
