STOs Awakening in Thailand:
Thailand Poised to Offer Securities Via Blockchain

March 2019 SEA Focused Issue

On Friday, February 22, Thailand’s parliament officially allowed securities to be issued over blockchain. This exciting development comes from an amendment endorsed by the National Legislative Assembly. When the rules take effect later in 2019, Thai securities such as stocks and bonds could be issued via blockchain instead of through traditional means. Over the coming months, the Thai SEC will issue provisions that allow businesses utilizing blockchain to apply for depository licenses. Previously, only the Thailand Security Depository Co, Ltd, a subsidiary of the Stock Exchange of Thailand (SET) could issue securities.

The language in the amendment references cryptocurrency-based initial public offerings (IPOs) and initial coin offerings (ICOs), but also refers to security token offerings (STOs), a new method of establishing capital that is poised to explode in the next few years. The Thai SEC will decide whether STOs will be regulated under existing securities regulations or new regulations for digital assets; which set of regulations will likely be determined on a token-by-token basis, as these tokens have much in common with both traditional securities as well as digital investment options. If a given offering represents features more commonly associated with traditional securities, such as profit sharing, dividends, or voting, then it would be presumed to be a traditional security, even though it is delivered electronically via blockchain. STOs that pay interest and repay the principal would instead be declared as a debt instrument.

What is a STO?

Until recently, ICOs have formed the bulk of cryptocurrency fundraising, allowing investors from all across the world to contribute to a project. While they are certainly effective vehicles for raising capital, they have also seen their share of misuse. Investing in an ICO is no guarantee that the project will not be abandoned before completion, if not an outright scam. The US Securities and Exchange Commission has recently introduced regulation to combat this misuse, although the cryptocurrency community has also introduced its own answer through security token offerings.

The primary difference of a STO compared to an ICO is that purchasing a token represents a stake in the issuing company itself, compared to ICOs which are a stake in a singular product or service from that company. Think of it as the difference between purchasing a stake in a new product’s financial returns, compared to purchasing stock in the product’s company itself. If the company fails to deliver on its new product offering, holding a stake in the company itself means you still hold the value of your investment, and they are still answerable to you as a stakeholder in that company. So in this case, they are very similar vehicles, but STOs add a layer of accountability that is not present in ICOs.

This level of accountability means that by their very existence, STOs are more trustworthy than ICOs. ICOs require next to nothing to launch, needing little more than an idea, a whitepaper, and a laptop to put it all together on. On the other hand, not only do STOs need to be tied to real-world financials and assets, from the outset they require regulation that ICOs are not subject to. They are an effective way to bridge the gap from legacy financials to blockchain while requiring the issuer to tie their stakeholders’ investments to real, tangible assets rather than relying on mere hype.

Taking it One Step Further

In 2018, STOs have raised more aggregate capital than ICOs had from 2014 through 2016. In the first half of 2018 alone, 18 companies had raised more than $380 million through STOs, one of which was prominent blockchain early adopter In addition to the previously mentioned benefits, STOs also offer more flexible implementations not available to ICOs. Due to their connection to tangible assets, they can act as simple common stock and act as a stake in a corporation and offer voting rights comparable to traditional securities. Others could provide revenue sharing options, such as profit distribution or issuing dividends. Essentially, they act very much akin to securities, while implementing the technological innovations present in blockchain.

STOs offer numerous benefits over traditional securities investment options while providing levels of accountability that may not be present in every ICO. For example, STOs have no administrative costs in the trading process, and no middlemen to proceed through. All investments, no matter their level of return, have to consider the fee structure involved. Removing these fees allows the investor to focus on whether the project is truly right for their portfolio, rather than having to consider this confounding variable. This also makes the trading process available at any time of day or night, rather than being restricted to set business hours.

Tokens are also much faster to trade than traditional securities, which can have a multi-day clearance period before funds are actively either invested and working towards the return or available back to the investor. Finally, a STO can be invested across borders, allowing investors to participate in foreign markets, enjoying the peace of mind that comes with a tangible investment while avoiding onerous regulations that could prohibit that investment from occurring in the first place.

Responding to Market Conditions

While many exciting innovations have been developed through ICOs, their misuse by unscrupulous ventures has shown that some design changes to the format were desperately needed. Investors seek surety in the projects and companies that they invest in, and there was a level of difficulty involved ensuring that an ICO project was on the level. STOs build upon the crowdfunding and community involvement aspects of ICOs while imposing accountability upon their project leaders. They represent the best ingredients of ICO fundraising while giving surety to its stakeholders, and engender growing trust within the fast-paced ecosystem of blockchain.

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Darius & Saul
Managing Partners

*Article was written March 2019

Varys Capital is a total return fund providing secure access to the digital asset class through venture capital and quantitative trading strategies.