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Financial institutions (FIs) have the opportunity to work with the Bank of Thailand (BOT) on exploring the potential of smart contracts and distributed ledger technology (DLT) in payments as part of a new regulatory sandbox project.
The use of smart contracts and DLT in payments may cause financial stability risks to both the wider economy and to existing payment systems, the BOT said, hence the need for sandbox testing.
Last week, the BOT announced that applications are now open for FIs that want to take part in a programmable payments trial.
The trial will take place under the BOT’s Enhanced Regulatory Sandbox framework, which builds on previous BOT sandboxes exploring the use of biometric technology (2023) and blockchain (2021) in financial services.
With applications open until September 13, FIs that wish to participate must submit details of how they intend to use smart contracts, DLT or “other similar technologies” to deliver programmable payments.
Unlike the earlier sandboxes, the enhanced framework will allow FIs that are not yet authorised by the BOT or other regulatory agencies to take part.
The BOT said it sees potential for the development of programmable payments using new technologies, and wishes to explore this potential under its mandate for cultivating “responsible innovation”.
Under the sandbox framework, the BOT defines “programmable payment” as any payment that uses electronic data to meet predetermined conditions that lead to automatic execution of a transaction.
An “electronic data unit” is defined as a unit of data that is created on an electronic network with the intention of being used as a medium of exchange to obtain goods or services.
By converting electronic data into programmable digital tokens, FIs could discover new ways to increase speed and transparency and reduce costs and friction in payments, the central bank said.
Applicants can submit plans to test any part of a programmable payments chain, including payment and settlement, escrow services and tokenisation processes.
Sandbox compliance requirements
Under the terms of the sandbox, applicants must agree to test programmable Thai baht payments only, where the value of each tokenised data unit is 1 baht.
As such, applicants must demonstrate that they have sufficient funds to ensure that all payments made during the sandbox are fully backed by stored Thai currency.
The stored currency must be held in a segregated account for the duration of the sandbox, and must be verifiable at any time upon request by the BOT.
Other requirements for applicants include the submission of risk management guidelines, IT security and business continuity plans, and an IT disaster recovery plan.
Know your customer (KYC), know your merchant (KYM) and customer due diligence (CDD) obligations will also apply to all applicants, as per the existing rules of the Anti-Money Laundering Office (AMLO).
Business objective requirements
All applicants must demonstrate why their proposed use of smart contracts, DLT or other similar technology will benefit stakeholders and end users.
Diagrams submitted with each application must highlight the business process flow of each proposal, the customer journey and the operational flows of the service provider.
An ability to test these proposals against existing solutions is required, highlighting the differential impacts on banks, consumers and other payments businesses.
A high-level diagram should indicate the operation of the applicant’s chosen DLT system, network, electronic wallets and smart contracts.
An interoperability diagram should also indicate how the applicant’s proposal would connect with existing payment systems or with other DLT networks.
The BOT has asked applicants to specify whether their proposed solution uses a public or private DLT system, and how these systems conform with relevant international standards.
Applicants must also create policies for collecting data in compliance with data protection laws and for handling customer complaints.
Thailand’s ecosystem for responsible innovation
Speaking at Money 20/20 Asia in April this year, the BOT assistant governor for payment systems policy, Daranee Saeju, said that finalising a programmable payments sandbox is a priority for 2024.
In a presentation that Saeju shared with Vixio, the BOT explains that its ecosystem for responsible innovation is oriented to the “key imperatives” of “productivity”, “inclusivity” and “immunity” (to technical failure).
The BOT’s three “strategic directions” for responsible innovation are “open infrastructure”, “open data” and “open competition”.
Prasad Thandapani, analyst at Vixio, noted that the BOT’s approach to programmable payments contrasts with that of its neighbour, Singapore.
“Thailand is exploring these technologies in a much more open manner compared to Singapore,” he said.
“Whereas Singapore hand-picked the FIs and merchants that are currently taking part in Project Orchid, Thailand's approach ensures that a wider variety of FIs have the opportunity to take part.”
Under Project Orchid, which was launched in 2022, the Monetary Authority of Singapore (MAS) has partnered with UOB, OCBC, Amazon and others to study the potential use cases of programmable central bank digital currency (CBDC).
