## 1laoea2023002 — Preface, Executive Summary, Introduction, Background, Decision 777, and Enhancements

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### Preface and mission overview
- At the request of the Bank of Lao People's Democratic Republic (BoL), the Monetary and Capital Markets (MCM) Department carried out a virtual seminar on the risks and approaches to regulation and supervision of crypto assets in June 2022.
- An in-person mission visited Vientiane from October 18–October 25, 2022 to assist authorities in implementing newly passed legislation on crypto assets.
- The mission held meetings with BoL, the Lao Securities Commission, the Ministry for Technology and Communications (MTC), and the private sector, and provided a one-day seminar to staff of BoL, Ministry of Finance (MoF), and the Securities Commission Office (SCO).

### Executive summary: status, scope, and immediate observations
- Lao P.D.R. has enacted legislation to pilot licensing of mining and crypto trading activities to support a digital economy transformation and to leverage surplus hydro power for foreign currency income.
- Institutional responsibilities:
  - BoL entrusted with licensing and supervision of crypto trading firms; MTC in charge of licensing crypto mining firms and supervising both from a technological perspective.
- Market uptake and structure:
  - Crypto uptake appears limited: limited public engagement in crypto trading and no engagement by financial institutions.
  - Domestic trading platforms largely absorb crypto from the mining industry and provide domestic entities to exchange and store crypto assets rather than serving a large retail market.
- Licensing status:
  - BoL has granted its first crypto trading license and is assessing a second applicant.
  - MTC has issued eleven licenses for crypto mining firms.
  - Licenses under the Pilot are granted for an initial period of three years.
- Regulatory assessment:
  - Current framework is a positive step but would benefit from additions on prudential and conduct matters, particularly asset segregation and market abuse.
  - Supervisory focus for BoL should be on identifying risks from complex interconnections and potential market abuse and adopting a more proactive approach as market expands.
- Coordination recommendation:
  - Continue domestic coordination and deepen cooperation with foreign peer regulators and participation in international fintech forums and standard-setting bodies.

### Key recommendations (from Table 1)
- Consider expanding the regulatory framework to include key prudential and conduct requirements, particularly safekeeping of clients’ assets, market integrity, and crypto marketing given that many crypto exchanges will be offering wallet services.
  - Responsible Authority: BoL
  - Timeline: ST
- Continue to deepen understanding of business models of licensed entities and ensure complex interconnections can be effectively supervised.
  - Responsible Authority: BoL
  - Timeline: Ongoing
- Ensure effective management of operational risk at domestically licensed trading platforms.
  - Responsible Authority: BoL
  - Timeline: ST
- Consider leveraging experiences of the global community through fintech cooperation agreements and/or joining global or regional supervisory forums.
  - Responsible Authority: BoL
  - Timeline: MT
- Put together an updated approach to communication and investor education regarding crypto assets.
  - Responsible Authority: BoL
  - Timeline: ST
- Ensure educational efforts by the private sector address key elements for consumer protection.
  - Responsible Authority: BoL
  - Timeline: ST

(Note: ST = short term, 6–12 months; MT = medium term, 12–24 months.)

### Background — macro, legal, and pilot framework
- Macro and strategic context:
  - Population of 7.2 million; GDP per capita of $2,551; national currency is the Kip.
  - Poverty rate: 7.1 percent.
  - Government strategy: turn Lao into a digital economy as part of a 5-year digital strategy supporting a broader 30-year strategy.
  - Lao P.D.R. has surplus renewable hydro power and seeks foreign currency income through piloting crypto mining and trading.
- Legal instruments:
  - MTC Decision No. 888 (November 2021): “Ministerial Decision on a Trial of Digital Asset Transactions No. 888” establishes a framework for a 3-year pilot program permitting crypto mining and crypto trading.
  - Decision 777 (BoL) sets minimum criteria for crypto trading platforms and focuses on trading activities.
- Decision 888 definitions and categories:
  - “Digital asset”: created with electronic data to act as a medium of exchange.
  - Two categories: (i) cryptocurrencies (examples given: Bitcoin, Ethereum, Litecoin, and others); (ii) digital token (electronic data created for specific purpose—investment tokens and utility tokens).

### Financial and fiscal requirements under the Pilot (Decision 888 and Decision 777)
- One-off royalty fee: $1 million.
- Lump-sum tax: 15 percent of the fees that the exchange collects from buyers/sellers at the time of each sale; to be contributed to government budget in four installments per year.
- Deposit requirement with BoL: $5 million.
- Limit on number of crypto trading platforms under pilot: two entities.
- Mining provisions include waiving of fees and tariffs and special conditions for power purchase agreements.
- Decision 777 additional fees (in Kip):
  - Service fee: 20 million Kip.
  - Business license issuing fee: five million Kip.
  - License extension fee: one million Kip.
  - Annual management fee: 0.1 percent of annual income.
- Ownership and operational requirements:
  - Trading platforms must be licensed with BoL and partner with a BoL-regulated commercial bank to facilitate money transfer, payment, and foreign exchange.
  - Ownership requirements: trading platforms must have majority Lao national ownership (51 percent) and at least one Lao national executive resident in Lao P.D.R.; mining entities must be 100 percent Lao owned.
  - Documentation focus: governance, financial resources and readiness, risk management processes.
- Consumer protection elements and gaps:
  - Crypto is not to be used as a means of exchange.
  - No current restrictions on crypto promotions, though BoL is considering developing these.
  - Decision 777 requires suitability tests: users must be over 18 years old, capable financially and mentally; if they pay in Kip, they need to withdraw in Kip.
  - Basic data protection and transparent disclosure of fees required.
  - No fund segregation requirements currently between mining entities and retail consumers, or between users and trading platforms.
- Prudential measures:
  - Capital requirements: $5 million to be held at BoL, with total capital requirements of $10 million (of which $5 million can be used for own business, and $5 million to be held with the central bank).
  - Requirement for trading platforms to partner with regulated commercial banks to manage foreign exchange rate fluctuation risks.

### Decision 777 — operational resilience and firm requirements
- Decision 777 imposes business continuity conditions, internal control including audit, risk management and security, IT maintenance, and rules on third party service providers in relation to IT administration.
- BoL is developing guidelines to support these Decisions; early drafting already reflects some mission recommendations.
- Decision 777 aims to ensure trading platforms have robust operational, audit, and IT controls and provides BoL with supervisory and enforcement powers, including economic sanctions and liquidation processes.

### Organization within BoL and interagency coordination
- MTC and BoL share responsibilities:
  - MTC: regulating, monitoring, and approving crypto mining entities and the use of technology for crypto asset trading platforms.
  - BoL: regulating and monitoring crypto asset trading platforms and foreign currency inflows and outflows associated with crypto activities.
- Payment Systems Department (PSD) within BoL:
  - PSD is the main group entrusted with crypto asset regulation and supervision.
  - PSD has around 25 staff and is being split into three functional divisions: fintech developments including crypto assets and CBDCs; payment service providers and payments oversight; and licensing and policy.
  - PSD collaborates with Bank Supervision Department and Monetary Policy Department for licensing, and with MTC for cyber and technological resilience supervision.
- Government-led Joint Committee (JC) for Crypto Assets (set up in 2021) includes MoF, MTC, Ministry of Energy and Mining, Électricité du Laos, and BoL; JC produced initial research underlying the Pilot.

### Market size, structure, and monitoring
- Extent of crypto asset activities is unclear; uptake seems limited with no official published research.
- Anecdotal user profile: younger and more tech-savvy; numbers limited.
- Domestic trading platforms are oriented toward absorbing mining output rather than retail customers, providing a domestic marketplace to prevent capital outflows from block rewards.
- Monitoring is carried out by JC members through outreach, industry discussions, and engagement with international regulatory authorities. BoL has engaged neighboring peer authorities and DoDT of MTC organizes provincial educational forums.

### Pilot licensing and market operations
- MTC licensing:
  - MTC has licensed eleven mining companies under the Ministerial Decision.
  - Licenses granted for a period of three years and re-evaluated at expiry; potential renewal for a subsequent three-year period.
  - All companies are domestic and assessed to comply with fit and proper, governance, and financial requirements.
  - MTC decides location and type of power supply for mining firms to leverage hydro power and minimize local impact.
- BoL licensing:
  - BoL has issued its first license for a crypto trading platform and is assessing a second applicant.
  - Ministerial Decision sets a limit of two licenses for trading services under the Pilot.
  - The first licensed platform started operating on a limited basis at the beginning of October; it offers trading and wallet services, online training, in-person outreach, and runs a crypto news website.
  - Back-end technical readiness was assessed as limited, leading to an initial soft launch.
- Trading operations specifics:
  - Trading platforms in the pilot offer only spot trading.
  - The single licensed firm currently lists 20 of the largest tokens by market capitalization; listing further tokens requires additional regulatory clearance.
  - For spot trading, the platform accepts customer deposits only from a single domestic bank (plans to support other banks in future).
  - Trading pairs are all linked to the stablecoin Tether (USDT); users must purchase USDT before trading and convert crypto to USDT when cashing out.
  - For each trade a domestic user must exchange Kip for US dollar, and then US dollar for a dollar denominated stablecoin (currently USDT), before exchanging that for their desired crypto asset.

### Dependencies, interconnections, and liquidity considerations
- Domestic platforms likely depend on third-party and overseas partners (e.g., wallet provision, liquidity) due to limited local blockchain development skills.
- Small domestic market implies poor liquidity and large spreads; platforms likely tap liquidity pools of larger global exchanges via partnerships and master account API access.
- Financial services entities in Lao P.D.R. often have complex ownership and board interconnections; crypto markets may quickly build links with broader financial services.

### Supervisory capacity and capital-flow management
- BoL is defining its supervisory approach; licensing provided initial insights into platform activities.
- Supervisory organization:
  - Development Division of PSD to carry out supervision due to technology concerns; Policy Division to carry out initial enforcement; Development Division to conduct ongoing supervision through continuous monitoring using onsite and offsite supervision.
  - PSD is relatively small and may manage risks from the planned two licensees but would need to increase resources if licenses expand after the pilot.
- Capital flow measures:
  - Trading platforms must ensure non-resident investors have balanced inflows and outflows; foreign residents withdrawing significant liquidity must obtain relevant permissions under foreign exchange control regulations.
  - If a local resident invests Kip, they must also withdraw Kip.
  - Stablecoins present capital flow challenges; authorities consider broader requirements to balance foreign exchange holdings to limit US dollar holdings or exchanges.
  - Trading platforms limit how much USDT a user can hold and can suspend balances if limits are breached.
  - BoL and MTC can directly access wallet details and funds held by licensed trading platforms to manage capital flow and financial integrity risks; authorities must ensure this ability is effectively disclosed to users.
  - Users can still trade on foreign platforms; authorities emphasize their unregulated nature but do not prohibit trading.

### Financial literacy, communications, and consumer protection
- Financial literacy in Lao P.D.R. is low and scams are not infrequent; anecdotal evidence suggests global crypto scams originate from entities in Lao P.D.R. and neighboring countries, impacting users abroad.
- BoL has issued public communications warning about crypto risks and plans to introduce rules on marketing and promotion of crypto assets.
- BoL notifications advise the public to deal only with licensed firms and note that overseas entities are not regulated.
- Private sector role: the first licensed trading platform provides free online and in-person training in Laotian that appears well attended.

### Findings, policy implications, and prioritized enhancements
- Overall assessment:
  - Decisions 888 and 777 establish an initial licensing and supervisory framework focused on consumer protection, market integrity, and financial stability; gaps remain.
- Key gaps and recommended enhancements to Decision 777 and supporting guidance:
  - Clarify taxonomy:
    - Current definitions of a crypto asset and a digital asset are extremely broad and could encompass digital money such as electronic money and mobile money.
    - Include references to distributed ledger technology to narrow scope; BoL should work with SCO to ensure security tokens are subject to securities regulation.
    - Consider creating a separate category for stablecoins to allow rapid regulation if a domestic issued stablecoin is launched, or a dollar denominated stablecoin becomes systemic.
    - To manage risks of “cryptoization” and dollarization, BoL might consider banning payments in dollar or Kip denominated stablecoins.
  - Asset safety and segregation:
    - Expressly require trading platforms that hold clients’ assets to make adequate arrangements to safeguard clients’ ownership rights; identify and hold clients’ assets separately from the platform’s own assets.
    - Require complete and reliable records so clients’ positions can be identified; restrict reuse/lending of client assets without explicit consent and appropriate compensation.
    - Ensure wallet addresses for users differ from the entity’s own wallet address.
    - Consider segregating assets of mining firms and retail users to limit contagion risk.
    - Consider requiring a proportion of client assets in cold wallets and cyber insurance policies; BoL staff should be able to determine terms and conditions.
    - Package these as specific guidelines on provision of wallet services.
  - Conduct of business and transparency:
    - Require platforms to treat customers fairly and not place platform interests before clients’.
    - Ensure retail users are not treated worse than mining customers.
    - Expand suitability requirements to cover financial background, borrowed funds use, and understanding of risks.
    - Require transparency and disclosure of conflicts of interest and market making arrangements, suspension and cancellation procedures, and treatment of assets after irreversible ledger changes.
  - Market integrity and surveillance:
    - Make clear that market abuse (pump and dump, insider trading, etc.) in crypto trading is prosecutable.
    - Require platforms to implement monitoring mechanisms to ensure fairness and investor protection.
    - Consider regulatory determination of acceptable asset types for trading, particularly for illiquid assets or privacy tokens.
  - External audits, outsourcing, and third-party reliance:
    - Consider regular external independent auditing of accounts and IT systems.
    - Impose requirements where domestic platforms partner with global trading platforms to access liquidity and ensure alternatives exist in times of stress.
- Supervisory approach and capacity building:
  - BoL should deepen understanding of licensed entities’ business models, upskill staff quickly, and identify domestically and globally the interconnections between traditional financial institutions and crypto platforms.
  - Require existing financial institutions to improve risk management for crypto exposures and monitor concentration risks in banking provision to crypto markets.
  - Continuously test and supervise operational resilience of domestic platforms and services provided via third parties.
  - Leverage global experience through fintech cooperation agreements and membership in global/regional supervisory forums to share information and learning.
  - Refer to international guidance from global standard setters when developing supervisory frameworks.

### Communications, investor education, and market conduct policy actions
- Update communication and investor education approach:
  - BoL needs an outreach initiative explaining the Pilot, main risks and protections, and wider investor education on crypto assets.
- Private sector education assessment:
  - As part of supervision, BoL should assess whether platform educational materials cover significant risks and explain consumer rights in simple language.
- Marketing and promotion:
  - BoL is developing a framework to limit inaccurate or unclear crypto promotions to protect consumers given low financial literacy.

*IMF — Lao P.D.R. Regulation and Supervision of Crypto Assets (content unit 1laoea2023002).*

### Preface ................................................................................................................

### 1laoea2023002 - Preface

### Preface
- At the request of the Bank of Lao People's Democratic Republic (BoL), the Monetary and Capital Markets (MCM) Department carried out a virtual seminar on the risks and approaches to regulation and supervision of crypto assets in June 2022.
- An in-person mission visited Vientiane from October 18–October 25, 2022 to assist authorities in implementing newly passed legislation on crypto assets.
- The mission held meetings with BoL, the Lao Securities Commission, the Ministry for Technology and Communications (MTC), and the private sector.
- The mission provided a one-day seminar to staff of BoL, Ministry of Finance (MoF), and the Securities Commission Office (SCO) on regulating and supervising crypto asset service providers.

### Executive Summary
- Lao P.D.R. has enacted legislation to pilot licensing of mining and crypto trading activities as part of efforts to transform into a digital economy.
- The country has a surplus of electricity generated by hydro power and seeks to generate more income in foreign currencies.
- A Ministerial Decision has entrusted BoL with licensing and supervision of crypto trading firms; MTC is in charge of licensing crypto mining firms and supervising both mining and trading firms from a technological perspective.
- Crypto uptake in Lao P.D.R. appears limited: limited public engagement in crypto trading and no engagement by financial institutions.
- Domestic trading platforms appear largely to absorb crypto from the mining industry and provide domestic entities to exchange and store crypto assets rather than serving a large retail market.
- BoL has granted its first crypto trading license and is assessing a second applicant; MTC has issued eleven licenses for crypto mining firms.
- Authorities are considering developing guidelines to support regulation and supervision of these firms; the mission understands these guidelines will reflect the recommendations in this report.
- The current regulatory framework for crypto trading platforms is a positive step but would benefit from additions on prudential and conduct matters, particularly asset segregation and market abuse.
- Supervisory focus for BoL should be on identifying risks from complex interconnections and potential market abuse; BoL should develop a more proactive approach to supervision of conduct-related matters as market expands.
- Authorities should continue domestic coordination and deepen cooperation with foreign peer regulators and participation in international fintech forums and standard-setting bodies.

### Key recommendations (from Table 1)
- Consider expanding the regulatory framework to include key prudential and conduct requirements, particularly safekeeping of clients’ assets, market integrity, and crypto marketing given that many crypto exchanges will be offering wallet services.  
  - Responsible Authority: BoL  
  - Timeline: ST
- Continue to deepen understanding of business models of licensed entities and ensure complex interconnections can be effectively supervised.  
  - Responsible Authority: BoL  
  - Timeline: Ongoing
- Ensure effective management of operational risk at domestically licensed trading platforms.  
  - Responsible Authority: BoL  
  - Timeline: ST
- Consider leveraging experiences of the global community through fintech cooperation agreements and/or joining global or regional supervisory forums.  
  - Responsible Authority: BoL  
  - Timeline: MT
- Put together an updated approach to communication and investor education regarding crypto assets.  
  - Responsible Authority: BoL  
  - Timeline: ST
- Ensure educational efforts by the private sector address key elements for consumer protection.  
  - Responsible Authority: BoL  
  - Timeline: ST

(Note: ST = short term, 6–12 months; MT = medium term, 12–24 months.)

### I. Introduction — mission scope and purpose
- BoL requested MCM assistance to strengthen knowledge regarding crypto assets to implement recently enacted legislation.
- MCM provided an online webinar in June 2022 and an October 2022 mission to Vientiane.
- The October mission aimed to understand BoL’s approach to implementing legislation, licensing crypto service providers, and to advise on regulation and supervision to manage risks to consumer protection, market integrity, and financial stability.
- This report reflects findings and recommendations from the October 2022 mission, based on meetings and review of regulatory documents.

### II. Background

H3: A. Fintech and the Digital Economy
- Government strategy: turn Lao into a digital economy as part of a 5-year digital strategy supporting a broader 30-year strategy.
- Population and macro indicators: population of 7.2 million; GDP per capita of $2,551; national currency is the Kip.
- Poverty rate: 7.1 percent.
- Government objectives: improve economic growth, reduce poverty, and leverage digital technology to mitigate pandemic-related challenges.
- Lao P.D.R. has access to renewable hydro power with surplus electricity; seeks to generate more income in foreign currencies through alternative methods, including piloting crypto mining and crypto trading.
- Following the ban in People’s Republic of China of crypto asset activities, many mining entities have relocated to neighboring countries; Lao is piloting programs for mining and trading while tasking regulators to manage broader economic impact.

H3: B. Legal and Regulatory Framework
- MTC Decision No. 888 (November 2021): “Ministerial Decision on a Trial of Digital Asset Transactions No. 888” establishes a framework for a 3-year pilot program and permits two types of crypto business: crypto mining and crypto trading. The Department of Digital Technology (DoDT) leads MTC work.
- Decision 888 definitions:
  - “Digital asset”: created with electronic data to act as a medium of exchange.
  - Two categories: (i) cryptocurrencies (examples given: Bitcoin, Ethereum, Litecoin, and others); (ii) digital token (electronic data created for specific purpose—investment tokens and utility tokens).
- Licensing criteria under the pilot (both mining and trading): financially stable with sufficient capital, meet fit and proper standards, minimum operational requirements (cyber-attacks, anti–money-laundering), and reporting requirements.
- Trading platform financial and fiscal requirements under Decision 888 and 777:
  - One-off royalty fee: $1 million.
  - Lump-sum tax: 15 percent of the fees that the exchange collects from buyers/sellers at the time of each sale; to be contributed to government budget in four installments per year.
  - Deposit requirement with BoL: $5 million.
  - Limit on number of crypto trading platforms under pilot: two entities.
  - Mining provisions include waiving of fees and tariffs and special conditions for power purchase agreements with the electricity operator.
- Decision 777 (BoL) sets minimum criteria for crypto trading platforms and focuses more deeply on trading activities:
  - Crypto trading platforms must be licensed with BoL and partner with a BoL-regulated commercial bank to facilitate money transfer, payment, and foreign exchange.
  - Ownership requirements: trading platforms must have majority Lao national ownership (51 percent) and at least one Lao national executive resident in Lao P.D.R.; mining entities must be 100 percent Lao owned.
  - Documentation and assessment focus on: (i) governance, (ii) financial resources and readiness, (iii) risk management processes.
  - Decision 777 requires liquidation processes and provides BoL with supervisory and enforcement powers, including economic sanctions.
  - Additional fees payable to BoL under Decision 777: service fee of 20 million Kip; business license issuing fee of five million Kip; license extension fee of one million Kip; annual management fee of 0.1 percent of annual income.
- Consumer protection elements:
  - Crypto is not to be used as a means of exchange.
  - No current restrictions on crypto promotions, though BoL is considering developing these.
  - BoL monitors social media advertising by unlicensed firms and will take action where necessary.
  - Decision 777 requires high-level suitability tests for users: users must be over 18 years old, capable financially and mentally; if they pay in Kip, they need to withdraw in Kip.
  - Basic data protection requirements and transparent disclosure of fees required.
  - No fund segregation requirements currently, either between mining entities and retail consumers, or between users and trading platforms.
- Prudential measures to manage financial stability risks:
  - Capital requirements: $5 million to be held at BoL, with total capital requirements of $10 million (of which $5 million can be used for own business, and $5 million to be held with the central bank).
  - Requirement for trading platforms to partner with regulated commercial banks to manage foreign exchange rate fluctuation risks.

### Findings and policy implications (synthesized from report)
- Regulatory framework progress:
  - Decisions 888 and 777 establish an initial, relatively comprehensive licensing and supervisory framework focused on consumer protection, market integrity, and financial stability.
  - Gaps identified include absence of fund segregation requirements and limited conduct-related safeguards (market abuse, marketing restrictions).
- Supervisory priorities for BoL:
  - Focus on understanding business models of licensed entities and monitoring complex interconnections within crypto markets and with broader financial markets.
  - Strengthen operational risk management oversight at domestically licensed trading platforms.
  - Prepare to enhance supervision of conduct matters (market abuse, fair treatment of clients) as retail participation grows.
- Domestic and international cooperation:
  - Continue coordinated domestic regulatory approach among BoL, MTC, MoF, and SCO.
  - Increase bilateral cooperation with foreign counterparts and participation in international fintech forums and standard-setting bodies to strengthen regulation, supervision, and enforcement capabilities.

*Source: IMF — Lao P.D.R. Regulation and Supervision of Crypto Assets (Preface, Executive Summary, Introduction, and Background).*

### 13.      Decision 777 also aims to ensure trading platforms have robust operational

### 1laoea2023002 - 13.      Decision 777 also aims to ensure trading platforms have robust operational

### Decision 777: operational resilience and firm requirements
- Decision 777 imposes business continuity conditions, internal control including audit, risk management and security, IT maintenance, and rules on third party service providers in relation to IT administration.
- BoL is developing guidelines to support these Decisions; early drafting already reflects some mission recommendations.
- BoL staff has been working with two neighboring peer regulatory authorities to provide substantial detailed guidance for entities operating in this sector.

### Organization within BoL and coordination with other authorities
- Both the MTC and BoL share responsibilities for regulating and supervising crypto asset service providers and related activities.
  - MTC: regulating, monitoring, and approving crypto mining entities and the use of technology for crypto asset trading platforms.
  - BoL: directly responsible for regulating and monitoring crypto asset trading platforms, and for regulating Lao P.D.R. foreign currency inflows and outflows in connection with crypto mining and trading activities.
- The Payment Systems Department (PSD) is the main group within BoL entrusted with crypto asset regulation and supervision.
  - PSD has around 25 staff, dealing with payment services licensing, supervision, policy, and legal areas.
  - PSD is being split into three functional divisions: a division focused on fintech developments including crypto assets and Central Bank Digital Currencies, a division focused on payment service providers and payments oversight, and a division that will look at licensing and policy.
- PSD collaborates with Bank Supervision Department and Monetary Policy Department for licensing, and with MTC for supervision on cyber and technological resilience.
- A Government-led Joint Committee (JC) for Crypto Assets was set up in 2021 with members: MoF, MTC, Ministry of Energy and Mining, Électricité du Laos, and BoL.
  - JC produced initial research that formed the basis for the Ministerial Decision for Pilot licensing.
  - JC regularly meets, both in the capital and across regions, to discuss licensing, placement of mining entities, and other topical matters related to crypto assets.

### Market size and monitoring of crypto asset activity
- Extent of crypto asset activities in Lao P.D.R. is unclear; uptake seems limited so far.
  - No official research published on demand and use of crypto in Lao P.D.R.
  - Anecdotal evidence: crypto users are younger and more tech-savvy and their numbers are limited.
- Development of crypto trading platforms is geared toward crypto mining rather than retail users.
  - Domestic trading platforms largely absorb crypto from the mining industry to provide a domestic marketplace and prevent capital outflows from block rewards.
- Monitoring is carried out by JC members through outreach events, discussions with domestic and foreign industry, and engagement with international regulatory authorities.
- BoL has engaged neighboring peer authorities to inform its approach; DoDT of MTC organizes events and provincial educational forums on crypto and mining implications.

### Pilot licensing of firms
- MTC has licensed eleven mining companies under the Ministerial Decision.
  - Licenses granted for a period of three years and will be re-evaluated when this period has elapsed; can potentially be renewed for a subsequent three-year period.
  - All companies are domestic and assessed to comply with fit and proper, governance, and financial requirements.
  - MTC decides location and type of power supply for mining firms to leverage hydro power and minimize local impact.
- BoL has issued its first license for a crypto trading platform and is assessing a second applicant.
  - Ministerial Decision sets a limit of two licenses for trading services under the Pilot.
  - Licenses are granted for an initial period of three years.
  - The first licensed platform started operating on a limited basis at the beginning of October; it offers trading and wallet services, online training, in-person outreach, and runs a crypto news website.
  - BoL assessed back-end technical readiness as limited, leading to an initial soft launch.
- Trading platforms in the pilot offer only a single activity: spot trading.
  - The single licensed firm currently lists 20 of the largest tokens by market capitalization; listing further tokens requires additional regulatory clearance.
  - For spot trading, the platform accepts customer deposits only from a single domestic bank (plans to support other banks in future).
  - Trading pairs are all linked to the stablecoin Tether (USDT); users must purchase USDT before trading and convert crypto to USDT when cashing out.
  - For each trade a domestic user must exchange Kip for US dollar, and then US dollar for a dollar denominated stablecoin (currently USDT), before exchanging that for their desired crypto asset.

### Dependencies, market structure, and interconnections
- Domestic trading platforms likely depend on third-party and overseas partners for services (e.g., wallet provision) due to limited local blockchain development skills.
- Small domestic market implies poor liquidity and large spreads; platforms likely to tap liquidity pools of larger global exchanges via partnerships and master account API access.
- Financial services entities often have complex ownership and board interconnections in Lao P.D.R.; crypto markets may quickly build links with broader financial services.

### Ability of BoL to supervise and enforce
- Authorities are still defining their approach to supervision for licensed firms; licensing provided initial insight into Pilot platform activities.
- BoL is leveraging peer regulator experience to develop supervision guidelines for off-site and on-site oversight.
- Initial supervisory responsibility:
  - Development Division of the PSD to carry out supervision due to technology concerns.
  - Policy Division to carry out initial enforcement activities.
  - Development Division to conduct ongoing supervision through continuous monitoring using onsite and offsite supervision.
- PSD department is relatively small and may manage risks from the planned two licensees, but would need to increase resources if licenses expand after the pilot.
- Managing capital flows is a primary element of the pilot.
  - Trading platforms must ensure non-resident investors have balanced inflows and outflows; foreign residents withdrawing significant liquidity must obtain relevant permissions under foreign exchange control regulations.
  - If a local resident invests Kip, they must also withdraw Kip.
- Stablecoins as a store of value present capital flow challenges; authorities consider broader requirements on trading platforms to balance foreign exchange holdings to limit US dollar holdings or exchanges.
  - Trading platforms limit how much USDT a user can hold and can suspend balances if limits are breached.
- BoL and MTC can directly access wallet details and funds held by licensed trading platforms to manage capital flow and financial integrity risks; authorities must ensure this ability is effectively disclosed to users.
- Users can still buy and sell crypto assets from foreign trading platforms; authorities do not allow crypto for payments but do not stop trading. Public communications emphasize the unregulated nature of foreign trading platforms, but competitive spreads and fees may entice users to use foreign exchanges.

### Financial literacy and communication
- Financial literacy in Lao P.D.R. is low and scams are not infrequent; anecdotal evidence suggests global crypto scams originate from entities in Lao P.D.R. and neighboring countries, impacting users abroad.
- BoL has issued public communications warning about crypto risks and plans to introduce rules on marketing and promotion of crypto assets.
- BoL has issued notifications advising the public to deal only with licensed firms and noting that overseas entities are not regulated.
- Private sector role: the first licensed trading platform provides free online and in-person training in Laotian that appears well attended.

### Findings and recommendations (selected)
- Existing regulatory framework is primarily set up to absorb and manage risks of crypto mining operations; this is considered a sensible first step given limited domestic retail and institutional involvement.
- Presence of local trading platforms and regulation could legitimize the market and lead to rapid growth, necessitating further regulatory steps to manage consumer, market, and financial stability risks.
- Authorities should be prepared to continue developing the regulatory framework as the market evolves and closely monitor industry developments and retail uptake.
  - This includes potentially more specific guidelines on the provision of wallet services, currently part of crypto trading platform requirements.
- BoL should ensure regulatory frameworks are consulted on and shared widely with the public:
  - Development should consider views of public authorities, academia, industry, the public, and other stakeholders.
  - Final decisions should be communicated simultaneously across various media in local languages.
  - Recommendation: BoL ensures Decision 777 is available freely and transparently to provide regulatory certainty and ensure consumers can identify protections.
  - Recommendation: Supporting guidelines should be shared publicly.

*IMF | Lao P.D.R. Regulation and Supervision of Crypto Assets | extracted content unit*

### 39.      The regulatory framework currently used for licensing and supervision of crypto

### 1laoea2023002 - 39.      The regulatory framework currently used for licensing and supervision of crypto

### A. Enhancements to the licensing and supervision framework (Decision 777)
- Consider amending Decision 777 or developing subsequent guidance to include additional prudential and conduct provisions beyond existing provisions around capital requirements, governance and risk management.
- Provide greater clarity on the taxonomy:
  - Current definitions of a crypto asset and a digital asset are extremely broad and could encompass digital money such as electronic money and mobile money.
  - Including references to distributed ledger technology can narrow the scope while providing clarity.
  - BoL should work closely with the SCO to ensure that security tokens are subject to securities regulation.
  - Consider creating a separate category for stablecoins to allow rapid regulation if a domestic issued stablecoin is launched, or a dollar denominated stablecoin becomes systemic.
  - To manage risks of “cryptoization” and dollarization, BoL might consider banning payments in dollar or Kip denominated stablecoins.
- Asset safety and segregation requirements:
  - Decision 777 contemplates fines for “combining money from end users into the platform’s account” and “utilizing clients’ money without approval”, but should expressly require trading platforms that hold clients’ assets to make adequate arrangements to safeguard clients’ ownership rights.
  - Clients’ assets should be identified and held separately from the platform’s own assets to protect from misuse and to assist in orderly winding up and return of client assets.
  - Platforms should be required to keep complete and reliable records to ensure clients’ positions can be adequately identified.
  - Client assets should be restricted from reuse and/or lending without explicit consent from the users and appropriate compensations.
  - Ensure wallet addresses for users are different to the entity’s own wallet address.
  - Consider segregating the assets of mining firms and retail users to limit contagion risk given the disproportionate role of mining.
  - Authorities might expressly require trading platforms to hold a proportion of client assets in cold wallets and ensure trading platforms have cyber insurance policies; BoL staff should be able to determine terms and conditions of such policies.
  - Package these measures as part of more specific guidelines on the provision of wallet services.
- Conduct of business rules:
  - Require platforms to treat customers fairly and not put platform interests before clients’.
  - Ensure retail users are not treated worse than mining customers.
  - Consider expanding suitability requirements to encompass financial background, use of borrowed funds, or users’ understanding of relevant risks.
  - Where platforms are part of a broader group, ensure appropriate governance procedures preventing conflicts of interest from other group activities.
  - Require transparency and disclosure of potential conflicts of interest (such as connections to other businesses).
- Transparency requirements:
  - Decision 777 requires trading platforms to provide customers with information about operations, fees and dispute resolution mechanisms.
  - BoL supervision should ensure platforms provide sufficient and clear information to ensure client understanding, including market making arrangements and mechanisms to ensure orderly trading (e.g., how and when the platform can suspend trading; the platform’s trade cancellation procedures; treatment of assets after irreversible changes to the distributed ledger protocol).
  - Emphasize clarity because retail clients can access platforms directly and lack of clarity can increase market integrity or fairness issues.
- Market integrity provisions:
  - Decision should make clear that market abuse (practices like pump and dump, insider trading, etc.) in crypto trading is a prosecutable offense.
  - Platforms are expected to put in place adequate mechanisms to monitor trading to ensure fairness and investor protection.
  - BoL should consider whether regulatory determination is needed for types of assets acceptable for trading or involvement in product listing, particularly for smaller illiquid crypto assets, assets with little or no accompanying information, or privacy tokens.
- External auditing of financial statements and IT processes:
  - Decision 777 requires annual auditing of crypto trading platforms’ financial statements and IT systems, but external independent auditing is required only when the audit is unclear or BoL determines so.
  - BoL could consider requiring external independent auditing of accounts and IT systems on a regular basis to ensure prudential and operational IT requirements are maintained.
- Outsourcing and third-party requirements:
  - Platforms may partner with third parties outside of Lao P.D.R.; Decision 777 provides a sensible framework for management of externally dependent IT systems.
  - Consider imposing requirements if domestic platforms partner with global trading platforms to access greater liquidity.
  - Consider approaches to ensure trading platforms can rely on domestic liquidity in times of market stress and are not completely reliant on accounts at global platforms that can be cancelled at short notice.

### B. Supervisory approach and global cooperation
- BoL should deepen understanding of licensed entities’ business models and engage on an on-going basis to understand implications for financial stability and consumer protection, and adapt regulation and supervisory approach as entities evolve.
- BoL needs to upskill staff quickly to manage risks from complex new businesses.
- Supervise complex interconnections:
  - Domestically identify interconnections between traditional financial institutions, broader institutions, and crypto asset trading platforms, and determine type and size of risks and regulatory/supervisory responses.
  - Determine if banks are likely to be exposed directly or indirectly to risks from crypto trading platforms and whether shared or pooled capital could impact retail depositors of connected banks.
  - Globally determine interconnections between local trading platforms and foreign trading platforms and wallet providers to ensure domestically licensed entities have sufficient alternatives if issues (such as blocked transactions, increased fees, de-risking, etc.) arise.
- Require existing financial institutions to improve risk management for crypto exposures:
  - Currently commercial banks’ exposure to crypto assets is limited and appetite to increase exposure appears weak.
  - If regulated financial institutions increase engagement with crypto activities, BoL should monitor and impose proper risk management and prudential requirements once increasing exposures are detected.
  - Monitoring helps avoid concentration of banking provision to crypto markets in a single or small number of banks, which could create concentration risks.
- Manage operational risks at domestically licensed trading platforms:
  - BoL has concerns about technical readiness of local trading platforms; market growth could impact consumers, markets, and financial stability.
  - Large global exchanges already struggle with operational resilience, particularly in market stress; lower levels of financial literacy in Lao P.D.R. mean inability to access funds might lead to disproportionately perverse outcomes.
  - Authorities must continuously test and supervise operational resilience of domestic platforms and supervise services provided via third parties and platforms’ monitoring of those services.
- Leverage global experience through fintech cooperation agreements and supervisory forums:
  - BoL could sign fintech cooperation agreements to share learning, exchange information and carry out joint research; these agreements are not legally binding but improve flow of information and learning.
  - Membership of global or regional supervisory forums (such as the Global Financial Innovation Network) can aid understanding through raising issues, joining workstreams, and observing testing involving crypto asset trading platforms.
  - Multilateral forums can be more cost-effective than ad-hoc bilateral engagement and allow BoL to determine participation level.
- Refer to international guidance when developing supervisory framework:
  - Guidance from global standard setters can be useful, including IOSCO paper “Issues, Risks and Regulatory Considerations Relating to Crypto-Asset Trading Platforms”, Basel Committee consultation report “Prudential Treatment of Crypto Asset Exposures”, and Financial Stability Board reports and consultations on crypto assets and global stablecoins.

### C. Financial literacy, communications, and consumer protection
- Update communication and investor education approach:
  - BoL needs an updated outreach initiative explaining its approach under the Pilot, main risks and challenges around crypto assets, and what protections exist in the country.
  - This should be part of a wider investor education plan on what crypto assets are and how they can affect the public.
- Ensure private sector educational efforts address consumer protection:
  - As part of supervision, BoL should assess whether educational materials from trading platforms discuss the most significant risks for consumers and explain these in simple, accessible language.
  - Private sector-led trainings are likely the first point of contact for the public engaging in crypto trading activities, so key risks and consumer rights must be adequately explained.
- Manage crypto marketing and promotions:
  - BoL is developing a framework around limiting inaccurate or unclear crypto promotions.
  - This step can limit risks to consumers, particularly given relatively low financial literacy rates in Lao P.D.R.
  - Development of crypto restrictions can differ across jurisdictions based on mandates and desired outcomes; further detailed advice can be provided if required.

*IMF | Lao P.D.R. Regulation and Supervision of Crypto Assets | content unit 1laoea2023002 - 39.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1laoea2023002.pdf_