Final Draft of ICO Legislation Could Signify Next Step for Philippines Fintech Sector
The Philippine Securities and Exchange Commission (SEC) is due to unveil the hotly anticipated draft regulation for cryptocurrencies in the next few days, if the information provided by The Manilla Times is correct. If the regulation reflects the previous enthusiastic efforts to implement cryptocurrency in the Philippines, it stands to play a seminal role in defining the country’s status as a major player in the fintech sector. The SEC chairman, Ephyro Luis Amatong, has previously emphasised the need to regulate cryptocurrency exchanges as traditional trading platforms.
The draft comes in the wake of several Philippine lawmakers calling for the creation of a properly structured and above-board regulatory environment for Initial Coin Offerings (ICO) as the country opens up to the new technology. In spite of several successful DApps being developed in the country and the start of a promising upward trend for the Filipino fintech industry, officials are aware of the need to create a competent legislative framework to both protect their citizens from scams and for the sector to develop profitably.
In stark contrast to the majority of other central banks worldwide, the Philippines central bank — Bangko Sentral ng Pilipinas (BSP) — has been extremely proactive in ushering in both the implementation and regulation of cryptocurrencies. The central bank has developed a partnership with the SEC in order to establish “cooperative oversight.” SEC Chairman Amatong explains their cooperation:
“We already discussed the matter with the BSP, since the BSP is also interested and we are also interested [...] The discussion […] [involves] joint cooperative oversight over [cryptocurrency exchanges] engaged in trading.”
Back in 2016, the BSP deputy director Melchor Plabasan made clear his positive outlook on the potential of cryptocurrencies in a televised interview, stating that:
“If you want something that is fast, near real-time and convenient, then there’s the benefit of using virtual currencies like Bitcoin.”
Final draft builds on months-long efforts to create effective legislation
As previously reported by Cointelegraph, this upcoming draft is the just the latest installment of the SEC’s attempt to regulate the cryptocurrency sector.
In November 2017, the SEC announced that it would move to legalize digital currencies by classifying them as securities, using the example of new regulation in the United States, Malaysia and Hong Kong. The SEC chairman and then-commissioner Emilio Aquino shed light on the developments in a news conference:
The direction is for us to consider this so-called virtual currencies offerings as possible securities, in which case we will apply the Securities Regulation Code. The heightened frenzy and increasing popularity surrounding Initial Coin Offerings has pushed authorities to lay down new rules to protect consumers.”
In August 2018, the SEC released their draft rules for public feedback. According to the official statement released by the local SEC, any company registered in the Philippines seeking to run an ICO must submit an initial request to the commision, establishing whether their token qualifies as a security. Companies must submit their assessment requests no less than 90 days before they plan to launch their sale period. The SEC will then review the request within 20 days and provide its findings in a written report.
The report also said that if ICOs were only to be distributed among 20 people or less, then registration with the SEC may not be compulsory.
The proposed legislative framework seeks to set out clear rules to avoid the creation of fraudulent ICO projects. The SEC has been proposing to regulate crypto assets since late 2017. In April, the Philippines also floated the notion of defining cloud mining contracts as securities, given that the investors of the data centers operate the process via “investment contracts.”
The SEC specified that they invited banks and investment houses, along with the investing public, to submit feedback on the proposed rules and set a deadline of Aug. 31.
Crime and punishment: The government cracks down on scams
Like most countries in which cryptocurrency is a burgeoning platform, the Philippines has been victim to a number of scams, as naive investors seek quick returns on offers that are too good to be true while regulators scramble to keep up.
In May, an email circulated using the name of President Rodrigo Duterte, along with high-profile members of the Senate, encouraging them to part with their hard-earned pesos in order to invest in cryptocurrency, with the promise of high returns.
The presidential spokesman for the Philippines was forced to step in and make a statement denouncing the email scam after President Duterte’s brother’s name was used in conjunction with the scandal.
In his official statement, Roque said:
“For your information, now that the President’s brother [is being dragged into that cryptocurrency scam], the President has asked me at least three times to announce and inform the public not to entertain any person peddling their alleged influence with the President, including his relatives.”
In another scandal, the Philippine’s SEC issued a warning to investors about Onecash Trading, another digital currency provider promising attractive returns of over 200 percent to investors in only eight weeks:
"Facebook Account Onecash Trading is inviting the public to sign up to their website through a sponsored link and deposit an amount of P1,000 [$20] as an enrollment fee. Upon activation thereof, a member may opt to become a Trader with a promise receiving 25 percent return of investment every Thursday for eight consecutive weeks without doing anything, or to be a Builder wherein a member shall be receiving P 50.00 [$1] per direct and indirect invites, up to the 10th level."
The SEC stated that all investment schemes that make use of either fiat money or cryptocurrencies are deemed securities and are subsequently required to comply with existing regulations in the Philippines. The statement also came with a warning: Those who fall foul of the law could end up serving 21 years in prison as well as paying up to $100,000 in fines.
Cryptocurrencies are a relatively recent phenomenon for most countries. Their sudden skyrocketing into the very center of both public consciousness and the world of finance has often caught governments and issuers by surprise. As a result of this, governments are often on the back foot when it comes to legislation, leaving the door wide open for scammers. An example of this is the January hack of Coincheck in Japan, which led to the theft of $532 million worth of NEM. Anger at the hack was compounded by the fact that Coincheck was not registered with Japan’s Financial Services Agency and was therefore not subject to the same level of scrutiny as other exchanges in the country. The exchange froze all transactions and issued an apology. The Coincheck security compromise is indicative of wider issues in the crypto world, with over $1.2 billion worth of cryptocurrency stolen worldwide in 2017 alone. However, investors and regulators alike are learning from their mistakes. With the Philippine government taking steps to crack down on cyber crime, the wild west environment that has allowed startups and scammers to flourish in equal measure is soon to draw to a close.
The current legislation put in place by the Philippine government to deter cyber criminals has been deemed too tepid for some. Opposition politician Senator Leila de Lima is pushing a bill through the senate that seeks to impose drastically stricter punishments for crimes relating to cryptocurrencies.
In her authority as a former justice secretary, de Lima used the April 4 arrest of two individuals for an alleged P900 million ($17.2 million) Bitcoin scam to emphasize the need for Senate Bill No. 1694 to be passed:
"I hope that this occurrence will push my esteemed colleagues in the Senate to take my proposed bill seriously and help pass it into law soon. Knowing that virtual currency resembles money, and that the possibilities in using it are endless, higher penalty for its use on illegal activities is necessary.”
De Lima provided a list of illicit activities that could use cryptocurrencies:
"Where unscrupulous individuals entice unsuspecting people to purchase fake Bitcoins, sending a virtual currency as payment for child pornography or a public officer agreeing to perform an act in consideration of payment in Bitcoins [direct bribery].”
De Lima’s bill would determine the severity of the criminal activity by the equivalent value of the funds raised through illegal activity. Depending on the amount illicitly raised and the circumstances in which the funds were raised, individuals could face lengthy prison sentences or even the death penalty.
Cryptocurrency and blockchain could help unite the Philippines fragmented payments sector
In a bid to keep the country at the forefront of the ever-expanding crypto frontier, the Philippine government has created the Cagayan Economic Zone Authority (CEZA). With countries like Malta and Switzerland already ahead of the curve in welcoming both blockchain and cryptocurrencies, the CEZA is the country’s response to the ‘Crypto Valley’ of Switzerland’s Zug canton. The Philippine government permitted 10 blockchain and cryptocurrency companies to operate in the zone, with the aim of promoting economic growth and generating jobs for its citizens. In spite of appearances, the zone isn’t just a tax haven free-for-all. Companies are required to contribute no less than $1 million over a two-year period, which, in turn, is topped up by up hundreds of thousands of dollars in fees.
CEZA deputy administrator for planning and business development Raymundo T. Roquero explained what businesses must do to be able to operate in the zone:
“When they apply, they will pay an application fee of $100,000 (P5.35 million) [and a] license fee of $100,000. Then you go into probity checks, then application programming integration (API), which costs an additional $100,000.”
In a ceremony granting licenses to operate in the zone in April, Roquero commented on some of the applications that had been successful:
“These are offshore companies, and they have committed investments of $1 million (P534.6 million) each. GMQ intends to build [its] infrastructure in Sta. Ana, Cagayan […] and will have an incubation period of two years, so they are already allowed to operate here in Manila.”
Crypto activity in the Philippines, however, is not confined to the CEZA alone. The U.S.-based company ConsenSys has launched Project i2i — short for “island-to-island,” a payment network built on Ethereum that aims to connect the 400 rural community banks across the Philippines. Although there are evidently banks to serve the country’s many rural communities, they are neither connected to any wider electronic networks nor international money transfer systems, meaning that thousands of people are without a means of making quick and reliable payments.
Photo from ConsenSys’ i2i release
The project uses a web API in order to allow banks to connect to a blockchain backend. This allows users to both carry out transactions and to make use of smart contracts on permissioned blockchain via ConsenSys’ Kaleido platform.
Transactions signed through this system will allow for the pledging of digital tokens corresponding to an amount of Philippine pesos in an off-chain account, as well as redeeming and transferring tokens among other platform users.
Success stories help the government to keep an open mind about cryptocurrencies
In spite of a stumbling start to the outright acceptance of cryptocurrencies, the Philippine government is clearly waking up to the many advantages that the technology can bring. This change has not gone unnoticed by some of the industry players.
In an interview with Nikkei, FintechAlliance chairman Lito Villanueva said:
“With these startups come huge investments in their portfolio. Surely, each country would want to take a piece of the action. Taking blockchain and fintech players in with enabling regulations and potential investment incentives would surely make the game more exciting.”
Some of the nation’s startups have already brought in considerable investment. Perhaps the Philippines’ most well-known fintech startup success story, Coins.ph, raised $5 million in a Series A funding round, securing investment from Naspers and Quona Capital. Other Philippine crypto pioneers include Bloom Solutions and Satoshi Citadel Industries.
Aiai Garcia, global business development lead for Consensys in Asia-Pacific commented on how the Philippines central bank’s openness toward cryptocurrencies had benefited the industry within the country:
“Today, the Philippines has one of the most advanced blockchain payments apps in the world [Coins.ph], which provides 1.5 million Filipinos alternative access to their finances and other value-added services. [Philippine] regulators were also among the first to announce the regulation of Bitcoin as security."
It appears that the government is aware that the opportunities for fintech companies can bring benefits for itself. Department of Finance spokesperson Paola Alvarez said:
‘’Secretary [Carlos] Dominguez is really pushing for the application of financial technology. He wants to harness fintech to improve business, for example, payment of taxes online."
As both cryptocurrency and blockchain technology gain footing across the globe, the potential benefits for the underdeveloped Philippine fintech industry are hard to deny. The disparate and fragmented nature of the island’s financial system could be revolutionized thanks to initiatives such as i2i, along with the nation’s many payment apps that have sprung up in recent years. With eager anticipation from high-profile government figures, the ICO regulations seem set to take the next step in defining the role of cryptocurrency in the nation’s future.