Published 4 February 2019, The Daily Tribune
Everybody is trying to keep up with technology. Naturally, the older generation suffers the brunt of adjusting to the advances of society. It is not uncommon for children to teach their parents how to create social media accounts, how to make online flight or hotel bookings, and sometimes, even how to operate the latest smartphones.
This endeavor gets harder as time passes by because technology advances at an exponential rate. In order for one to be updated at least with the basic technology majority of the public is using, there is no alternative to actually exposing one’s self to what is being offered in the market. Indifference to technological advances or absence of exposure can create a piling deficit that results into an individual’s learned helplessness.
The same is true for the practice of law. The law, by its nature, is a practice with a penchant for the past. Laws are created customarily as a reaction to opportunities or problems currently being faced by society, it is merely an aftershock created by a strong societal earthquake. Consistent with its nature, the legal community puts a premium on the number of years a lawyer has invested practicing his craft. The more years you put into practice, the more knowledgeable and dependable you are as a lawyer. This attachment of law and the legal profession to things of the past makes it especially hard for lawyers to adjust to technology, much like how the older generation struggles with the same.
Today, let us take a step into avoiding this piling deficit by discussing the legal implications of Virtual Currencies in the Philippines.
Virtual Currencies (VC) are defined by an SEC advisory as a digital representation of value issued and controlled by its developers and used and accepted among the members of a specific community or users. The same advisory defines Initial Coin Offerings (ICO) as the first sale and issuance of new virtual currency to the public usually for the purpose of raising capital for start-up companies or funding independent projects. A popular kind of VC is Cryptocurrency. This VC uses cryptography so only those intended can read it. This kind of VC was popularized by Bitcoin.
The SEC will have jurisdiction over VC’s once they fit the legal definition and test of a security under the Securities and Regulation Code (SRC). There are several kinds of securities under the SRC, one of which is an investment contract. The implementing rules and regulations of the SRC (SRC-IRR) defines such as a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others. Jurisprudence also uses the flexible “Howey Test” in determining if a transaction is an investment contract. The test requires unanimity of the following elements: (1) makes an investment of money, (2) in a common enterprise, (3) with the expectation of profits, (4) to be derived solely from the efforts of others.
The SEC has taken the proactive stance that VC’s, depending on the circumstances, will fall under the legal contemplation of an investment contract. Once the SEC identifies a VC as an investment contract, the whole spectrum of security laws and regulations will be imposed on the VC.
A VC that is sold or offered for sale or distribution within the Philippines should be registered with the SEC. The people involved in the operation of the VC business such as a broker, dealer, or salesman also have to be registered with the SEC.
Violation of the multiple registration requirements under the SRC and its IRR prompts not only the imposition of fines, but also that of terms of imprisonment. Corporations which violate these requirements are not shielded from these penalties because the officer responsible will be held ultimately accountable. Erring officers who are not Filipino will also be deported after service of sentence.
This proactive stance was further bolstered by SEC’s issuance of a Cease and Desist Order in SEC CDO Case No. 01-18-046. In this case, a domestic company executed a global ICO without complying with SRC registration requirements. As a result, the SEC issued the Cease and Desist Order on January 2018 and affirmed the same on March 2018.
Albeit SEC’s flexing of its mandate into this new technological advancement, the regulator appears to be open to having a conversation with industry players. The Markets and Securities Regulation Department of the SEC has been inviting all interested parties to comment on the regulator’s Proposed Rules on ICO’s. The most recent submission of comments had a January 15, 2019 deadline.
The BSP appears to also have a stake on the matter. No talk of currency, even if it is only virtual, escapes it likewise proactive stance on regulation of VC’s.
BSP Circular No. 944 requires VC exchanges or businesses that offer the conversion of VC’s into real cash to be registered as remittance and transfer companies. The BSP will make sure that these businesses provide measures that will help address the possible abuses endemic to VC’s, such as money laundering, financing of terrorism, consumer protection, and financial stability.
True to its word, the BSP has approved several registered remittance and transfer companies that offers VC exchange services. The limited number of approved companies impresses a stringent screening process of the financial services regulator.
Even the Cagayan Economic Zone Authority (CEZA) wants a bite of the VC industry. Through the leadership of Secretary Raul Lambino, CEZA is considered the first economic zone in Asia that offers and regulates Offshore Virtual Currency Exchanges. Positioned to become the Silicon Valley of Asia, CEZA’s extensive initiative on financial technology deserves a whole article altogether. Interested parties should take note of the process, documentary requirements, and fees that comes unique to the CEZA system.
A total of 310 out of 2,208 billionaires in Forbes’ 2018 World’s Billionaires list generated their wealth through the finance and investment sector, the most in any sector. The sector created 14% of the world’s wealthiest individuals. This recognizes the potency of how an investment can change the stars of a person. Probably, this is why government regulators adopted a balanced approach to VC’s in this country. They will allow its proliferation but VC entities should comply with regulations that keep safe the investing public. In this way, the regulators can maintain the freedom of Filipinos to generate wealth while at the same time safeguarding the financial stability of the Philippines.
For comments and questions, please send email to cabdo@divinalaw.com
