Examining developments in cryptocurrency law around the region is like taking a litmus test to measure the flexibilty and depth of competency of these legal systems. staying up to speed is crucial
The International Monetary Fund’s (IMF) World Economic Outlook Report has projected that global economic growth will slow down, from 3.6% in 2018 to 3.3% in 2019. However, the Philippines has been projected by both the World Bank and the Asian Development Bank (ADB) to grow at 6.4% in 2019 (down from an earlier projection of 6.7%, released in 2018).
The ADB also reports that growth is attributed to strengthening domestic investment and consumption, which will more than offset weakening external demand. Private consumption is lifted due to a low unemployment rate, growth in formal sector employment, a continued rise in remittances, and lower inflation.
Public investment will drive domestic investment with the implementation of major public infrastructure projects such as bridges, expressways, ports and railways. Private investment is also seen to support growth in domestic investment with the continued increase in imports of capital goods and credit to businesses, as well as the accelerating momentum in private construction, which is sustained by continuing strong demand for office and retail space, and for housing.
With a relatively robust economic growth, growth in the cryptocurrency business in the Philippines has also expanded. At the time of writing, there are already 41 licensed cryptocurrency businesses in the country, 31 of which have been given Financial Technology Solutions and Offshore Virtual Currency (FTSOVC) Licences by the Cagayan Economic Zone Authority (CEZA), and 10 having been given Certificates of Registration as Virtual Currency (VC) Exchange licences by the Bangko Sentral ng Pilipinas (BSP).
From our cryptocurrency report in 2018, regulatory reforms have been pushed by the BSP as well as the Philippines Securities and Exchange Commission (SEC). Notably, during the recent Fintech Alliance’s Summit 2019 Manila, BSP director Melchor Plabasan stated that amendments to the BSP’s circular No. 944 (VC Exchange Rules) are forthcoming.
During the same event, SEC commissioner Ephyro Luis Amatong also said that the SEC’s Rules on Initial Coin Offerings and Digital Asset and Token Offerings would be released by the second quarter of 2019.
These rules are welcome developments in cryptocurrency regulation, which everyone in the industry is keenly waiting for. At the time of writing, these rules have yet to be released by the BSP and SEC.
Cagayan Economic Zone Authority Rules on Digital Asset and Token Offerings. Apart from the announcements by the SEC and BSP of impending regulatory issuances, the only other significant regulatory-related development in the Philippines is the adoption by CEZA of rules to govern Digital Asset and Token Offerings by FTSOVC Businesses.
On 12 December 2018, the CEZA approved its Rules on Digital Asset and Token Offerings (DATO rules), which supplements the Cagayan Special Economic Zone and Freeport (CSEZFP) Financial Technology Solutions and Offshore Virtual Currency Business Rules and Regulations of 2018 (CEZA VC rules).
The DATO rules seek to regulate entities intending to offer digital assets to the public (issuers), as well as any digital asset agent, expert or relevant person. Under the DATO rules, issuers are those licensed to do business in CSEZFP, which issue or propose to issue digital assets shall not be sold or offered for sale or distribution within the Philippines.
Issuers shall ensure that they comply with the laws and regulations applicable to the offer of digital assets to persons in any jurisdiction where regulations govern the offer of digital assets.
The DATO rules define digital assets as those that are uniquely identifiable electronic representations of value, property or chattel, the conferral, storage and transfer of which is recorded electronically, including by transmission of electronic information or adjustment of an electronic record, and which is any or a combination of virtual currency, asset token, or utility token. Digital assets do not include electronic representations of value that are part of an affinity or rewards programme, or those used in online games or gaming platforms.
Under the DATO rules, the CEZA remains the principal regulatory authority, but it shall appoint or designate a self-regulatory organization (SRO) that will assist in the enforcement and implementation of the DATO rules. CEZA designated the Asia Blockchain and Crypto Association (ABACA) as its SRO.
Digital Asset or Token Offering (DATO) means an offer to more than 20 persons during any 12-month period to purchase or acquire digital assets to be issued by an Issuer. DATOs are categorized based on threshold amounts sought to be raised: Tier 1, not exceeding US$5 million; Tier 2, more than US$5 million but not exceeding US$10 million; and Tier 3, more than US$10 million.
However, such threshold amounts shall be subject to quarterly review by the SRO, which, in turn, may recommend to CEZA such adjustments as market conditions or exigencies of effective regulation may require. Each DATO tier shall be subject to different rules and requirements for registration.
Prospective digital asset issuers are required to submit to the CEZA and the SRO a document containing the information necessary to enable investors to make an informed assessment of the prospects of the issuer, the proposed project and the features of the digital asset (offer document). An offer document shall be valid for 12 months after its acceptance by the SRO or, if later, successful completion of its review by CEZA. The DATO rules also require the issuer to publish the offer document in electronic form.
The offer document should include details about the offer, the issuer, the issuer’s principal activities, the issuer’s directors and officers, benefits for third parties and other expenditure, and the issuer’s financial track record.
Asset-backed DATOs are subject to additional rules provided in article VI of the DATO rules. In general, there is a prohibition on making asset-backing representation in relation to one or more digital assets unless the issuer has made, and continues to make, an asset-backing disclosure. Either the CEZA determines that an asset-backing certification is not required, or an asset-backing certification has been made by an asset-backing auditor in respect of each of the digital assets to which the asset-backing representation relates.
Among others, the DATO rules also require issuers to comply with applicable laws and code of conduct to be developed by the SRO, and ensure adoption of mechanisms in respect of security, confidentiality, and disclosure of information. Non-compliance with provisions of the DATO rules subjects erring parties to stiff penalties under article IX.
Based on the foregoing regulatory developments in the Philippines, we foresee that the country will continue to welcome cryptocurrency business. Considering that regulators appear to be receptive and open to communication with industry participants, future regulations will likely continue to foster development of the industry.