The latest blockchain meetup in Makati provided an avenue to discuss the recently released draft rules on initial coin offerings by the Philippines’ Securities and Exchange Commission.
The draft rules released by the commission has become a widely discussed topic in blockchain circles in the Philippines and covered by the media abroad. This is expected, as the pending rules will dramatically change the ICO landscape in the country.
Utility vs Security Tokens
Security tokens are tokens whose purpose, among other things, is to increase in value. Utility tokens are tokens intended to provide access digitally to an application or service. (Read: Different Types of Tokens According to PH SEC)
The SEC draft rules state that the commission will presume that all tokens are securities unless they see it otherwise. According to the meetup organizer and moderator Atty. Rafael Padilla, Legal Head at SCI Ventures, we can safely say that the SEC is only interested in regulating security tokens.
If the commission decides that your token is not a security, you may proceed with your ICO. To further explain, if the SEC decides that the token is purely for utility purpose, and this is further reinforced by judicial doctrines like the Howey Test, the commission will not regulate and there’s no need to register.
If the application is rigorous, will the ICO just go somewhere?
In the draft, we can see the rigorous process that the commission wants the coin issuing company to undergo. The initial assessment alone requires too many documents already. Atty. Padilla said that this is because the regulator wants to arrive at an informed judgment so that they can back their decision when they decide that your token is a security or not a security.*
*The draft rules have different token classifications, such as payment tokens, asset tokens, etc. However, all these tokens can still be a security token, according to SEC, unless they deemed it to not be the case.
For Mr. Mark Vernon, founder of TagCash, it is clear that SEC simply doesn’t want scams to pretend as ICOs. But there is a risk, he said, in making the application process rigorous. “If the process is too complicated, the issuer will just go to another country to launch their ICO,” he said.
Afterall, ICOs are borderless. What matters is how you market it. Mr. Ramon Tayag of Bloom Solutions confirmed that they did not market their ICO for BloomX in the Philippines because they are waiting for the rules.
Why Burden the Issuer? What about the Timing? Why Escrows?
Mike Abundo from Reel Media raises interesting points during the discussion. Why should the burden of proof be on the issuer? To which Mr. Vernon replied, “because people try to present themselves as utility but they really are a security.” Johan Sten, the creator of Stargazer wallet, further mentioned that there are many ICO whitepapers that contain 30 pages of content but only has 1 sentence or paragraph of explanation about the token being a utility.
The timing is another point of discussion; SEC released the draft rules just as the Cagayan Economic Zone Authority (CEZA) in Northern Luzon is busy in bringing 25 blockchain companies to build a blockchain hub in Cagayan. Although, some attendees in the meetup noted that this is SEC’s response to the failed effort last year of a Calata-led project to convert stock shares and entice investors in the Philippines to invest in Krop Coins.
Next, the draft rules also stated that the ICO is required to keep the proceeds under escrow with a reputable independent escrow agent. The attendees agreed that smart contracts are better to be utilized in this regard. Atty. Padilla, however, mentioned that at the moment, the regulator is more trusting of third-party escrow systems as they don’t have the confidence yet that the technology (smart contracts) will be able to secure it.
What about more types of tokens?
Everyone agrees that there’s a lot of crossover between the tokens. Tokens can even be classified further, but it will be difficult, according to Colin Goltra of Coins.ph, to create specific rules for each of them.
Also, there may be more risk, according to Mr. Goltra; more money will go to those who can understand how to navigate these regulations. It is valuable, but with multiple categories of tokens, more money will not go to the product but will be invested in persons who can navigate the laws.
With that, Mr. Vernon said the simpler the better, so that retail investors will be able to understand and will get offered to participate.
The SEC created these draft rules in order to protect the public as they know that there are a lot of abusers. However, points can still be made clearer (even though, the lawyers in the meetup argued, that the draft rules are actually simpler than other laws such as the securities and regulations code).
Two key points before the meetup wrapped up. 1) The rules can still be made simpler 2) The official rules is scheduled to be released before 2018 ends. The public is encouraged to submit comments to the SEC regarding the draft rules. Blockchain companies and groups will also be submitting their position papers.
All eyes are on the Philippines as the government, through the commission, formalizes rules regarding initial coin offerings. If this pushes through, we’ll have legal ICOs, whether they are security tokens or otherwise, by 2019.
Photo from Blockchain Space
The event: Stellar + SECs Draft ICO Rules Discussion is organized by the Makati Digital Currency Meetup.