August 3, 2019 – This week, the Manila Ethereum Meetup Group organized an event where a panel discussion is held regarding the recently released “Draft Rules on Digital Asset Exchanges” by the Philippines’ Securities and Exchange Commission (SEC).
- Justin David – Chief Operating Officer, Bloom
- Tim Ying – Chief Executive Officer, GOW Exchange
- TJ Mendoza – Partner and Head of Banking and Finance, Quisimbing Torres
- Joel Tan-Torres – Partner, Reyes Tacandong & Co. (Former BIR Commissioner)
- Franco Dagelet – Business Head, VantageX
- Miguel Cuneta – Co-founder and Chief Community Officer, SCI Ventures
- Rafael Padilla – Co-founder, Blockdevs Asia Inc, (also moderator of the panel and chief organizer of the event)
In this meetup, the panelists were asked to share their opinions on some of the key takeaways of the Draft Rules on Digital Asset Exchanges.
A Digital Asset Exchange Has to Register with the SEC
“No person or entity shall form or operate, or enable another to form or operate a Digital Asset Exchange. (DAE).”
Tim Ying: We know that digital assets (like Bitcoin) can move across different exchanges, across different jurisdictions. While enforced to local exchanges, it might be difficult to enforce this to foreign exchanges accepting users in the Philippines. While it makes sense to register, it might be difficult to implement for all exchanges.
Atty. Padilla: Once you serve Philippine residents and offer securities to them, the Securities Regulation Code already applies. The problem is unlike the US SEC that has a long arm (meaning it can somehow enforce even outside the US), it might be difficult for the PH SEC to do the same.
Atty. Mendoza: SEC is never shy in issuing advisories for Foreign Exchange brokers targeting the country. So that is a precedent – that they can also issue advisories against unregistered DAEs.
Joel Tan-Torres: Eventually all the global regulators will come up with ways to regulate global digital businesses.
Digital Asset Exchange Must be an SRO
“No applicant for registration as a Digital Asset Exchange shall be approved, unless registered as a Self-Regulatory Organization under these Rules.”
Atty. Padilla: Is this commercially feasible, or an opportunity for exchanges to consider consolidation?
Joel Tan-Torres: The intent here is to make an organization independent in terms of structures, financing, and fees but still has to comply with these rules.
Capitalization of Php 100 million ($2 million)
“Applicants desiring to register as a Digital Asset Exchange in accordance with these Rules shall maintain in fiat form the an initial paid up capital of at least Php100,000,000as a minimum. In addition to the above, the Digital Asset Exchange is required to hold regulatory capital equivalent to twelve months of operational expenses.”
Miguel Cuneta: It seems a lot if you are a startup. However, with a lot of money coming from all these transactions, I guess it is just to make sure that the company has enough capital to sustain itself, making sure they are not fly-by-night operations.
Atty. Padilla: I guess it makes sense if you consider the fact that you are setting up a financial infrastructure. (Also, could be reasonable for an SRO as the companies making up the SRO can divide it themselves).
Atty. Mendoza: Since the SEC is asking for comments, we can request the Commission to review this or relax the requirements especially if you have other licenses (EMI, etc) that pretty much tackle and are in relation to digital assets.
Registration fee of Php 50,000 and Additional Fees on top of transactions happening in the exchanges
“No application for registration as a Digital Asset Exchange shall be processed except upon payment of the registration fees of Php50,000.00 plus a Legal Research Fee (LRF) of Php500.00.”
Everyone agrees that the registration fee of Php 50,000 is reasonable.
Franco Dagelet: When benchmarking with established exchanges, it’s just 1 basis point. It’s still large, could be 5% of the revenue but reasonable. However, as there will be more exchanges in the future and more competition, it could decrease.
SEC also has the power to review the DAE’s listing of a digital asset
“No digital asset may be listed in a Digital Asset Exchange without the Digital Asset Exchange securing the review of the Commission to such listing, among others.”
Everyone agrees this is reasonable.
“Prohibited Market Manipulation Activities, Representation and Conduct”
Atty. Padilla: SEC might think of a potential conflict of interest.
Franco Dagelet: This might completely shut down the IEO Market (IEO – Initial Exchange Offering – refers to the practice of selling initial tokens using a trusted exchange. Refer to this article to know more about Initial Exchange Offerings.)
Tim Ying: Given that this is the current standard practice in fundraising for crypto and blockchain companies, this rule might be a little bit premature in terms of where we are as an industry.
Atty. Padilla: It’s also possible that this rule is SEC’s rejection of that current standard.
On the subject of staking, an audience member poses the question of what happens when Ethereum moves to proof of staking.
Atty. Padilla: It’s possible that SEC might create exceptions for this phenomenon.
Audience member: Because right now, in some exchanges, when the customer does staking, they are going to earn something, nothing goes to the exchange. Perhaps these requirement needs more nuance and suggestions from the people who are actually doing crypto trading, staking, etc).
Customers only allowed to purchase digital assets worth up to Php 50,000 or else sign a waiver
“No user shall be allowed to purchase Digital Assets through the Digital Asset Exchange exceeding in aggregate an amount equivalent to fifty thousand pesos (Php 50,000) during any 12-month period, unless the user executes a waiver, in written or electronic form, of the investment limitation.”
Tim Ying: A waiver might be executed every single time (because there are traders who definitely trade more than that amount.)
Atty. Padilla: This is problematic because this is easily avoidable. The question is whether it is good to set it at 50K. However, if the SEC is serious in the implementation, maybe they need to be stricter when it comes to the exception.
Justin David: Given that the SEC is doing this for “public protection”, this rule is probably targeted to the C – D market segment, they are the ones these rules will protect. But in the global perspective, 50k is small.
Miguel Cuneta: If we look at the many people investing on pyramid and shady investment schemes, if you sign a waiver, you are saying that you understand what you are doing, including the risks. Of course, if it’s easy to bypass this exception (by signing a waiver), then what’s the point?
Audience member: Us here and the government are looking at this in different perspectives. We know this (cryptocurrency) is going to be big, the government (does not) and will look at it on the view of protecting the consumer. We understand why do it, but if we educate them more, they will know and understand why this limitation is laughable.
On the Subject of Market Manipulation
Everyone agrees this is standard and okay.
Justin David: It could be difficult to enforce especially to illiquid tokens like those in ICO that have very low volumes.
“Any unregistered Digital Asset Exchange existing immediately prior to the effectivity of these Rules shall file an application for registration in accordance with these Rules within forty-five (45) days from effectivity, unless falling under any of the exemptions provided under these Rules.”
Franco Dagelet: Realistically, it’s almost impossible to comply within 45 days.
Atty. Padilla: If we look at the “rules for crowdfunding”, registrants there was given a period 3 months so perhaps that is something we can suggest when we deliver our comments to the SEC.
Other provisions noticed by the panel are the following: 1) Deposit and withdrawal addresses need to be identified 2) The use of multisig 3) a recovery mechanism for lost private keys.
At the end of the discussion, each member of the panel gave final thoughts with regards to the discussion. The consensus: While the SEC’s draft rules on digital asset exchanges is a step in the right direction, in its current form, it isn’t satisfactory. The community is encouraged to submit their position papers and comments so that the SEC can improve these rules.
For this article, we will end it with a quote from one of the audience members who also shared his thoughts:
Audience member: With the high barriers currently proposed, big exchanges where majority of Filipinos trade will have to assess whether registering in the Philippines is worth the trouble, while small exchanges might close down before they can even begin. Only those with the highest available resources will be able to fully qualify. This translates to a few players and potential oligopolies, which is against what we’re fighting for via blockchain and decentralization.
This article is first published on BitPinas: [Recap] Recent Blockchain Meetup in Manila Discussed PH SEC’s Draft Rules on Digital Asset Exchanges