Does SEC Tag Crypto as Security Under the Financial Products and Services Consumer Protection Act?

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Editing and Additional Reporting by Nathaniel Cajuday

  • Aside from protecting consumers on a wider scale, the new draft of RA 11765 prepared by the Securities and Exchange Commission also highlighted that “tokenized securities products” will also be included under Section 3.1 of Republic Act No. 8799, or the Securities Regulation Code (SRC).
  • This may include those that grew with the abstraction of key characteristics from cryptocurrency’s underlying distributed ledger technology to apply in the traditional financial sector.
  • However, Atty. Rafael Padilla, a lawyer specializing in the financial technology and blockchain industry, explained that the new draft does not classify cryptocurrencies as security, tokenized securities are. 

Following the release of the Implementing Rules and Regulations (IRR) for Republic Act No. 11765, or the Financial Products and Services Consumer Protection Act (FCPA), will the Securities and Exchange Commission (SEC) have more jurisdiction over cryptocurrencies?

Financial Products and Services Consumer Protection Act

Passed into law in May 2022 by then President Rodrigo Duterte, RA 11765 aims to protect the interests of financial consumers by strengthening the country’s financial regulators by providing them with rule-making, surveillance, inspection, market monitoring, and more enforcement powers. 

Its IRR, prepared by the Commission, will be applied to all financial products and services—securities, investments, payments, remittances, and other similar products and services—and financial service providers that aim to provide consumers better protection from investment scams and fraudulent activities. 

Basically, it is expected to strengthen the regulatory powers of financial regulators, namely the Bangko Sentral ng Pilipinas, the Insurance Commission, the Cooperative Development Authority (CDA), and the SEC.

The regulatory agency will also have the following stricter measures:

  • power to formulate its standards and rules, conduct market surveillance and examination, require financial service providers and their third-party agents to submit reports, and impose enforcement action against non-compliant financial service providers. 
  • define investment fraud as any form of deceptive solicitation of investments from the public, which includes Ponzi schemes and other schemes involving the promise or offer of profits or returns that are sourced from the investments or contributions made by the investors themselves.
  • require investment advisers to file their applications with the Commission within 90 days from the effectiveness of the memorandum circular.
  • require the staff of financial service providers that directly deal with consumers to undergo adequate training suitable to the complexity of the financial products or services they offer.
  • punish the lawbreakers by one- to five-year imprisonment or a fine of ₱50,000 to ₱2 million, or both. 
  • impose a fine of ₱50,000 to ₱10 million for each instance of investment fraud and not more than a ₱10,000 fine for each day of continuing violation.

SEC on Digital Items, Crypto, and Crypto Exchanges

The SEC has been active in issuing public advisories against entities that entice the public to invest in their investment schemes. The common denominator among these entities is offering a digital item or token, or even deceiving their investors into letting them invest the money in crypto. 

One basic example is CSTMINE.COM, an illegal investment scheme posing as a crypto mining platform, for being an unregistered entity to sell securities, which also possesses a Ponzi Scheme.

Another example is a proposed crypto exchange and trading platform, BITBANKUPS.COM, which offers guaranteed profit through commissions and expects its investors to put in an initial capital of at least $100.00 to $5000.00, all in USDT or Tether2. However, investors reported that they were not able to withdraw their investments when the website closed and became inaccessible.

With these, the Commission issued an advisory in September 2021 that cautions the public to be mindful when dealing with unregistered entities, corporations, and organizations. These unregistered entities include foreign currency (FOREX) brokers and exchanges, digital asset/cryptocurrency/virtual asset exchanges, decentralized finance (De-Fi) investment platforms, yield farming and staking platforms, multi-asset/multi-security brokerage companies, websites for securities token offering or token generation, illegal investment scheme websites, binary options trading apps, pay-to-click or ck/captcha websites, “play-to-earn gaming” platforms, various fiat/cryptocurrency gambling websites, and various cryptocurrency-related investment websites.

The regulatory agency then reiterated the public advisory before 2022 ended against using unregistered and unlicensed cryptocurrency exchanges operating in the country. This follows the recent collapse of a large international exchange, specifically the FTX, which left many unsecured creditors with little chance of recovering their money.

While last September, the SEC also asked the Senate to draft legislation addressing the issues and loopholes within our regulations concerning cryptocurrencies and digital assets. According to them, the Commission does not have the power to control other cybercrimes that involve digital assets and was only able to shut down investment scams that are considered investment solicitations that violate the Securities Regulation Code. The Bangko Sentral ng Pilipinas (BSP) also expressed the same concerns. 

Does SEC Tag Crypto as Security?

Aside from protecting consumers on a wider scale, the new draft of RA 11765 also highlighted that “tokenized securities products” will also be included under Section 3.1 of Republic Act No. 8799, or the Securities Regulation Code (SRC), noting that this may include those that grew with the abstraction of key characteristics from cryptocurrency’s underlying distributed ledger technology to apply in the traditional financial sector.

As defined by the regulatory agency, security tokens are virtual currencies, items, and assets created through a smart contract and are used as payment, utility, and asset tokens that satisfy the definition of security under the Securities Regulation Code.

In a tweet, Philippine Daily Inquirer business reporter Miguel Camus claimed that the law classifies cryptocurrencies as securities.

However, it must be clear that tokenized securities are not the same as cryptocurrencies, Atty. Rafael Padilla, a lawyer specializing in blockchain and a  BitPinas contributor, replied, reiterating that the new regulation on securities does not equate to directly including crypto into the SEC’s jurisdiction:

“I disagree. Not with the SEC, but with this tweet. This excerpt doesn’t say anything about crypto being classified as security. Tokenized securities are, for obvious reasons, correctly treated as security, but the excerpt doesn’t say that crypto = security.”

In a separate article, Padilla cited SRC to explain what securities are, noting those are “shares, participation, or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, or instrument, whether written or electronic in character.”

“Merely calling a digital asset a ‘utility’ token or structuring the token to provide some utility does not prevent the token from being viewed as a financial instrument or a security. Tokens and offerings that incorporate investment features and marketing efforts that emphasize the potential for profits based on the entrepreneurial or managerial efforts of others contain the hallmarks of a security under the Securities Regulation Code,” he wrote

It can also be recalled that in 2020, the Commission has issued the Rules and Regulations Governing Initial Coin Offerings, which govern the conduct of ICOs wherein convertible security tokens are issued by start-ups and registered corporations organized in the country through online platforms.

Though ICOs issued through other means or media other than online electronic platforms are not covered by the said rules and regulations, the SEC still insists that the requirements under the SRC still apply. 

This article is published on BitPinas: Does SEC Tag Crypto as Security Under the Financial Products and Services Consumer Protection Act?

Disclaimer: BitPinas articles and its external content are not financial advice. The team serves to deliver independent, unbiased news to provide information for Philippine-crypto and beyond.

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Shiela Bertillo

    BitPinas is the leading and most trusted blockchain and cryptocurrency news outlet that covers the Philippine blockchain and crypto scene. We are also writing general and international blockchain topics that are relevant to our audience.