SAMANTHA POBLACION

On the eve of December 17, 2017, the price of the world’s first and most-traded virtual or cryptocurrency, Bitcoin, reached an all-time high of $19,783.21 since the publication of Satoshi Nakamoto’s white paper on the use of Bitcoin in 2009, when each coin had practically no value. The phenomenal increase made “hodlers” (the crypto space jargon for long-time Bitcoin holders) millionaires. Even as the price later dropped, plateauing at just below $7,700.00, the trading volume has consistently risen to what is now almost $5 billion in a 24-hour cycle as of this writing.

The decline of Bitcoin’s price did not deter the community’s enthusiasm for the future of crypto space and the uses of its underlying technology called the blockchain.

Filipinos are active players in the virtual currency space. For the first half of 2017, virtual currency transactions to and from the Philippines have reached a daily volume of $8 million. The Bangko Sentral ng Pilipinas (BSP) recently reported 29 pending applications for virtual currency exchange registrations, after several exchanges had obtained approval to operate. In the meantime, several local companies have launched token sales to crowdfund projects utilizing Ethereum and other open-software platforms based on blockchain technology. Many of these projects or decentralized applications (DAPPs), possible only with blockchain, are turning out to be innovative and useful. In these instances, the tokens/coins being sold will or already have actual utility within the DAPP’s ecosystem. The proceeds from a token sale are used to fund the completion or expansion of these projects.

The lightspeed and global adaptation of virtual currencies and blockchain technology are causing regulators to examine whether they should, and, if so, how they should, regulate these activities.

In the Philippines, the BSP recently issued Circular 944, which focuses on the regulation of virtual currency exchanges. While the BSP has categorically declared that virtual currencies are not legal tender, it understood that it could better monitor virtual currency transactions by regulating the local platforms that provide trading services. In this circular, the BSP treats virtual currency transactions the same way as those facilitated by remittance and transfer companies, money changers and foreign exchange dealers. The BSP treats virtual currencies as assets, moving to and from exchanges, similar to fiat money.

The Philippine Securities and Exchange Commission (“SEC”), on January 8, 2018, issued an advisory on certain companies, individuals or groups of persons enticing the public to participate in so-called initial coin offerings (ICOs) and to purchase the corresponding virtual currency. The SEC advised that, “some of these new virtual currencies, based on the facts and circumstances surrounding their issuance, follow the nature of a security as defined by Section 3.1 of the Securities Regulation Code.”

The SEC noted that under Section 3.1 of the SRC, a security includes an “investment contract,” which is “presumed to exist whenever a person seeks to use the money or property of others on the promise of profits.” In the case of a security, the SEC warned that the virtual currency has to be registered and necessary disclosures made for the protection of the investing public.

Our regulators should take care not to unnecessarily regulate or over-regulate these virtual currency transactions. Otherwise, we will find these transactions simply moving overseas.

Regulation, if necessary, should not stifle the myriad innovations that blockchain technology has brought or will continue to bring about. Both the BSP and the SEC stand a better chance at effectively regulating the virtual currency space by adopting an inclusive approach, and creating a sandbox environment where both innovation and regulation efficiently coexist.

Samantha L. Poblacion is a senior associate of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, deal, and litigation lawyer. The contents of the above article are intended for general information purposes only and do not constitute legal advice. If you have any question or comment regarding this article, you may email the author at [email protected] or visit MTF Counsel’s website at www.mtfcounsel.com.