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By: Samantha L. Poblacion on July 25,2019

There have been several major developments in the virtual currency space since our article, entitled “Regulating the Virtual Currency Space”, which was published on July 8, 2018.

In the said article, we mentioned that the Securities and Exchange Commission (SEC) issued an advisory to the public on the proliferation of ’initial coin offerings’(ICO), the street parlance for what has now been defined as “digital asset token offerings” (DATO), by relevant regulators. The advisory is concerned that most of these DATOs being peddled involve digital assets which take the nature of an investment contract or a security.

Under the Securities Regulation Code, any security being offered to the public has to be registered with the SEC and necessary disclosures must be made for the protection of the investing public. On August 2018, as an acknowledgment that digital assets have already established a firm foothold in the country’s investment sector, the SEC released a set of draft rules on regulating ICOs (now DATOs), for public review. Under these draft rules, any attempt or offer to sell digital asset tokens to Filipinos must undergo an ‘initial assessment request’ with the SEC to determine if the token offered is a security or not. To date, the final set of rules has yet to be released.

The most significant developments in the local virtual currency or asset space come from the Cagayan Economic Zone Authority (CEZA), which touts itself as the country’s financial technology (fintech) sandbox and the future “Crypto Valley of Asia”. And it would seem that CEZA is attempting to achieve this status at a fast clip.

On May 2018, CEZA launched its Financial Technology Solutions Business Enterprise (FTSBE) and Offshore Virtual Currency Exchange License Program (OVCE). This program enables foreign entities to obtain a license in the Philippines to operate a regulated offshore virtual currency exchange. One such virtual currency exchange which has obtained a CEZA OVCE license is Cryptosx Digital Assets Exchange. Cryptosx, as a digital asset token exchange platform which uses distributed ledger technology, or blockchain to digitize assets and package them into smart contracts that can be rapidly deployed across markets and jurisdictions. It also uses blockchain for KYC (know-your-customer) and anti-money laundering verifications before prospective investors can access its platform and subscribe to Cryptosx DATOs, which can be accessed across 30 countries.

On Feb. 4, 2019, after releasing its offshore digital asset exchange license framework, the CEZA approved and released its own regulations governing initial public offerings of DATOs, designed to regulate the virtual currency space, protect investors and create a more precise regulatory framework for the acquisition of DATOs, whether as security or utility tokens. Under these regulations, the tokens offered must be listed in a CEZA-constituted OVCE. The framework will be mainly regulated by CEZA, while a group called the Asia Blockchain and Crypto Association (ABACA) serves as a self-regulatory organization to enforce the said framework. With these regulations, the CEZA has effectively overtaken the SEC’s timeline for the release of its own DATO rules, supposedly, in early 2019.

On July 4, 2019, CEZA announced it has certified the Flourish City Development Limited (FCD) DATO, which serves as the first-asset-backed token approved by CEZA. FCD is a leading plantation owner, developer and producer of agarwood. The FCD token symbol is AGWD, and will be backed by one FCD common share. AGWD will be traded exclusively on Cryptosx. As mentioned, Cryptosx holds a CEZA-issued license to operate an OVCE. The FCD DATO is being overseen by First Bullion Holdings (FBH), which will release the offer document in its website, as well as instructions on how to subscribe to the DATO. FCD hopes to raise $4.9 million from its DATO.

Coming at the heels of CEZA’s first certified token offering, the SEC has released its own set of draft rules digital asset exchange (DAE) on July 16, 2019. The SEC DAE draft rules function in the same manner as CEZA’s OVCE regulatory framework, but instead of governing offshore exchanges, the SEC’s draft rules govern registration and operation of an exchange in which digital assets are traded on an online platform accessible in or from the Philippines. Some of the notable points of the SEC’s DAE draft rules is the more precise definition of a digital asset and the requirement of P100one hundred million pesos initial paid-up capital, which must be in fiat currency. It would also seem that trading digital assets using methods other than through an electronic online platform will not be covered by these proposed rules but by the Securities Regulation Code.

Considering the rapid assimilation of digital asset tokens into the Filipino’s investment portfolio, a legal and regulatory framework has become imperative, which will balance both public interest without undue restrictions on FfinTtech developments. The CEZA’s frameworks pave the way for the SEC to issue its own regulations. Thus, we hope that the SEC will be able to approve and release its own regulations soon. After SEC shall have released and finalized its own regulations, we shall then make more in-depth discussion of these rules, vis-à-vis the CEZA regulations.pave the waySEC to issue its own regulations. Thus, wethat will After SEC shall have released and finalized its own regulations, wethen .

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