Earlier this month, the Security and Exchange Commision (SEC) released a draft document to cover Initial Coin Offering (ICO) regulations, welcoming public comments until Aug 31, 2018. On Aug 16, 2018, The Philippine Association for Digital Commerce and Decentralized Industries (PADCDI) submitted its position paper containing collective comments from its members to elucidate legal ambiguities on the proposed ICO regulations.
ICO is a new process of fundraising that involves token creation, distribution and sale to finance a new or an ongoing project. This gives start-up companies access to funds from different types of investors, which used to be limited to venture capital funding. This opened a wider spectrum of investment opportunities, however, many people have been scammed due to lack of knowledge and protection. Now countries, including the Philippines are trying to regulate this new market, while this is the best way to move forward, regulations will make ICO a restricted business activity. PADCDI, on the other hand, provided valuable talking points on how they can address these ambiguities to make sure that the regulations will not hinder innovation.
According to the draft guidelines, SEC presumes that all tokens are securities unless proven otherwise. While this could ease the doubt over cryptocurrencies, classifying tokens as securities by default could be an obstacle for start-up companies. With this kind of provision, start-up companies will be forced to hire lawyers to justify their token classification, a budget that could be allocated to other important expenses. This can be optimized by putting standard assessment criteria for classifying tokens. PADCDI is willing to work with the SEC to fully qualify tokens and suggests that an assessment matrix should be used to distinguish token behaviors, security and non-security tokens (e.g. pure utility, reward, payment, points, redemption, etc.), instead of arbitrarily classifying tokens as securities.
Some individuals have expressed concern about how the process of legal justification may hamper innovation and flexibility in the field by pinning down existing issuers to either a security or non-security model, and by forcing new startups to weather potential repeated legal challenges from the SEC.
In Singapore, the regulatory position of the Monetary Authority of Singapore (MAS) is that tokens are classified as utility and therefore not regulated unless they exhibit characteristics of capital market products which includes securities, futures contracts, and contracts or arrangements for purposes of leveraged foreign exchange trading. PADCDI is pushing for the same position to lower the legal barriers to entry.
Sterling Tech (Sterling Openovate Corporation) commends the SEC’s efforts to engage industry players through PADCDI in its development of a regulatory framework for digital assets, crypto tokens, and Initial Coin Offerings. We aspire for a future where innovation is supported and accelerated by national policies and systems, and believe that the development of a landmark ICO regulatory framework presents an opportunity for the SEC to stimulate – rather than stifle – economic development. – Edgar John Ilaga, Business Development Manager, Sterling Tech; Product Manager, Monico; Deputy Head, Compliance Committee, PADCDI, told Bitchikka
PADCDI also suggested using smart contracts for escrow funding. A smart contract is a self-executing contract that enforces the agreement between parties when certain conditions are met.
“The SEC must qualify whether escrows should be actual entities, or if digital contract escrows can be used.”
The organization also foresees that a significant number of applications will be submitted to the commission upon implementation of the regulation, thus reviewing all the documents could burden the commission. According to the draft ICO regulations, SEC will have 20 days to conclude the initial assessment but may extend the period for another 20 days if needed. The commission is also given 5 days to communicate the result of the assessment in writing. Following this, the company conducting the ICO needs to go through the registration proper not later than 45 days before the start of their pre-sale period. This means that a company should factor in a buffer of at least 90 days for assessment and registration process. In a thriving industry such as this one, a streamlined and efficient process is crucial. On this note, PADCDI suggested that
“SEC timelines and default actions for processing of applications must be made more reasonable than provided for in the draft. PADCDI also hopes for – and would be happy to assist in – the online submission and tracking of initial assessment processes and security token registration process.”
Another point worth highlighting is the transparency of the fee structure for the review and approval process. According to PADCDI, this should be explicitly defined so that start-up companies would understand the fees involved in the application process.
PADCDI asks the Commission to explicitly define and state the proposed fees it intends to levy on prospective ICOs, and to make the review fees accessible to startups and companies that intend to use the funding methodology to accelerate their (legitimate) attempts at innovation.
Other talking points included in the position paper which were not mentioned above are:
- The Commission is suggested to align its requirements needed to be submitted for assessment to PADCDI’s requirements.
- A clear retroactive enforcement of the rules.
- Targeted enforcement should be applied to existing token holders.
- Identify departments that will be handling the review and approval process.
- A rubric, matrix, or other reasonably quantifiable assessment frameworks should govern the approval process.
Overall, PADCDI welcomes regulation in the hopes that it will not impede the industry’s growth. Here are some statements from PADCDI officials expressing their stance.
The initial rules on ICO’s is our government’s way of showing support to our industry. I am personally happy about it. there may be some items we need clarification with but in general, it’s a very fair set of rules. it will clearly weed out the scams in our industry. We have submitted our position paper to SEC this week and I hope and pray that they will seriously consider all the items we have highlighted for these will greatly help our industry.- Jayjay Viray, Founding Director, PADCDI, told Bitchikka.
PADCDI welcomes regulation in the blockchain and cryptocurrency space and it aims to encourage innovation. Striking the proper balance between the two will allow the burgeoning industry to grow and perhaps make the Philippines a thought leader in the space- Incoming Chairman, Paolo Bediones told Bitchikka.
“PADCDI welcomes the initiative of the Commission to engage and involve businesses and regulators in the creation of a pioneering policy leading to mainstream acceptance of digital assets, crypto assets, and tokens. PADCDI sees the SEC’s pioneering actions as the first step towards a future where innovation is accelerated by borderless, secure, transparent, and accessible trading and funding options. We would like to continue to push for more prescriptive policies that are more attractive for investors to take a deeper look at the Philippines”—Diego Jose Ramos, Director for Stakeholders, told Bitchikka.
According to ICOData, 1,042 ICOs have been launched this year, with a total of $6,638,705,749 raised. The country has a huge number of unserved and unbanked people making it a perfect haven for blockchain solutions to thrive. The Philippines should craft its ICO legislation to allow a more inviting environment to both innovators and investors. The regulators should heavily consider these suggestions presented by PADCDI.