SEC to check cryptocurrency firms

The Securities and Exchange Commission (SEC) isn’t ready to ban coin offerings, a form of crowdfunding that has taken Silicon Valley and Wall Street by storm since last year, but it has vowed to run after firms abusing this scheme to sell unregistered securities here.

In a press briefing on Monday, SEC Commissioner Emilio Aquino said that while other countries like China and South Korea had outrightly banned coin offerings, the local corporate watchdog was still looking at this new fund-raising scheme and how it would benefit the people.

“We’re believers in technology, too, but at the same time, it’s not technology but the bad behavior of people taking advantage of the technology that we want to look at. If it will really help start-ups, why not?” Aquino said.

The briefing was held to explain the SEC’s issuance of a cease-and-desist (CDO) order against the ongoing initial coin offering (ICO) of Krops, an online marketplace for farm produce led by controversial businessman Joseph Calata. The CDO was also slapped against affiliates Black Cell Technology Inc., Black Sands Capital Inc. and Black Cell Technology Ltd.

The SEC is studying a new framework for ICOs that will be distinct from an upcoming framework on crowdfunding. But ahead of the issuance of any specific framework on ICOs, the SEC’s position is that if what an entity is selling qualifies as securities, these must be registered with the SEC before being offered to the public.

One possible regulatory direction for the SEC is to allow coin offerings in the Philippines but for distribution only to “accredited” investors, or those who have the “necessary” background to understand this instrument, which has been described as volatile and highly speculative by the International Organization of Securities Commissions.

“As it is now, small and big investors don’t understand it. Some people with a certain level of financial literacy will understand, in that sense, it’s possible that we can give exemptive relief (from registration). We’re looking at that,” Aquino said.

Aside from Krops, Aquino said the SEC was looking at some other companies doing the same coin offerings.

Coin offerings, also known as token sales or coin sales, typically involve the creation of digital tokens—using distributed ledger technology—and their sale to investors by auction or through subscription, in return for a cryptocurrency such as bitcoin or ether. These offerings are not standardized and their legal and regulatory status is likely to depend on the circumstances of the individual offering.

The cryptocurrency system recently suffered a big blow after hackers stole $530 million worth of digital money from Tokyo-based cryptoexchange operator Coincheck, one of the biggest cyberheists on record.

Aquino said the SEC would need a little more time to craft its regulations on coin offerings.

“We just don’t want to come up with something that will stifle (markets) but neither do we want to be very lenient in the sense that I’m not going to judge Japan (on the Coincheck debacle),” he said.

Aquino said the SEC was now trying to compare notes with other regulators in the region like Malaysia, which was also trying to come up with a framework for coin offerings.

“That’s why we’re not ready to make a direct ban on these cryptocurrencies. It’s the nuisance claim that they can offer you so much, that they have these values and all. We really have to look at the technology and the people behind the technology, and the team and the community that’s supporting it,” he said.

In the case of Krops, the SEC declared its coin offering illegal, noting that the exercise was the same as a public offering of securities which should be subject to registration and strict disclosure rules, including the disclosure of pending cases against the founder, offeror and promoter.

As of Monday, Krops was still selling coins at a discount of 10 percent through its website, reporting that it had now sold 61 percent of 6.4 million available tokens.

“If they fail to heed and follow our order, then we will have to cite them in contempt. But I don’t want to preempt that, because they still have a five-day period to move for lifting (of CDO). It’s to their best interest to stop (offering) first and talk to us,” Aquino said.

The SEC ruled that the ICO of Krops satisfied all of the four elements of the Howey test, a test created by the US Supreme Court for determining whether certain transactions qualify as “investment contracts.”

1.It is an investment of money;
2.There is an expectation of profits from the investment;
3.The investment of money is in a common enterprise; and,
4. Any profit comes from the efforts of a promoter or third party.