SEC offers reasonable prospects for ICOs
BEN KRITZ
IT took them long enough to complete the task, but the proposed new rules for the regulation of initial coin offerings (ICOs) presented by the Securities and Exchange Commission (SEC) this week turned out to be worth the wait.
Under the proposed rules, any prospective ICO will have to submit to screening by the SEC to determine whether it should be registered as a security. ICOs by their very nature are securities, so virtually every one that is proposed will fall under the new regulations. The open-ended language of the rules simply allows reasonable exceptions for ICOs with limited applications.
The proposed rules are fairly detailed – they’re about 37 pages in length – but in general subject ICOs to the same qualifications as any other security. The ICO must be offered by a Philippine company, or a foreign issuer that has established a local branch office. The ICO must have a clearly stated purpose relevant to the local market and economy and the issuer must meet normal standards of competence to issue and manage a funding instrument.
Whatever debate and adjustment the proposed rules might need should be limited to the technical details of ICOs, and the information that should be included in a prospectus. The fundamental standards for qualifications of issuing companies, responsible personnel, the purposes of ICOs, and protection of investors are sound as the SEC has presented them.
Whether or not potential ICO issuers will view the new rules that way remains to be seen, but they should accept them and recognize the SEC regulatory proposals for the opportunity that they really are.
As a concept, the ICO is a reasonable application of blockchain technology, and represents a step toward maturity for something that was originally created as naively optimistic alternative to actual money. In actual practice, however, the management and outcomes of ICOs have been a little dubious, because their development got ahead of appropriate regulation and established a couple of highly undesirable characteristics for the funding tool. They set a very high risk threshold for investors, and in most cases avoid paying any sort of tangible returns, promising investors an exchange of questionable value. Abusive speculation and pure fraud have become epidemic as a consequence. In a report last year by the well-known ICO advisory firm Satis Group, it concluded that eight out of 10 ICOs launched in 2017 were outright scams.
Although some ICO issuers might balk at being “mainstreamed,” so to speak, the existence of a set of clear guidelines and regulations immediately improves ICO market by discouraging those who dont have honest intentions. The effectiveness with which the SEC conducts its appraisal process can only be judged certainly in practice, but on paper at least, its proposed rules present a framework that goes beyond eliminating potential scams to weeding out ICOs that are well-intentioned but otherwise unrealistic or unacceptably risky ideas.
If all goes well, what the SEC will have provided is an ICO environment where both potential issuers and potential investors are assured that any risks encountered are not significantly greater than what should be expected of any other capital-raising venture like an IPO or bond issue, and that business processes and protections for both issuers and investors are handled in a consistent fashion.
Establishing this kind of environment is important, and potentially gives the Philippines a competitive edge, because the legitimately practical uses of blockchain technology beyond the economic dead ends of “alternative currency” and “tradable securities” are still at a nascent stage. There have been advances in using blockchain for certain types of financial transactions, such as international trade transactions or overseas money transfers.
Despite the widespread abuses, the few successful ICOs that have been applied to project or business expansion funding have demonstrated that the concept is viable if managed well.
Provided the SEC does its job according to the plan it has laid out with the proposed ICO regulations, the Philippines will become one of the first places in the world where ICOs are indeed managed well, and that should attract a great deal of interest and investment that will ultimately benefit the local economy. There are of course many “ifs” that could derail those aspirations, but so far, the SEC seems to have gotten off on the right foot.
ben.kritz@manilatimes.net
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