The Security and Exchange Commission [SEC] of Philippines has issued a recommendatory note on cryptocurrency cloud mining contracts. It says the Howey test should be applied to them to classify the contracts as securities.
Howey test is a test that was created by the Supreme Court of USA to determine whether certain transactions had qualified as Investment Contracts. If they did, they were considered as securities and were subjected to disclosure and registration requirements.
The Howey test makes a transaction as an investment contract if it satisfies five factors. They include:
- If its an investment of money
- There is a chance of obtaining profit from the investment
- The investment of the money is in a common enterprise
- The profit comes from the effort of promoter or third party
- Whether the profit that comes from an investment that is partially or totally outside of the investor’s control, if its then it is a security. But if the investor’s actions dictate whether the investment is profitable, then it is not a security
The SEC Commissioner had earlier, in a news conference, stated that they intend to take a direction where the consideration of cryptocurrencies as securities is possible and if that happens, the security Regulations Code will be applied.
“The heightened frenzy and increasing popularity surrounding initial coin offerings has pushed authorities to lay down new rules to protect consumers.”
This comes in the backdrop of the bill which was filed to impose stricter penalties for cryptocurrency related crimes as the complexity of the investigation process increases. It added that all crimes which were described by revised penal code would incur a penalty of one degree higher if the crime involved the use of virtual currency and suggested the seizure of the cryptocurrency from the guilty party.
The senator who filed the bill, Leila de Lima, in a press release had added that because of the anonymity and pseudonym character of the users, law enforcement agencies will encounter difficulty in tracing the users and hence the need for a higher penalty is warranted.
The SEC further made it mandatory that all the brokers, dealers or salesman or recruiters who are involved in bringing over new users to invest in the contracts must obtain registration and failure to comply will be regarded as an unregistered issuance of securities which is liable to prosecution with a maximum penalty of 21 years of imprisonment.
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