Is digital money a security?

What do Paris Hilton, the stunning hotel heiress, and Floyd Mayweather Jr., the boxing champ with a ripped body, have in common?

 No, it’s not Manny Pacquiao, Hilton’s boxing idol and whom Mayweather beat years ago. 

What they have in common is that they are both riding the wave of the red-hot crypto currency phenomenon and share the belief that the future of finance is crypto tokens. Both have endorsed initial coin offerings (ICOs), sending jitters to the US Securities and Exchange Commission. 

Indeed, long before US corporate regulators can even decide on the nature of digital currency, this so-called virtual money has grown at a dizzying speed.  And celebrities are endorsing it. 

Regulators around the world can’t decide just yet if crypto currency is indeed a financial security like stocks that need to be regulated. 

They have issued flashy warnings, but some have no teeth. 

Here at home, the same confusion is hounding regulators. 

The good news is that our very own SEC has finally issued an advisory against ICOs. The bad news is, the fine print isn’t so fine. The advisory comes after KROPs, a mobile app founded by Joseph Calata, launched an ICO late last year.

The SEC said, “when a virtual currency is likewise analogous to any of the types of securities under Section 3.1 of the Securities Regulation Code (SRC), there is a strong possibility that the said virtual currency is a security under the jurisdiction of the SEC and has to be registered and necessary disclosures have to be made for the protection of the investing public.” 

“Where the scheme involves the sale of securities to the public, the SRC requires that the said securities offered are duly registered and that the appropriate license and/or permit to sell securities to the public are issued to the corporation and/or its agents, pursuant to the provisions of Section 8 and 28 of the SRC,” the SEC also said. 

The SEC’s advisory leaves room for interpretation. All that an entity needs to do is to prove that his virtual currency is not a financial security. 

Perhaps, the SEC really needs to determine once and for all, whether a virtual currency is indeed a security or not.  It can come up with a more defined legislation. 

China did just that. It became the first country to ban ICOs entirely. South Korea followed. 

The SEC said the ICO becomes a security if it includes an investment contract, which in turn, is presumed to exist whenever a person seeks to use the money or property of others on the promise of profits. 

Again, entities can skirt around this. 

Arnold Spencer, the general counsel of Coinsource, a Bitcoin ATM operator in the US, gave a good analogy to really determine if a virtual currency is a security or not. 

“If you buy an interest in a golf course to make money, it is a financial investment and therefore a security. If you buy shares to join the club, it is not a financial investment and not a security,” he said.

 But regulatory confusion is normal especially with the rapid changes in the world – new ways of doing business and new financial methods. 

What is digital currency? 

When I sat down with the people of ConsenSys, a block-chain technology company, to understand digital money for the first time, I hardly touched my sashimi, considering that Japanese cuisine is my favorite. 

For hours, all I could do was to take down notes and try my best to understand the whole digital currency world. 

I left the restaurant more knowledgeable on the subject than when I walked in but still hardly an expert. 

Virtual currency refers to a digital representation of value issued and controlled by its developers and accepted by users. An ICO is the first sale and issuance of a new virtual currency to the public usually for the purpose of raising capital. 

Crypto currency has become the Wild, Wild West of the financial world. I believe regulators around the world need to regulate this without being too restrictive. 

They need to work double time to catch up and find a balance. 

When stocks were introduced to the world, it was also met with confusion, fear and madness. 

Stocks or shareholdings in companies started during the Roman era but it was the Dutch East India Company, a pioneer in the spice trade that conducted the modern world’s first initial public offering in the 1600s.

The rest of the world followed, but only after rules were eventually sorted out.  

This is what is happening now in the digital world.  It’s as if crypto currency suddenly exploded while regulators around the world were asleep. 

It’s now time to catch up because changes are happening at remarkable speed. 

We don’t want to just watch the next financial crash happen because we were caught up in our own confusion. 

More and more celebrities will be endorsing virtual currencies and their followers, not surprisingly, will take the cue. 

I wouldn’t be surprised if Manny Pacquiao soon joins the fray. After all, his glamorous fan has done it, and his nemesis, too. 

Iris Gonzales’ email is [email protected]