‘Spring Cleaning’ Part 7: Is CEZA a Safe Harbor?

How the Cagayan Economic Zone Authority (Philippines) stole the region’s thunder

by Edmund Yong


The Cagayan Economic Zone Authority (CEZA) is a state agency formed in Feb 1995 to develop the Cagayan Valley, and reports into the Office of the President of the Philippines. It covers some 50 thousand hectares of land that extends to the northeastern tip of Luzon island.

It is strategically located at the crossroads of international shipping routes between the west coast of North America, Far East and Southeast Asia. According to its website, the Cagayan Freeport operates as a separate customs territory similar to Labuan in Malaysia and Hamburg in Germany. In May 2018, CEZA launched a brilliant licensing program to attract blockchain-based businesses and their investment dollars, including a public-private initiative to establish a Crypto Valley and Fintech Hub that will “catalyse the next economic boom destined to spread from Cagayan”.

Soon enough this caught the eye of the global crypto community that have becoming increasingly restless and anxious with regulatory uncertainty – CEZA’s neighbours are either putting down hardline prohibitions or not sure-footed on the direction to take. Geographically, CEZA is within striking distance of China, Korea, Japan, Hong Kong and Taiwan; a region where the crypto industry has gathered great momentum. English is the lingua franca of the land, which makes it compatible for American and European entrants looking for a beachhead in Asia. It also has a huge IT talent pool to draw from, after years of honing its advantage as a global BPO (business process outsourcing) hub.

Most of all, it doles out licenses to crypto trading platforms, known as Offshore Virtual Currency Exchange Services (OVCE), that seek legal recognition. Crypto has created a new nomadic class of corporate persons ala Binance. CEZA is giving them a safe harbour. But it depends on your definition of ‘safe harbour’. If you are expecting a lawless state or legal vacuum, you will be disappointed. CEZA is a tight-run ship with strict pre-probity checks – applicants must pass muster. There are tax incentives but it may not be the ‘tax shelter’ as you understand it. And it doesn’t come cheap.

Here are a few things you need to know:

  • The motherland is off limits. While the license allows you to run the business legally in the Philippines, it can only serve users from outside the country. And this is only for crypto-to-crypto transactions; fiat-to-coin exchanges require separate approval from the central bank Bangko Sentral ng Pilipinas (BSP), which gives out its own virtual currency licenses to domestic operators.
  • Money transfer rules are not lax. Any crypto transaction above USD10,000 equivalent per day per entity or person must be identified and notified to the authorities within 24 hours.[1] For those issuing ICOs, there are statutory guidelines for Digital Asset and Token Offerings (DATO) which remain subject to the applicable securities laws, and maximum USD500,000 fine for breach.[2]
  • You will need deep pockets. Principal licensees need to commit investment of USD1 million spread over two years to invest in the economic zone; maintain minimum authorised capital stock of USD500,000 (paid in USD200,000); a one-time, non-refundable, application processing fee of USD100,000; and one-time license fee of USD150,000 upon approval; among other prescribed costs.[3]
  • The authorities will get a cut. Profits from the licensee exchange are shared to CEZA, part of which goes to the Central Audit System: recurring fee of 0.1% for every transaction, or if you are a fintech solutions provider, 4% of net annual transaction volume. Don’t even think of stiffing or short-changing payment. The penalty is up to USD500,000 per month of delay (with monthly interest of 1% on unpaid amount), and a repeat offence will result in the cancellation of your exchange license.[4]
  • It is a self-regulated regime. The Asia Blockchain and Crypto Association (ABACA) has been appointed as a self-regulatory organization (SRO), patterned after the JCVEA model in Japan, and is answerable to CEZA as the overall regulator. ABACA will monitor and enforce a Code of Conduct among its members and “police its own ranks” as part of CEZA’s broader regulatory strategy.[5]

Judging from the response, this program has been a veritable success. It has issued almost all of its target 25 principal licenses (at the time of writing) in less than a year since its launch.[6] It is an offshore regulatory framework done right, a “one country two systems” dichotomy that spurs foreign investment and protects local investors.

Note: We have covered the CEZA phenomenon a few times before on our Blog. We talked about the mad rush for legitimacy (Why the Race for Crypto Licenses?), gave an interview on jurisdictional arbitrage (Islands in the Sun), and even spoke at the official launch event itself (Navigating the Regulatory Landscape). This is just an opinion piece. For the avoidance of doubt, we do not endorse or receive any form of compensation from the parties indicated herein.

Reference

[1] Rule IV, Section 30(d) and 30(g)(iv), The Cagayan Special Economic Zone and Freeport Financial Technology Solutions and Offshore Virtual Currency (FTSOVC) Business Rules and Regulations of 2018.

[2] Article VII, Section 7.01 and Article IX, Section 9.01, Rules on Digital Asset and Token Offerings (DATO): Supplemental Rule to the FTSOVC Business Rules and Regulations of 2018.

[3] Supra note 1, Rule III Licensing Process. Also https://ceza.gov.ph/fintech-ovce/fees.

[4] Supra note 1, Section 11 Penalty for Late Payment and Underpayment.

[5] https://www.newsbtc.com/press-releases/asia-blockchain-association-secures-sro-status-from-ceza/

[6] https://ceza.gov.ph/article/list-ceza-offshore-virtual-currency-exchange-ovce-licensees

 

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