Philippine Lawbytes 142: The False Legal Assumptions of the “Incorruptibility” of the Blockchain, and Its Limited Application to Economic Transactions, Contained in the Philippine SEC 2019 Draft Rules On Initial Coin Offerings [copyright by Dr. Atty. Noel G. Ramiscal]

I have been engaged in a series of lectures and fora since 2018 on the topic of blockchain, as it pertains to fintech, distributed ledger technologies, cryptography and cryptocurrencies.
In my November 22, 2018 lecture for 5,000 Certified Public Accountants (CPAs) in their 73rd National Convention in Bacolod, and in my lectures this 2019 on the Electronic Evidence, and even on Cyber Law Ethics for the Mandatory Continuing Legal Education (MCLE) seminars for lawyers, I discuss the concept of the blockchain as a source of electronic evidence for accountants and legal practitioners.

Dr. Atty. Noel G. Ramiscal, lecturing to 5,000 CPAs, on Cryptography and the Blockchain Technology, inside the SMX Convention Center, at the 73rd PICPA National Convention, around 7:30pm, Bacolod, November 22, 2018

Nevada was one, if not the first state in the United States that passed a law regarding this matter. The 2017 Nevada Law defined blockchain technology as:

“(A)n electronic record of transactions or other data which is:

1. Uniformly ordered;

2. Redundantly maintained or processed by one or more computers or machines to guarantee the consistency or nonrepudiation of the recorded transactions or other data; and

3. Validated by the use of cryptography.

Further, it requires that “if a law requires that a record be in writing, the submission of a blockchain that electronically contains the record satisfies the law”.
The notion of a blockchain being “incorruptible” is reflected in the first two requisites which insists on the blockchain being uniformly ordered, and the decentralized nature of the blockchain to ensure the “nonrepudiation” of the transactions that are verified which comprise the blocks.

Dr. Atty. Noel G. Ramiscal Blockchain, DLT and Cryptocurrency MCLE lecture, ACLEx, May 7, 2019

The current Philippine SEC 2019 Draft Rules on Initial Coin Offerings took the characteristics of the blockchain to another level. It defines blockchain as:
“…an incorruptible digital ledger of economic transactions that can be programmed to record virtually all things of value, including financial transactions” [Chap. 1, Sec. 2. D.].
The Philippine SEC has been required by Congress to actually explain to the legislators its Draft ICO Rules and its treatment of ICOS and cryptocurrencies. The SEC definition of “blockchain” is loaded with two false assumptions that I must caution Philippine legislators and regulators, not to adopt.

First, the blockchain, as an instantiation of distributed ledger technologies, can in fact be used not merely as ledgers for economic transactions and “of things of value”, but for various purposes. To legally state this as its sole usage would be to limit its applications.

Since 2018, in my lectures on Data Privacy for lawyers, students, and various professionals, I show how the blockchain can be operated to secure the digital identification system, in response to the passage of Republic Act 11055 which established the national ID system for Philippine citizens. In my discussions, I give the example of the Estonian government’s successful usage of the blockchain in securing all the personal information and transactions of their citizens.

For example, last February 28, 2019, I showed to the lawyers, engineers and scientists of the Mines Geosciences Bureau (MGB) in Cebu how the blockchain can be employed to determine the progeny of certain gems like diamonds and emeralds that can come from countries which use these gems to fund their blood wars.

Dr. Atty. Noel G. Ramiscal FinTech, Blockchain, DLT and Cryptocurrency MCLE lecture, MGB, UPIAJ, February 28, 2019

The day after, March 1, 2019, I showed the MGB participants how the blockchain can also be applied in automated elections that does two things: it allows the voter to determine if his/her vote actually went to the person s/he voted and at the same time, secures the privacy of the voter’s identity and vote.

Dr. Atty. Noel G. Ramiscal FinTech, Blockchain, DLT and Cryptocurrency MCLE lecture, as these relate to Data Privacy. MGB, UPIAJ, March 1, 2019

Blockchains can thus be made to handle various important governmental and private processes and functions depending on the creativity and necessity of the entities involved.
Second, the “incorruptibility” of the blockchain is a myth, in the same way that the notion of a blockchain’s “immutability” is an illusion.

Blockchains are only secure, immutable, incorruptible as their weakest chains. As the history of the unrestrained feuding and fracases in the Bitcoin’s echelon of programmers and leaders, and the tumultuous saga of Ethereum, it is a fact that blockchains can be systemically hacked, altered, modified and even forked, causing great damage to their investors!

This fact was first officially acknowledged in the Philippine government by the Bangko Sentral ng Pilipinas when it issued a warning to Philippine citizens in 2014 after the Mt. Gox online exchange’s bitcoins apparently disappeared after years of being hacked. I touched on this matter in my August 14, 2014 lecture on “Electronic Evidentiary issues in E-Commerce” for the University of the Philippines Institute of Administration of Justice.

In my February 7, 2019 lecture for the law firm of Cruz, Marcelo and Tenefrancia, I discussed the latest greatest upheavals that shook the Bitcoin community last November 2018 which resulted in losses of the Bitcoin’s value to an estimated 50 billions of US dollars in a span of mere days, and the establishment of two separate Bitcoin blockchains!

Dr. Atty. Noel G. Ramiscal in his MCLA Lecture on Fintech, Cryptocurrencies & Distributed Ledger Technologies, Cruz, Marcelo & Tenefrancia Law Firm, February 9, 2019

Given these, it is truly the height of technological and legal naivete to statutorily or regulatorily posit that blockchains, as they pertain to cryptocurrencies, are “incorruptible”. It is dangerous for it can lull investors into a false sense of security. It can also unnecessarily burden litigators presenting contrary evidence that a blockchain has been corrupted. The current Philippine SEC Draft Rules on ICO do not reflect these realities and for that, the legislators must scrutinize these rules before they are passed by the Philippine SEC.

Philippine Lawbytes 141: A Critical Encounter with the Philippine SEC Personnel, the Insecurity of the SEC Website, and Comments on the SEC ICO Draft Rules (Copyright by Dr. Atty. Noel G. Ramiscal)

In August 14, 2019, I had the opportunity to have an audience with the Philippine Securities Exchange Commission (SEC) personnel who attended the SEC-UPIGLR professional development course training. Since my lecture was all about “Developments in Cybercrime, Security and Cryptocurrencies”, I took upon myself the task of giving them a taste of my criticisms of the SEC Draft Rules on Initial Coin Offerings (ICOs), and other matters, after I went through my usual discussion on the current trends in cybercrime cases, data privacy and data security.

Dr. Atty. Noel G. Ramiscal, in his lecture for the SEC people, on Cybercrime, Security and Cryptocurrencies, August 14, 2019

First off, I pointed out that the SEC website has been insecure for quite some time. I showed them evidence of screen shots from three popular web browsers in the Philippines: Google Chrome, Internet Explorer/Microsoft Edge, and Mozilla Firefox. The implications of their website’s insecurity are significant considering the SEC website gathers and contains the sensitive and often confidential personal information of data subjects all over the Philippines.

Dr. Atty. Noel G. Ramiscal, in his lecture for the SEC people, on Cybercrime, Security and Cryptocurrencies, August 14, 2019

I enlightened them about the National Privacy Commission decision concerning the COMELEC e-leaks and how potentially grave the criminal consequences are for the officers and employees of this Commission, if the personal information of data subjects contained in their databases would be hacked and published like what happened to the Philippine voters’ e-data. Unfortunately, even at the day when I published (October 13, 2019) and amended (October 15, 2019) this article, the SEC website is still insecure!

Screen shot of SEC website home page. on October 15, 2019, the day this article was amended, showing the website’s insecurity using the Google Chrome browser

Since 2018, when the SEC released its ICO Draft Rules, I have been critical of several essential provisions and important gaps in these rules. One of the significant and less known implication of the Draft Rules’ scope is that they are not applicable to any effectively and actually decentralized blockchain cryptocurrency like Bitcoin that is not totally represented nor centrally governed by any corporation or organization anywhere.

The “sandbox” approach by the SEC, while quite well intentioned also does two things which might be deemed anti-competitive. Since it does not apply to already existing cryptocurrencies like Bitcoin, its regulatory provisions would not cover the purveyors of these cryptocurrencies and would not protect Philippine investors. Second, since its regulatory provisions would only apply to cryptocurrencies that are going to be part of the ICOs which will fall directly in the Rules’ scope once they are approved, the purveyors of these cryptocurrencies would not be granted the essential leeway or governmental non-intervention that Bitcoin had enjoyed which resulted in its phenomenal global success.

I brought to the attention of these personnel, some of whom belong to the enforcement division of the SEC, how the SEC had utilized the current Securities Regulation Code extraterritorially with no adequate basis in going after promoters of cryptocoins offered in different jurisdictions, just because these offerings were accessible to Philippine investors, via the Internet.

While the Draft ICO Rules have provisions for the source code review of the software and the ensuing hardware to be utilized in rolling out the cryptocoins, the Draft rules apparently has the perspective that these cryptocoins would remain stable, codewise, and otherwise. This is evidenced by the fact that there are no provisions in the Draft Rules that address the consequences of hacking, and even forking, which are systemic risks of putting and investing e-assets in the block chain. As a parting shot, I also brought to the attention of the attendees of the real impending threat posed by advances in cryptanalysis that could render some forms of cryptography utilized by blockchains useless or vulnerable to hacking.

As always, I had hoped that by bringing these to their attention, they would act accordingly. That remains to be seen.

Philippine Lawbytes 140: The “Tinkerbell” Effect and the Volatility of Bitcoin’s Pricing, which is Not Dealt With by any Philippine Law or Rule (Copyright By Dr. Atty. Noel G. Ramiscal)

One lawyer in my lecture for the UP IAJ last May 8, 2019, and in my lecture tours of different universities last year, tech savvy students from the University of St. La Salle (Bacolod) and the Jose Maria College (Davao), all asked questions pertaining to the determination of the value of Bitcoin, in relation to my lectures on the links between cryptocurrencies and cybercrime.

Dr. Atty. Noel G. Ramiscal in his MCLE lecture on Cryptocurrencies, Blockchains & Distributed Ledger Technologies, UP IAJ, May 8, 2019

A writer speculated that the value of the bitcoin currency lies in its technical value as an expedient way of transferring funds for e-commerce, and its speculative value for its investors. One cited quaintly that the Bitcoin’s value reflects the “Tinkerbell” effect, which is to say that something exist insofar that someone believes it exists.

Dr. Atty. Noel G. Ramiscal, delivering his lecture on ecrimes and cryptocurrencies for the students of University of St. La Salle, Bacolod, November 23, 2018

To hone in on the point further, I will say that the value of the Bitcoin is what the investors in such currency give it. The price is a conventional measure of what the collected pool of investors from all over the world is willing to believe that Bitcoin has at any given time, at any given day.

This belief can indeed be reinforced by things that happen around the world relative to bitcoins, e.g., announcements that certain governments are no longer allowing bitcoins to be traded in their exchanges, or there are rumors of impending bitcoin forks, or that online exchanges are hacked etc., which algorithms probably employed by online Bitcoin exchanges take into account in regularly posting updated Bitcoin prices. Based on this perspective, you can probably have a glimpse of an understanding of the hitherto see-saw/roller coaster highs and lows of Bitcoin prices.

Dr. Atty. Noel G. Ramiscal in his lecture on Cyber Ethics, ECrime and ECurrencies for the students of Jose Maria College, Davao, NOVEMBER 14, 2018

But even if you read the trade ezines and follow the developments on this front, you can still find yourself at a loss in grappling how in one day the price of Bitcoin can reach up to US$20,000 (which is more than a million Philippine pesos), and a few days scale down to US$6,000 and eventually drop to US$2,000 or less in a few months, and even disappear, for a few unfortunate investors, as in the Mt. Gox hacking case.

Dr. Atty. Noel G. Ramiscal, lecturing to 5,000 CPAs, on Cryptography and the Blockchain Technology, inside the SMX Convention Center, at the 73rd PICPA National Convention, around 7:30pm, Bacolod, November 22, 2018

The volatility of the Bitcoin’s pricing reality, which can be taken as a gauge for the uncertainty in the prices of cryptocurrencies is not reflected in the Philippine 2019 SEC Draft Rules on Initial Coin Offerings. Nor is the matter of how cryptocurrencies can be verified or mined or earned through technical consensus protocols by entities offering cryptocurrencies, dealt with, directly and adequately. to protect the investor, under these Draft Rules. I have harped on these matters repeatedly since my Fintech Reaction, and my Crytocurrency and Blockchain lecture, both for the 73rd PICPA Convention held in Bacolod last November 22, 2018.

Dr. Atty. Noel G. Ramiscal, delivering his Reaction to the several talks on Fintech, at the morning session for the private sector, at the NAIC Hall, at the 73rd PICPA National Convention, around 11:20 am, Bacolod, November 22, 2018

Several lawyers from different government agencies and the private sector have already consulted, and directly asked me for investment advice, and my reply is the same. For those people who are still thinking of investing on Bitcoins as of today, you must exercise sound judgment. Remember, Bitcoin transactions made by Philippine investors are NOT covered nor protected by the Philippine 2019 SEC Draft Rules on Initial Coin Offerings which have yet to be passed, nor by the Cagayan Economic Zone Authority’s Digital Asset Token Offering Rules.The losses sustained by any Philippine Bitcoin investor are not shielded by any Philippine law nor insured by the Philippine Deposit Insurance Corporation because Bitcoin is not legal fiat currency. The Bangko Sentral ng Pilipinas Rules on Virtual Currency are also not relevant in this regard. If you have money to risk and burn and can afford to speculate in cryptocurrency, then you can do so. But if you are managing tight resources for your children’s education, for that house mortgage, for that lifetime trip, or for your retirement, then you’re better off investing elsewhere.