By Alithea De Jesus

There is no denying that the blockchain technology has many benefits for the business. From efficiency, cybersecurity, data storage, among others, it has become a must have for many enterprises. Hence, the growing adaption becomes a necessity, rather than a luxury.

Cognizant of its many benefits especially to lure more foreign investors who want transparency, efficiency an secured system, CEZA takes pride of embracing the blockchain technology. But more than just an adaption, it goes beyond this as it shares the vision for the utilization of the technology.

As part of its bid to become the blockchain capital of Asia and possibly the world, the (CEZA) is forming a registry for decentralized autonomous organizations (DAO). A DAO is an autonomous and transparent community-led entity with no central authority that operates businesses or initiatives through a blockchain, digital asset, or the web3 industry.

Prior to the advent of DAO registries in other parts of the world, DAOs existed in a legal gray area. By joining a DAO registry, these organizations become formally incorporated, gaining legal protection, operational benefits, and other advantages through doing so. 
In launching a DAO registry, CEZA wants to become the best place in the world for this business activity, besting all the cities and countries in the space. Other DAO registries include Malta, Switzerland, Estonia, Gibraltar, and Wyoming, United States, which is currently the number one destination for DAOs seeking registration.

In aiming to become the world’s number one DAO registry, CEZA is not only after an influx of DAO registrations. What ultimately matters is that these DAO registrations become an entry point into building a full-fledged blockchain ecosystem. 

This process can occur organically – organizations, after all, will want to do business in the locality that their DAO is registered in. This involvement can also be facilitated, as CEZA wil strive to do in its zone. DAOs registered in CEZA will receive many of the same benefits of other businesses located there, such as tax and other fiscal incentives.

The opening of a DAO registry in CEZA would thus lead to rapid growth in blockchain businesses that operate out of CEZA.

“While a DAO registry is an achievement on its own, having and maintaining one is also strategically important. Persuading any enterprise to do business in your jurisdiction is difficult. But making this case when the business is already incorporated there is not only easier, but a natural progression of events,” said CEZA Secretary Jamie R. Escaño.

Achieving this goal hinges on CEZA being a more attractive destination for registration than other markets with DAO registries. This challenge is easier said than done. As pioneers in blockchain legislation, these markets did their best to enact progressive policies and frameworks that can potentially stand the test of time.

But there are still severe gaps in these frameworks, all of which CEZA aims to address. For example, in some jurisdictions the fees associated with filing a DAO are cost-prohibitive. In other cases, the time horizon of obtaining a DAO registration is excessive and possibly detrimental to a business in an industry where speed is important.

In other markets, the issue is neither cost, nor speed. Some jurisdictions still hold too much liability on the senior officers of a DAO, or are bestowed with extraordinary ability that make businesses uncomfortable, such as the ability to completely dissolve a DAO in the event of perceived wrongdoing.

From this perspective, CEZA actually benefits from being a relatively late entrant into the DAO registry space: The zone can address all of the issues that have made businesses reluctant to register or operate there. It would not make sense to fix these issues using any technology other than blockchain.

To this end, all registrations of DAOs will be done on a public ledger powered by a blockchain,which will enable enterprises to track and monitor the status of any application, fund any application or renewal entirely through the DAO registry system, and get their needed documents in a timely manner, since thousands of miners help validate transactions.

In making these changes, CEZA can quickly shoot up the rankings as the preferred registry of choice for DAOs.

“By launching this DAO registry, CEZA will attract more blockchain businesses. In time, this critical mass of enterprises will be the selling point for more of its peers. Eventually, businesses will come primarily for the zone’s branding as the Crypto Valley of the World: They know that they’ll meet other innovators in the space right here,” said Escaño.

In a Senate hearing with the Committee on Banks, Financial Institutions & Currencies chaired by Honorable Mark A. Villar, government institutions like the Banko Sentral ng Pilipinas (BSP), the Security Exchange Commission (SEC) and the Cagayan Economic Zone Authority (CEZA) sat down with private entities including Binance and the FinTech Alliance Philippines to discuss key initiatives in putting together policies and guidelines for fintech and digital assets. Central to the discussion was how the Philippines can harness new innovation while ensuring the appropriate guardrails are in place necessary for consumer protection

BSP’s Deputy Governor, Chuchi Fonacier, outlined its sandbox approach to regulation. The approach is designed to not hinder or stifle new innovations in financial technology. The same approach has helped drive the growth of fintech and the digital payments sector especially in areas of user protection including Virtual Asset Service Providers or VASPs. 

Part of the initiative is to conduct research into the formation of digital asset policies in an ongoing effort to keep up with the latest developments in the FinTech space. SEC Chairperson Emilio Aquino highlighted the need to be also active in enforcing security measures against digital asset-related misconduct. 

Senator Sonny Angara questioned if Cease and Desist efforts are enough to implement necessary enforcement against illicit use of digital assets. The honorable senator points out that the websites in which these activities take place are made available globally on the internet. 

The existing policy regime stresses flexibility in developing and adapting regulations and while the department is still catching up to new developments, they are actively performing their mandate of looking into digital assets.

Industry representatives were also present during the senate hearing. Binance, the global blockchain company behind the world’s largest cryptocurrency exchange, was represented by its APAC Director, Leon Foong, and General Manager for the Philippines, Kenneth Stern. Together with CEZA’s FinTech and Cryptocurrency officer Mike David and Fintech Alliance’s Chairperson Lito Villanueva, the industry representatives were all in agreement that a proper regulatory mechanism is necessary for the growth of the industry that fosters innovation. 

Kenneth Stern, Binance’s General Manager for the Philippines, shared: “We strongly believe that the crypto industry can greatly benefit the Filipino people through addressing the necessity of financial inclusion through digitalization. 78% of Filipinos remain unbanked, but crypto can help decrease that number as crypto asset holders will soon surpass the number of credit card holders in the country.” 

Industry players provided critical insights for the committee and the active steps being taken to put in place measures that address concerns around safety. Binance specifically highlighted their policies around user protection and security which are some of the strictest in the fintech industry. Key security features are embedded at all stages of a user’s experience including strict Know Your Customer (KYC) process, active collaboration with global law enforcement and banking agencies, and the strict evaluation process of digital assets offered on the exchange. 

Providing financial literacy was also agreed to be a foundational driver for ensuring user protection. Binance has already rolled out a partnership with  Philippine universities and professional groups offering free courses in blockchain technology, crypto currency, web3, trading, the metaverse, and decentralized finance (DeFi). 

Binance, CEZA and the Fintech Alliance all expressed support to the ongoing efforts by the BSP and SEC to develop a framework that will identify and regulate digital assets like cryptocurrency. 

Last year, China offered to develop Fuga Island into an industrial park complete with medical school and hi-tech industry.  It will be named “Smart City.”  But here is the caveat: It will be for the exclusive use for Chinese. No Filipinos allowed.

Eventually, the island could become an exclusive domain of China that could do whatever she wants to do in the island. That means that the current 2,000+ Filipino residents of Fuga Island would have to be relocated to another island or to other parts of the province of Cagayan where the town of Fuga is a part.

The Cagayan Economic Zone Authority (CEZA) said it signed seven deals with Chinese businesses planning to invest $3.9 billion in projects first unveiled at the Belt and Road Initiative Forum in Beijing. CEZA Administrator Raul L. Lambino said the signing event was “highly successful (and) brought new investment and empowered countries, including the Philippines, participating in China’s Silk Road project.”

Smart City

The plan alarmed the Philippine Navy after it was announced that CEZA had announced through a news headline in its website: “Chinese firm invests $2B on Cagayan isle.”  The announcement said:  “A $2-billion ‘Smart City’ on Fuga Island here will be constructed under a memorandum of understanding between the CEZA and the Xiamen-based Fong Zhi Enterprise Corp.”

This development has alarmed Defense Secretary Delfin Lorenzana, who had earlier said that Chinese plans to build economic and tourism zones on Fuga Island, as well as on Grande and Chiquita islands in Subic Bay, would make the Philippines vulnerable to Chinese spying. He also said that the Chinese might also use the islands to stage “adverse actions” within Philippine territory.

“The current threat to Taiwan is currently from the west. If China establishes its footprint in Fuga, the threat would also be from the south,” the defense official added.

And this brings to the fore the question:  What would prevent the Chinese from converting Fuga island into a secret military base complete with missiles, radar, armed personnel, aircraft, and gunboats like what it did with the reclaimed islands in the Spratly Archipelago?  Remember, once China starts deploying military assets on Fuga Island, it would be hard to expel them.  And it would have unimpeded access through the Luzon Strait, which would provide China with the capability to attack the U.S. defense along the Second Island Chain right into America’s doorstep, Guam; thus, opening the entire Pacific Ocean to Chinese penetration.

One-China Policy

One needs to know that since the Philippines recognizes a One-China policy; it considers Taiwan as a province of China.  In the event of war between Taiwan and China, the Philippines’ recognition of Taiwan as part of China would put the Philippines at odds with the U.S. who is obligated by treaty to defend Taiwan. With Chinese President Xi Jinping vowing to “reunite” Taiwan with the mainland by military means by 2020, China has only five months left to invade Taiwan.

And this puts the Philippines in a precarious geopolitical situation because of the Philippines’ treaty alliance with the U.S., which obligates the U.S. and the Philippines to come to each other’s defense in the event of hostility between the U.S. and China.  And should Fuga by that time is already controlled by China’s military, that would certainly put the Philippines right in the middle of U.S.-China war.

With cross-straits tensions rising, Philippine security experts are suspicious of Chinese investment deals facilitated through state-owned companies to surround or even facilitate military action against Taiwan in the near future.  Philippine military officials recently described the northern Philippine islands—including Fuga – as “strategic features,” since they can potentially control access to the Luzon Strait, which connects the South China Sea and the Western Pacific.

With China’s renewed interest in Scarborough Shoal, the U.S. State Department issued a stern warning that any attempt by Beijing to physically occupy Scarborough Shoal would be a “dangerous move” and would be met with “lasting and severe consequences.”

The State Department also repeated U.S. Secretary of State Mike Pompeo’s remarks that the U.S.-Philippines Mutual Defense Treaty (MDT) covered the South China Sea, citing “any armed attack on Philippine forces or public vessels in the area will trigger mutual defense obligations.”

It’s interesting to note that retired Supreme Court senior associate justice Antonio Carpio had earlier warned that China would reclaim Scarborough Shoal as it is a crucial component of their plan to declare an Air Defense Identification Zone (ADIZ) in the South China Sea.

He said that China may “very soon put up” air and naval bases on Scarborough Shoal.  He also said that this is the next stop in China’s reported plan for ADIZ in the South China Sea.  He said, “When China hinted it will establish an ADIZ over South China Sea, it only meant one thing: China will very soon put up the air and naval base on Scarborough Shoal.”

Carpio said that without the air and naval base, ADIZ couldn’t be enforced over the South China Sea because of a “hole in China’s radar, missile, and jet fighter coverage” in the vicinity of Scarborough Shoal.

ADIZ is defined by the U.S. government as a designated “area of airspace over land or water, in which the ready identification, location, and control of all aircraft is required in the interest of national security.

With the Strategic Triangle and ADIZ achieved, China could then establish a strong springboard in its attempt to penetrate the Luzon Strait, the gateway to the Western Pacific and the Second Island Chain from Japan down to Guam to the Marshall Islands to Papua New Guinea.  And beyond the Second Island Chain is the vast Pacific Ocean all the way to the continental U.S.

But before all this could happen, three things need to happen: (1) Militarization of Scarborough Shoal, which would complete the Strategic Triangle; (2) Chinese control and militarization of Fuga Island, which would control the Luzon Strait; and (3) invasion of Taiwan.

Xi’s game plan

If Xi’s game plan were to be followed, China would soon invade Taiwan; however, the time could be moved to 2021 or at a much later time after the militarization of Scarborough Shoal and Chinese control of Fuga Island.

While it might sound like it’s farfetched from accomplishing all these, the mechanisms are pretty much in place except the invasion of Taiwan.  However, that doesn’t have to be done right away but it’s still doable since Xi would remain in power for a long time since his presidential term has been extended indefinitely.

Scarborough’s militarization seems to have taken precedence over the “other” things.  Well, this can be achieved within two years.  But once it is achieved, there are only two things left: Militarization of Fuga island and invasion of Taiwan.

With Fuga Island taking center stage in the geopolitical scene recently, another island that came out was Batanes.  In my column, “Pivot to Japan” (May 3, 2015), I wrote: “In April 2014, the U.S. reportedly asked the Philippines for access to military bases in eight locations – four in Luzon, two in Cebu, and two in Palawan. The four sites in Luzon include the former U.S. bases in Subic and Clark. The other two are the Laoag Airport and Batanes Island.  Surmise it to say, Laoag and Batanes would provide the U.S. with the capability to prevent China from breaking through the Bashi Channel or any of the other two channels, Babuyan and Balintang, in the Luzon Strait.  But due to the pending petition before the Philippine Supreme Court challenging the constitutionality of the Enhanced Defense Cooperation Agreement (EDCA), the U.S. has to wait until the High Court issues a ruling. If the High Court rejects EDCA, just like when the Philippine Senate rejected the retention of the American bases in 1992, then the Philippines will be taken out of the loop in the U.S.’s rebalancing of her forces in the Asia Pacific.

“Meanwhile, the U.S. has to make do with “Pivot to Japan.” It’s anticipated that with the signing of the new U.S.-Japan defense guidelines, Japanese warships would soon be joining American warships in patrolling the East and South China Seas. Uncle Sam couldn’t have gotten a better deal than that.”

On January 12, 2016 the Philippine Supreme Court came out with a courageous decision reaffirming the constitutionality of EDCA between the Philippines and the United States.  In a 10 to 4 decision, the Supreme Court upheld the EDCA, paving way for the return of forward-deployed U.S. forces to select Philippine military bases.

However, U.S. interests in Batanes and Laoag City waned and the U.S. pursued other locations of interest.  It now occurred to me why the U.S. had become interested in the northern Philippines, particularly Batanes, a remote island at the mouth of the Luzon Strait.  Control of Batanes is control of the Luzon Strait, the strategic gateway to the Pacific and beyond.

Now we know why China wants Fuga Island badly?

For comments, please free to email, PerryDiaz@gmail.com