On 01 April 2022, Kava Network’s (KN) marketing division posted a tweet stating that Tesla, Inc., Elon Musk’s company, is building on top of KN to allow Tesla owners to earn income through yield farming while driving. While this post was intended as satire, several market participants relied on this assumption to purchase $Kava, causing the token price to skyrocket.

Around twenty minutes after the post, Kava Network’s twitter retracted the tweet by stating that the previous post is satire, “Happy April fools”. This immediately resulted to a price crash allowing some individuals, who may or may not have information that this was satire, to profit in expense of uninformed market participants. Is the act punishable under Philippine Laws? The publisher or an insider could be liable under Philippine Laws depending on the circumstances, viz: Philippine Laws considers $Kava, the native currency of Kava Network, as security Philippine Laws do not consider cryptocurrencies as securities

Is the act punishable under Philippine Laws?

The publisher or an insider could be liable under Philippine Laws depending on the circumstances, viz:

1. Philippine Laws considers $Kava, the native currency of Kava Network, as security

2. Philippine Laws do not consider cryptocurrencies as securities

KAVA as a security

Under Section 26 of the Securities Regulation Code, it is unlawful for any person, directly or indirectly, in connection with the purchase or sale of any securities, to:

a. employ any device, scheme, or artifice to defraud; xxx or

b. engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

While Pump-and-Dump is not specifically enumerated under the Securities Regulation Code, actions that tend to artificially inflate the price through posting untruthful statements regarding a security and subsequently selling the security to profit at the expense of uninformed participants may fall under Section 26 (a) and (c).

In this type of activity, an insider could, in a short time span, make use of the opportunity to dump on new market participants. However, an action against the insider based on this ground will only prosper if future jurisprudence and legislations view cryptocurrencies as securities. However, investors are not precluded with other alternatives in the event that Kava is not considered as a security.

KAVA is not a security

The Revised Penal Code of the Philippines punishes individuals or entities that post fake news or publications, to wit:

Article 154. Unlawful use of means of publication and unlawful utterances. - The penalty of arresto mayor and a fine ranging from P200 to P1,000 pesos shall be imposed upon:

1. Any person who by means of printing, lithography, or any other means of publication shall publish or cause to be published as news any false news which may endanger the public order, or cause damage to the interest or credit of the State;

In the event that Philippine laws and jurisprudence do not view cryptocurrencies as securities, the publisher or the person responsible for the untruthful or false statement can still be held liable under Philippine Criminal Laws. Due to the damage to the interest or credit of the investors, the State, through the Office of the Solicitor General, may institute a criminal action for and in behalf of the public. After considering these circumstances, we look into the enforceability of the corresponding penalty.

Persons responsible and liable

Who could be responsible in pump-and-dump of cryptocurrencies?

Insiders - persons who knew that the marketing division will post such untruthful statements, used such opportunity to purchase the asset at a lower price prior to the publication, and subsequently selling it at a higher price knowing that such statements are false. These could be persons under Sec. 27 of the Securities Regulation Code.

Publisher - individuals who knew that they are publishing false or fake news which cause damage to the public.

Other persons - persons or individuals who ordered the publication of false or fake news.

Are developers immediately liable? Generally, developers of a blockchain network could not be held liable under Securities Regulation Code nor Revised Penal Code in relation to the activity. However, if the developers had prior knowledge of the falsity of the material non-public information, and by virtue of the publication, they profited through selling their respective assets, they could face criminal penalty. In addition, developers that caused the publication of the false or fake news, may be held responsible.