CEZA aims to be silicon valley of Asia

The Cagayan Economic Zone Authority (CEZA), an economic Freeport zone in the north of the Philippines, has been making good on a plan to transform itself into a Fintech hub, with demand for licenses outstripping potential supply by almost three times.

CEZA was the Philippines’ online gambling hub before President Rodrigo Duterte shook up the industry by allowing land-based regulator, the Philippine Gaming and Amusement Corp, to offer online licenses. The result was an exodus of licensees from CEZA, with the number of companies regulated under master licensor, First Cagayan, plunging by more than half.

The zone is now reinventing itself and is building an entire ecosystem that allows blockchain technology to thrive. It’s partnering not just with crypto exchange companies, but also with educators to train Filipinos to become blockchain software engineers; universities for research; budding entrepreneurs and the banking and finance sectors to facilitate transactions.

The Philippines is one of the first countries in Asia to make cryptocurrency legal, in sharp contrast to other nations which have been wary of digital currencies.

“From what we know, CEZA will be the first in Asia to do this. There has already been similar movement in some places in Europe like Switzerland, but CEZA will likely be the first here,” said John Cornejo, chief technology officer at LR Data, a technology services company to the online gaming industry.

CEZA has so far issued 6-month provisional licenses for financial technology solutions and offshore virtual currency, or FTSOVC, to companies including Hong Kong-based Liannet Technology, a subsidiary of Apsaras Group; Golden Millennial Quickpay, also based in Hong Kong and Bangkok’s Ultra Precise Investments.

Twelve of the 17 other Fintech and offshore virtual currency firms that have fully paid their application and license fees are waiting in line. In total, CEZA has received 70 applications so far, though not all will be successful as it has set a cap of 25.

"Modesty aside, I can, in all honesty, declare today: The CEZA Fintech hub is already making history," said CEZA Administrator and Chief Executive Officer Raul Lambino on the announcement of Liannet’s license with CEZA.

Lambino said that CEZA’s charter has put it in a perfect position to create a hub that will host companies that produce financial products relating to blockchain, cryptocurrency exchanges, initial coin offerings, payment solutions, cloud computing, big data, artificial intelligence, robo-advice, and other financial technology solutions.

“Our goal is to push the logical progression of these technologies into the mainstream, so that transactions that are mediated by them will be fail-safe, will be secure, and will be easier and faster,” said Lambino.

DFNN’s iWave Inc. was one of the latest Fintech companies to jump on board with CEZA.

“iWave has very strong and innovative competencies and continues to assert itself in the financial technology space. We look forward to further pioneering breakthroughs in the blockchain and cryptocurrency sectors. We look forward to not only exploring this avenue, but to eventually be a market leader, similar to our position in the e-casino industry,” said DFNN’s CEO, Calvin Lim.

CEZA expects a significant boost in revenue from the new licensees. According to Lambino, income from Ftsovc application and license fees has “exceeded 2017 revenue by more than 50 percent.”

The interest expressed by offshore companies to operate in Ceza “surpassed all our expectations,” he added, noting that fintech operations are expected to create an initial 20,000 jobs.

A principal licensee is required to pay a total of $360,000 while its regular licensees will have to pay $85,000. CEZA expects to earn some US$68 million from the issuance of Ftsovc licenses, on top of the 0.1 percent share for every transaction value of registered digital coin exchanges.

Under the regulations, crypto exchanges registered in the special economic zone must also invest at least $1 million locally within two years, and have a back office in the Philippines.

The Philippines released guidelines for bitcoin exchanges in early 2017 and regulators are working on a republic act to regulate activities, including offshore banking units.

The Anti-Money Laundering Council will also begin to observe digital currency transactions as part of their broader effort to crack down on dirty money. Firms will be obliged to report covered transactions as well as any transactions they deem suspicious.

“Based on the discussions we’ve had with CEZA, they’re in the process of discussing this with Bangko Sentral ng Pilipinas. The key here is open dialogue among stakeholders,” said Cornejo of LR Data.

To attract companies to the remote northern location, CEZA is offering tax incentives, while transport and other infrastructure is also being upgraded.

“It is advantageous to locate in the area given the economic benefits,” said Ramon C. Garcia Jr., COO of iWave.

These include income tax holidays, 5 percent tax on gross profit after the expiration of the income tax holiday, and tax and duty-free importation of capital equipment.

“Previous public announcements have shown that well-respected, world-class companies are moving into CEZA. This will provide a thriving ecosystem that is supported by top-tier infrastructure,” Garcia said.

Although many online companies were licensed with First Cagayan, they were not physically located in the zone due to its poor transport links and other infrastructure inadequacies. It’s now working to change that. The zone has a new airport that puts Taiwan, Malaysia and China within less than three hours flight time.

It’s also striving to develop as an Eco-Zone, with designs similar to the layout of a Google or Apple-style campus. Hiro Kobayashi, Chairman and CEO of iWave says these advantages position the Philippines to become the Silicon Valley of Asia.

“The Philippines is one of the fastest growing economies in the world with 6-7 percent GDP growth year on year. The country is largely capable to be a rising influence in Southeast Asia and neighboring regions.”

“The whole point of Silicon Valley is to boost innovation and its people must be in a place that promotes that. CEZA capitalizes on the quality of Philippine labor but also its natural resources,” he said.

But it doesn’t come without its challenges.

“Unlike the early days of online gaming, these guy are actually expected to domicile in CEZA so infrastructure like good bandwidth will be important. We also need to ensure against the possibility of hacking and attacks,” said Cornejo of LR Data.

“The other challenge is the people. Right now we don’t have the manpower, but that’s something that CEZA expects to be catalyzed through this initiative. One of the things we’re looking at is some sort of knowledge import from countries that have expertise in blockchain,” he added.

According to Kobayashi of iWave, Inc. another challenge lies in educating the public about crypto and Blockchain technology. “As with any new industry or technology, there is resistance because of a lack of understanding. Eventually, as regulations and know-how catch up, the public more readily accepts these innovations.