The Philippines’ Securities and Exchange Commission (SEC) has warned that cryptocurrency cloud mining contracts will be viewed and regulated as securities. Using the 71-year-old Howey test, the SEC decided that such contracts need to be registered before being offered.

Cryptocurrency cloud mining operations sell users contracts that allow them to keep the earnings a specific amount of hashrate will bring in, over a specific amount of time. The user pays for the contract up front, and never really operates mining machines.

Per the SEC, investors put their money in cloud mining contracts expecting profits, based on the returns they’ll get from the amount of hashrate they purchase. The scheme differs from joining mining pools, as users don’t directly purchase contracts from cryptocurrency mining pools, they use their own hashrate.

Investing in cryptocurrency could mining contracts is, as such, considered an investment in a “common enterprise,” in which investors expect profits “generated from the efforts of others.” The Philippines’ SEC will require all brokers, dealers, salesmen and recruiters to get an appropriate license to sell these contracts. Those who continue operating cloud mining businesses without a license will face a sentence of up to 21 years in prison.

Furthermore, according to the regulator, the public should stop any and all investments into unregistered contracts. The regulator’s warning reads:

“In view thereof, the public is hereby advised to STOP INVESTING in these kinds of unregistered investment activity and to take the necessary precautions in dealing with these cloud mining companies.”

Philippines' SEC

The SEC’s move, which highlight’s the Philippines’ toughened stance on cryptocurrency-related activities, came after it noticed firms were advertising and soliciting investors within the country’s borders.