Regulation of Cryptocurrencies and ICOs in the Philippines: SEC, BSP, and CEZA Regulations
Cryptocurrency has the potential to empower millions of unbanked people in the Philippines. It bypasses the setup fees and identification requirements of traditional banks. Anyone with an Internet connection can gain access. It also addresses many of the operational inefficiencies that beset the banking industry.
Cryptocurrencies bring about financial inclusion. According to the Global Findex, only 69% of adults worldwide have a bank account. In the Philippines, only 22% of Filipinos have a bank account. Among the obstacles to owning a bank account are: (a) not enough money, (b) lack of proper documentation, and (c) inaccessibility of banks (mostly in rural areas).
The foreign remittance industry in the Philippines currently drives most of the demand for cryptocurrencies in the country. Transaction fees are low and there is no need for setting up a bank account, making it easy for users to avoid regulations on the amount of money that can be sent in and out of the country.
What is Cryptocurrency?
Cryptocurrency is a form of virtual currency (VC) that can be used to buy goods and services, both online and in the real world. It uses a combination of cryptography, math, and computer science to verify and secure transactions, as well as issue new units of a given cryptocurrency.
Cryptocurrency advocates note that the traditional banking system is expensive and inefficient. Limited hours, long processing times, expensive fees, and lack of transparency are common complaints among consumers. Furthermore, it requires reliance on trusted third-parties. The 2008 Financial Crisis saw an erosion of public trust in these third-party institutions, from governments to banks. Bitcoin, the first successful cryptocurrency, developed in response to this loss of confidence.
Bitcoin and the Blockchain Technology
In 2009, Satoshi Nakamoto, the anonymous founder of Bitcoin, published a white paper detailing blockchain technology. Unlike traditional banks, there is no controlling authority or central server. Instead there is a public ledger, or blockchain, distributed across all computers running Bitcoin software. Transactions are reconciled every ten minutes, thus eliminating delays. Coins are transmitted peer to peer, reducing transaction fees.
As Nakamoto wrote on his/her blog,“Everything is based on crypto proof instead of trust. Without the need to trust a third party middleman, money can be secure and transactions effortless.”
The process is effortless for the average user it should be said. However, miners must invest enormous amount of effort and energy to verify each transaction in the blockchain. Miners are high-powered computers that validate transactions on the network by solving extraordinarily complex mathematical computations. This is called proof of work, and whilst requiring enormous output to solve, it is easy for other users to verify. Thus, a decentralized, low-cost, secure banking system is enabled through the blockchain.
Today, Bitcoin is the most visible and successful of cryptocurrencies, occupying over 50% of market share. However, there are an additional 2,022 crypto-assets, currently worth US$125 trillion.
Government Regulation of Cryptocurrencies and ICOs in the Philippines
The Philippines has taken a three-pronged approach to the regulation of virtual currencies and Initial Coin Offerings (ICOs). The central bank of the Philippines (Bangko Sentral ng Pilipinas or BSP), the Cagayan Economic Zone Authority (CEZA), and Securities and Exchange Commission (SEC) each provide direction on consumer and investor protection, as well as facilitating a fair and orderly medium of exchange.
The BSP requires virtual currency (VC) exchanges to register as remittance and transfer companies and regulates them as such. A VC exchange is an online platform that allows users to exchange digital currency for other digital assets or for fiat currency. Users store their currency in electronic wallets, which is a form of software that monitors their balance, transfers funds, and conducts other transactions.
The initial BSP regulatory framework can be found under BSP Circular 944 and only concerns the conversion of virtual currency to fiat currency. All BSP-licensed VC exchanges must have measures in place protecting consumers – and the financial industry at large – from cyber attacks, money laundering schemes, and the funding of terrorism. Annual auditing and quarterly reports are also required.
For consumer protection, the BSP advises virtual currency users to participate only in BSP-licensed exchanges. There are currently six BSP-approved VC providers:
- Betur, Inc. (operates the wallet app Coins.ph)
- Fyntegrate, Inc. (operates the cryptocurrency trading platform PDAX)
- Rebittance, Inc. (a subsidiary of Satoshi Citadel Industries or SCI Ventures)
- Virtual Currency Philippines, Inc.
More recently, the BSP consulted the International Decentralized Association of Cryptocurrency and Blockchain (IDACB) for assistance in establishing sound VC policies. IDACB claims 95 member countries, and its stated mission is to find best industry practices to synchronize a global legal framework for cryptocurrencies.
The BSP regulation does not address VC companies operating as a trading platform or Initial Coin Offering (ICO), necessitating joint oversight between the BSP and the Philippines SEC.
An ICO is the public sale of a new virtual token to fund startups and other projects. It is analogous to an Initial Public Offering (IPO) whereby investors purchase shares in a company. However, ICOs are more speculative and carry greater risk than a traditional IPO. Investors often fund the company pre-project, before any product has even been launched, in exchange for tokens. Some companies have tried to classify these tokens as utility tokens; that is, they only grant access to the new virtual platform.
The Philippines SEC wants to see them defined and regulated as securities per section 3.1 of the Securities Regulation Code which states, “Securities are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instruments, whether written or electronic in character.”
“We want to create an environment where investors can feel more or less safe in investing in what are essentially securities that have a digital form… Instead of paper or securities that are housed within PDTC (Philippine Depository & Trust Corp.), the depository they’re being proposed to be housed on a blockchain,” Mr. Amatong, SEC Commissioner, explained.
At the time of this writing, the SEC is still drafting proposed regulation and remains open to public comment.
CEZA is a government-owned corporation responsible for the Cagayan Special Economic Zone and Freeport. It is charged with drawing foreign investment and operates independently of local laws. As such, it is creating its own regulatory framework aimed at foreign corporations seeking to register a fintech company in the Philippines to operate virtual currency exchanges.
“It is our goal to provide a clear set of rules and guidelines that will foster innovation yet ensure proper compliance by actors in the ecosystem. It is our hope that this set of regulatory innovations will take the digital asset sector one step closer to adoption and acceptance by institutions and the traditional financial system,” explained Raul Lambino, CEZA administrator and CEO.
CEZA currently issues financial technology solutions and offshore virtual currency (FTSOVC) licenses. Companies must first undergo stringent background and security checks to be granted such license. An investment of US$1 million, payable over 2 years, is required. The following companies currently hold an FTSOVC license:
- Golden Millenial Quickpay Inc. Ltd.
- Ultra Precise Investment Ltd.
- Liannet Technology Ltd.
- Rare Earth Asia Technologies Corp.
- Formosa Financial Holdings Ltd.
- Tanzer Holdings Ltd.
- Asia Premiere International Ltd.
- Orient Express Global Ltd.
- White Ranch Limited Ltd.
- Dragon Empire Developments Ltd.
- Galaxy Plus Developments Ltd.
- Tiger Wheel Ltd.
- IPE Global Pte. Ltd.
- Cr8tiv Solutions Management Ltd.
- Sino-Phil Economic Zone Agency Development and Management Corp.
- Digifin Technologies Pte. Ltd.
- Hong Kong Yuen Shing Hong Ltd.
- First Bullion Holdings Inc.
- OKCoin Philippines Technology Co. Ltd
- 6X Tech Pte Ltd
- Increz Korea
- Harseq Inc Limited
- FAFA Internet Blockchain (China) Co. Ltd
These companies operate their back-office in the Philippines but are only licensed to transact with users outside of the country. Conversely, those holding BSP licenses can engage in local transactions and acquire onshore VC exchange users.
Sandbox Strategy for Industry Growth
All three agencies are using a sandbox (or test-and-learn) approach to regulation. This ensures regulation keeps pace with industry innovation, protecting consumers without stifling growth. Unlike some countries, such as China and South Korea, which have banned many crypto-technologies outright, the Philippines is working with the industry to draft regulation. According to the Oxford Business Group, this strategy creates a uniquely supportive regulatory environment. As such, the Philippines is well-positioned to become a global leader in fintech.