The Philippine economy is built on remittances from overseas Filipino workers, who contributed US$33 billion to the country’s US$400 billion GDP in 2017. However, the country’s financial literacy is ironically low. Access to financial services is not universal, with the Bangko Sentral ng Pilipinas (BSP), the country’s central bank and financial regulator, estimating that 10% of local government units remain unbanked. Despite being the third-largest country for remittance inflow, Philippine remittance costs are high compared to the global average estimated by the World Bank, at 7.4% for every US$200.
It is in this context that cryptocurrency usage in the Philippines has grown. Yet the volatility inherent in a decentralized currency has given rise to concerns that cryptocurrency may be used to defraud financially illiterate Filipinos. Moreover, that cryptocurrencies were designed precisely to circumvent global governmental regulation poses serious challenges for a country that has only recently skirted the money laundering blacklist and is beset by terrorism-financing propensities.
Hence, Philippine regulators are faced with a unique quandary arising from a conflict between, on one hand, allowing access to financial services through cryptocurrencies and, on the other, preventing the Philippines from becoming a hotbed of money laundering, terrorism financing and cybercrime. Notwithstanding the essential difficulties in regulating cryptocurrencies, Philippine regulators have embarked on initiatives to balance these policies.
Regulation as investment contracts
As of this article being written, the Securities and Exchange Commission (SEC), which regulates the licensing of domestic and foreign corporations, has not released any rule specifically concerning virtual currencies. However, the SEC’s Enforcement and Investor Protection Department (EIPD) has expressed its position that virtual currencies fall within the definitions of “security” and “investment contract” in the Securities Regulation Code (SRC), and so are under the regulatory jurisdiction of the SEC. On 8 January 2018, the EIPD released an advisory that virtual currencies must be registered and subjected to disclosure requirements under the SRC before they are sold to the general public.
Consistent with this, the SEC issued a Cease and Desist Order on 23 January 2018 in a matter of Black Cell Technology Inc et al against four companies for selling and/or offering for sale Krop Tokens or KropCoins, both of which are virtual currencies. On 2 March 2018, the SEC found that these virtual currencies were investment contracts that were not registered prior to their sale, and although Krop Tokens or KropCoins were issued from Hong Kong, these were still being offered and/or sold in the Philippines because they were accessible and made available to buyers in the Philippines via the internet.
On 10 April 2018, the EIPD issued a similar advisory for “cloud mining contracts”. Treating cryptocurrency as securities or investment contracts has serious regulatory implications. Registration of securities and investment contracts tediously involves the preparation of registration statements and prospectuses, publications in newspapers of general circulation, disclosure requirements, and multiple approval processes designed to protect the investing public. Once registered, these may only be sold by salesmen, brokers and agents who must also be registered with the said regulator. The violation of these requirements is criminal in nature, punishable by fines and/or imprisonment.
In any event, SEC officials have publicly confirmed that the regulator is drafting rules for virtual currencies and initial coin offerings (ICOs) to be released this year. The SEC is also reportedly looking into complaints and investigating companies conducting cryptocurrency transactions.
Virtual currency exchanges
Under the General Banking Law, the BSP has regulatory powers over the operations of finance companies and non-bank financial institutions performing quasi-banking functions, including remittance or transfer agents, money changers, or foreign exchange dealers. Because these entities may function as virtual currency (VC) exchanges by converting or exchanging cryptocurrency to fiat currency (or vice-versa), the BSP has issued circular No. 994 (2017) or the Guidelines for Virtual Currency Exchanges, which will apply to virtual currency exchanges that also operate as remittance and transfer companies, money changers, or foreign exchange dealers. “Virtual currency exchanges” used hereafter refers to those covered by BSP circular No. 994.
BSP circular No. 944 lays out various regulations that are now deemed incorporated as section 4512N of the Manual of Regulations for Non-Banking Financial Institutions (MORNBFI).
The MORNBFI now requires the registration of virtual currency exchanges upon compliance with the requirements for registration of remittance and transfer companies, money changers, or foreign exchange dealers. It also requires payment of registration and annual service fees corresponding to remittance agents. Virtual currency exchanges are also further required to maintain risk management and security control mechanisms to manage technology risks associated with virtual currencies, including an effective cybersecurity programme (if the VC exchange provides for wallet services for holding, storing and transferring virtual currencies) and an internal control system commensurate to the nature, size and complexity of their respective businesses. Notification and reportorial requirements, in the same form and manner as those required for remittance and transfer companies, money changers, or foreign exchange dealers are also imposed on VC exchanges.
More importantly, the MORNBFI also requires VC exchanges to transact only via direct check payments or direct credit to deposit accounts whenever a payout would amount to more than PHP500,000 (about US$10,000) or its foreign currency equivalent.
The MORNBFI also requires VC exchanges to register with the Anti-Money Laundering Council (AMLC). Notably, remittance and transfer companies, money changers and foreign exchange dealers are themselves subject to the Anti-Money Laundering Act (AMLA) as covered institutions, under which they are required to timely file reports for covered transactions (i.e. transactions involving a total amount in excess of PHP500,000 within one banking day) and suspicious transactions, as defined in the AMLA. VC exchanges are thus also subject to the AMLA’s know-your-customer and record-keeping requirements.
As of writing this article, BSP circular No. 944 is the only regulation of national application that specifically concerns cryptocurrencies.
Regulations for Virtual Currency Businesses in the Cagayan Special Economic Zone. While national regulators are concerned with restricting cryptocurrency trading and businesses, the Cagayan Special Economic Zone Authority (CEZA) has formulated rules permitting virtual currency businesses to operate in the Cagayan Special Economic Zone (Cagayan Ecozone), a special economic zone and free port established by law and located in the province of Cagayan in the northern part of the Philippines. In April 2018, the CEZA announced it will license 10 blockchain and virtual currency companies, which may then conduct cryptocurrency mining or ICOs, or operate an exchange within the Cagayan Ecozone, provided the exchange of money into virtual currency (and vice-versa) is done offshore.
The Cagayan Special Economic Zone and Freeport Financial Technology Solutions and Offshore Virtual Currency Business Rules and Regulations of 2018 (CEZA VC rules) regulate Financial Technology Solutions and Offshore Virtual Currency (FTSOVC) business-related activities within the Cagayan Ecozone, and were issued to, among other things, ensure that adequate safeguards are established and enforced to prevent these activities from being used for money laundering and other crimes, and digital financial fraud.
It must be emphasized that the cryptocurrency businesses licensed by the CEZA are not allowed to transact with clients in the Philippines, and licensees may thus provide FTSOVC services only to overseas clients. The extraterritorial destination of such services results in the inapplicability not only of BSP circular No. 994, but also the SRC, which requires registration only for securities that are sold or offered for sale or distribution in the Philippines.
The CEZA VC rules require FTSOVC businesses to secure special licences to operate as such entities, with registration requirements pertinently including an investment commitment in the Cagayan Ecozone amounting to at least US$1 million spread over two years, and the registration of foreign entities as financial technology solutions business enterprises, or offshore virtual currency exchanges in their respective home jurisdictions.
Licensees are also required to develop anti-money laundering and counter terrorism-financing rules, and maintain effective data privacy and cybersecurity programmes, and are subject to the inspection and audit authority of the CEZA. Each licensee is likewise subject to the CEZA’s inspection and audit authority, and must be connected to the CEZA’s Financial Technology Solutions Audit System and maintain records relating to its FTSOVC activities.
FTSOVC licences may have a maximum renewable term of 25 years, subject to suspension or revocation by the CEZA upon the grounds provided in the CEZA VC rules.
Overall, regulators remain cautious and have refused to endorse the use of cryptocurrencies as new stores of value and mediums of exchange. While this regulatory disposition is not expected to change soon, the approach taken by the CEZA shows that there are investment opportunities in this industry, especially if other special economic zones follow suit.
9, 10, 11 and 12 Floors, One Orion
11th Avenue corner University Parkway
Bonifacio Global City, Taguig City 1634