Are New Regulations a Bottom or Bottom for Philippine Bitcoin Startups?

Rage Review : The deputy governor of the Central Bank of the Philippines issued a circular aimed at clarifying the government's position on Bitcoin and other cryptocurrency exchanges. It is only a matter of time before Bitcoin and cryptocurrency exchanges are regulated. This is because virtual currency systems have the potential to revolutionize the delivery of financial services, especially payment and remittance services. However, due to insufficient testing, it will take some time to fully understand the impact of the new regulations on Philippine Bitcoin startups.

Translation: Nicole

The Philippines has been a hub of innovation for bitcoin remittance companies, with Abra and ZipZap both eyeing the country as a market launch or regional base of operations.

The local founder said it was only a matter of time before the central bank, Bangko Sentral ng Pilipinas (BSP), regulates the industry, having started the regulatory process in early February this year.

At that time, BSP Deputy Governor Nestor Espenilla announced that the central bank would issue a circular aimed at clarifying the government’s stance on Bitcoin and other cryptocurrency exchanges.

At the time, Espenilla noted that the Philippines’ monthly domestic bitcoin volume had jumped from $1 million in 2015 to between $5 million and $6 million the following year, and that it was time to set guidelines. The circular has now been issued (BSP Circular No. 944) and will take effect at the end of the month.

Nestor Espenilla

On the surface, the circular appears to take some inspiration from Japan’s Financial Services Agency, which issued its own Bitcoin trading regulations last year, which came into effect in April of this year.

However, there are differences.

Overall, the preamble emphasizes the BSP’s stance on encouraging innovation and financial inclusion — a welcome statement based on the content of the circular.

The release content is as follows:

“Bangko Sentral finds that virtual currency systems have the potential to revolutionize the delivery of financial services, particularly payment and remittance services, given their ability to provide faster and more economical domestic and international fund transfer services and can further support financial services.”

Casting a wide net

This does not mean that the circular is impeccable.

As Philippine startups have been using Bitcoin for the past three years, it seems that the BSP has latched onto this single use case.

What is virtual currency in the eyes of the central bank?

The BSP is casting a very wide net.

“VC broadly includes digital trading units that (1) have a centralized codebase or administrator; (2) are decentralized and have no centralized codebase or administrator; or (3) can be created and obtained through computation or manufacturing.”

Possibly in an effort to increase efficiency — the guidelines apply to both centralized and decentralized currencies, blockchain-based and non-blockchain-based currencies.

This may even include technologies that don't exist, as it's not entirely clear what this would mean for 'making' a virtual currency.

Trading Rules

The BSP does, however, take care to differentiate between “virtual currencies” and “mobile money” — WoW coins, Starbucks points and frequent flyer miles. (In the Philippines, mobile money is governed by a different and stricter set of regulations.)

The definition of a “cryptocurrency exchange” is nuanced.

For one thing, it includes more than just “VC exchanges.” It’s written to include bitcoin wallets and bitcoin payment processors—indeed, any service that facilitates currency conversion. (Wallet providers are exempt if they don’t exchange fiat for bitcoin, but those types of services don’t have much use in the Philippines.)

Virtual currency exchanges will obtain a Certificate of Registration (CoR) issued by the Anti-Money Laundering Committee Secretariat and pay an annual fee.

The document referred to is a previous circular (Circular 942) detailing the various fees that need to be paid. In most cases, the registration fee is over $2,000 and the annual fee is the same.

Basically, all VC exchanges are now considered remittance companies.

Impact on the industry

On the surface, an annual fee of $2,000 for the first year would not be higher than what any traditional money service business in the Philippines would charge, so it is fair.

The bigger challenge is how to integrate mandatory compliance and reporting processes without impacting costs. In most cases, this also involves hiring additional staff and retaining legal consulting services.

So what does this mean for the Bitcoin industry in the Philippines?

Overall, it’s good news that the government is finally recognizing that startups have been operating in a legal gray area since 2013. Happily, they’ve spent enough time to understand Bitcoin and its advantages.

The intention seems to be to treat all companies that deal with Bitcoin as remittance agents, even if remittance is not the company’s primary goal. But perhaps most importantly, they will not provide more than a temporary sandbox status for startups to test.

It will take some time to fully understand the impact of all these new regulations.

The hope now is that this will not slow down the innovation momentum that has been building over the past few years in one of the world’s most densely populated and important regions.