On 07 February 2017, the Bangko Sentral ng Pilipinas (BSP), the country's central monetary authority, issued Circular No. 944 (s.2017). Known as the Guidelines for Virtual Currency Exchanges, it is the first time that a Philippine government authority has issued regulation concerning intermediaries who are using bitcoin and other cryptocurrencies, an emerging technology that is thought-provoking for policymakers because of its multi-faceted implications that would impact economic, monetary, commercial, social and even political spheres.
Notably, Circular 944 does not discourage the use of cryptocurrencies for legitimate financial transactions. By not declaring them as illegal, which is the unfortunate approach taken by other jurisdictions (Venezuela and Ecuador for example), the Guidelines acknowledge that cryptocurrencies “have the potential to revolutionize delivery of financial services, particularly for payments and remittance, in view of their ability to provide faster and more economical transfer of funds, both domestic and international, and may further support financial inclusion.” The BSP’s decision to regulate cryptocurrency exchanges in the Philippines also gave the nascent industry: (1) legitimacy that now enables them to operate within a regulatory framework, (2) the consumers adopting its usage some level of comfort that these exchanges are now regulated, and (3) the investors who are funding innovative business cases some certainty on where the industry is heading.
From a consumer protection angle, the government has substantial interest in regulating cryptocurrency exchanges who leverage the technology to deliver financial services such as payments and remittance especially when they hold valuable assets on behalf of the customers and their beneficiaries.
It is also remarkable how BSP showed great understanding of Bitcoin’s decentralized payment system by not intending to regulate peer-to-peer (P2P) bitcoin transactions.
Circular 944 is just the beginning. Similar to the initiatives of other central banks and monetary authorities globally, BSP will eventually study deploying blockchain technology to improve efficiency in the financial system and streamline the cost of financial services.
Very simply, a blockchain is a distributed digital ledger where transactions are bundled in “blocks” that are chronologically linked by timestamp secured by asymmetric cryptography. This innovation is a technological breakthrough as previously we never had the ability to validate transactions without trusted intermediaries (banks, clearing houses, notaries, brokers, etc.) getting involved. Blockchains could promote efficiency through automation, reduce cost by cutting middlemen, and mitigate risks by using tamper-proof protocols rather than relying on error-prone agents or potentially fraudulent counterparty.
In the future, the BSP could even explore coming up with its own Central Bank-issued Digital Currency (CBDC), which is not far-fetched considering how CBDCs are being researched or experimented by monetary authorities in England, Canada, Dubai, Singapore, India, Hong Kong and China, just to name of few. Only recently, Madame Christine Lagarde, Chief of the International Monetary Fund, shared her thoughts on the most positively disruptive piece of financial technology - that is blockchain, and why the International Monetary Fund will be looking into applying this technology to power IMF's special currency, the Special Drawing Rights (SDR).
Majority of central banks and monetary authorities in the world are now closely studying cryptocurrencies and the underlying technology that underpins it. The initiatives vary from advanced studies, to experiments (called “proof of concept”), to launching an actual production-level application for blockchain and other forms of Distributed Ledger Technology (DLT). For instance, the central bank of Belarus has created an information network based on blockchain technology - the first practical application of which relates to the transfer of information on issued bank guarantees.
There’s also a lot of interesting business cases for blockchain in the financial services industry. One recent and notable example is in insurance. AXA, the French multinational insurance company, launched Fizzy - a blockchain-based parametric insurance to compensate passengers for delayed flights. Fizzy will store and process payouts via smart contracts — self-executing contracts triggered automatically once pre-determined parameters are met in the real world — built on the Ethereum blockchain.
I sometimes mention to my law students how I love bitcoin. But I never really bothered explaining why because the reasons are not relevant to our subject matter.
My reason is simple. I love Bitcoin because it is the first implementation of a technology that I am passionate about. I believe blockchain technology gives this generation this amazing window of opportunity to make this world better. It does not make sense to love blockchain but be dismissive about Bitcoin - as many traditional bankers do - especially if the only reason to reject Bitcoin is because of the reputational issues that burden the cryptocurrency, which arose from an outdated narrative that criminals were among the early adopters of the technology.
By introducing a new network infrastructure that can (1) secure data robustly by removing any single point of attack and (2) transfer value completely native on the internet (including the backend) in an elegant manner that is achieved through a decentralization combined with clever cryptography, blockchains have tremendous potential for public good even more in areas where the legacy systems fail. For instance, the recent cyber-attacks that targeted several hospitals in Europe might have been avoided if perhaps those compromised medical records were stored within a decentralized database that incorporates a blockchain architecture or some other form of distributed ledger. Factom, a US-based firm, received substantial amount of grant from the Melinda and Bill Gates Foundation to work on the development of a secure, reliable, and readily available distributed health records.
There is a wide array of financial and non-financial use cases for blockchain that are in development. Blockchain is a general-purpose technology that could potentially enhance financial inclusion to benefit the poor and the unbanked, usher the revival of artistic rights, effectively enforce data privacy, track provenance in the supply chain, ensure we are consuming fair-trade products, and automate the enforcement of certain aspects of legal agreements through “smart contracts” – all in ways that were never possible before. The list of applications goes on and on. We should focus on these aspects of the technology, rather than on the cryptocurrency’s susceptibility to abuse. After all, I’ve never heard somebody say that we should stop using social media because ISIS and Ponzi scammers use Facebook and Twitter.
It is true that bitcoin has been used in ransomware, cyberhacking and illegal money movements. But so is cash, the king of the underground. Frankly it's not bitcoin's fault that criminals find this cryptocurrency convenient to use. I stress again how history shows us that criminals are always the early adopters of new technology.
However, if I'm in law enforcement, I would want criminals to use bitcoin because that would give me greater chance to catch them. Unlike before when the technology was new and still being understood, by 2017 a large number of law enforcement authorities have become sophisticated enough to appreciate that criminals using bitcoin and other cryptocurrencies leave immutable audit trail on the publicly viewable blockchain. In other words, evidence and leads. Transactions analysis tools are also widely available that make investigation simpler and reliable. One company called Chainalysis is doing a great job in protecting the integrity of cryptocurrencies and other digital assets.
I was recently chosen as one of the mentors for a global hackathon for projects that seek to apply blockchain to address various social concerns. Called Blockchain for Social Impact Coalition (BSIC), I had the opportunity to touch base and advise teams working on financial inclusion, transparency in supply chain, sustainable energy, protection of identity, vulnerable peoples and the environment. Among several projects I mentored, Handshake and Kore Payments stood out.
Handshake seeks to ensure the protection of migrant workers by shielding them against unfair and fraudulent side agreements, utilizing smart contracts technology to faithfully execute some of the terms of standard employment contracts. Interestingly, the New York based project will pilot their platform in partnership with a Philippine-based recruitment agency.
Kore Payments wants to enable workers in the construction industry to receive daily wages through a mobile wallet that could be downloaded on feature phones and cheap smart phones. Still at its early phase, the team based in New Zealand hopes to enable automated daily payouts by using a decentralized payments network that will run on the blockchain. In my capacity as advisor, I recommended to the team to include the Philippines among the countries where they could test the project.
There were also three teams from the Philippines who took part at the BSIC hackathon. Lifemesh is a blockchain-based disaster management platform that facilitates transparency between nongovernment organizations and government institutions. It does this by connecting, verifying and tracking resources needed for effective disaster management. Prodigy is an education-to-jobs platform that will run on Ethereum, while Lifeblocks is an interesting project from Lasalle undergraduate students who are building an alternative to the legacy certification models implemented by educational institutions.
At the hackathon’s demo day held at Mapua University last October, A group of Mapua professors, including one college dean, announced Project Bluebook, a blockchain-based digital identity solution to ensure and protect privacy of visitors in residential and commercial buildings, to be first implemented at RCBC Plaza in Makati City. Not only that I find this project intriguing, the initiative - supported by the Yuchengco Innovation Center - shows the level of awareness from the academe when it comes to emerging technologies such as blockchains, smart contracts and decentralized applications.
[This post was originally published on Red Chronicles last November. Red Chronicles is our law school's official publication and Chain of Liberty is my column.]