2019 is an interesting year in terms of regulatory developments in the Philippines on cryptocurrencies and blockchain. We have seen financial regulators such as Bangko Sentral ng Pilipinas (BSP), Securities and Exchange Commission (SEC) and Anti-Money Laundering Council (AMLC) take proactive measures to address the market’s need for guidance and clarity, from crypto ATMs to crypto trading platforms.
We are also witnessing the beginning of a competitive race among different economic zones - such as Cagayan Economic Zone Authority (CEZA), Authority of Freeport Area of Bataan (AFAB), and Aurora Pacific Economic Zone and (APECO) - in developing their respective investment promotion agenda for digital assets, blockchain and the broader financial technology space.
But for the legal nerds, this year’s centerpiece is R.A. 11453, the Amended AFAB Charter. This new law which was enacted by Congress last August 2019 quietly introduced the term “cryptocurrency” for the first time in the Philippine legal system.
BSP
As of December 2019, there are now 13 “Virtual Currency Exchanges” registered with Bangko Sentral ng Pilipinas (BSP). The rising number of registered VCEs tells a lot about how market adoption for digital assets is growing in the Philippines.
In relation to BSP’s regulatory framework for crypto exchange service providers, the Central Bank clarified in March 2019 that operators of Automated Teller Machines for Virtual Currencies that allow purchase or exchange of Virtual Currencies (VCs) or other devices with similar functionality and capability, are considered as Virtual Currency Exchanges (VCEs) and should register with the BSP pursuant to Circular No. 944. According to BSP Memorandum M-2019-06, “As registered VCEs, they should comply with anti-money laundering/terrorist financing laws and regulations, ensure sufficient and appropriate controls and governance framework are adopted to manage the associated technology and other operational risks, and put in place adequate consumer protection and customer support, among others.” In relation to cryptocurrency ATMs, the BSP approved in early 2019 the installation of a bitcoin ATM inside a branch of a commercial bank located at the corner of Ayala Avenue and Paseo de Roxas in Makati City.
As part of its sandbox policy approach, the BSP also approved the pilot launch of a stablecoin issued by a Philippine commercial bank. Live transactions were conducted among three participating institutions that were part of a blockchain-based clearing system and payments networks for rural banks.
AMLC
In June 2019, the Financial Action Task Force issued a comprehensive Guidance for a Risk-Based Approach on Virtual Assets and Virtual Asset Service Providers. The Guidance explained in detail the ramifications of FATF’s resolution in October 2018 which clarified that the FATF Recommendations to prevent money laundering and terrorist financing now apply to financial activities involving Virtual Assets and Virtual Asset Service Providers. The amended FATF Recommendation 15 requires that VASPs be regulated for anti-money laundering and combating the financing of terrorism (AML/CFT) purposes, licensed or registered, and subject to effective systems for monitoring or supervision.
What’s interesting is as early as 2018, the Anti-Money Laundering Council (AMLC) already incorporated FATF’s definitions for “Virtual Assets” and Virtual Asset Service Provider” in the amended Implementing Rules & Regulation for the Anti-Money Laundering Act (AMLA). The AMLC Implementing Rules also stated broad principles that financial institutions should consider to manage and mitigate money laundering risks associated with cryptocurrencies.
Further, the AMLC clarified in 2018 Guidelines for Designated Non-Financial Businesses and Professions that cryptocurrencies and other digital assets are considered “property” within the context of Anti-Money Laundering laws and regulations. The expanded definition of property was also adopted from FATF several months before FATF’s Guidance for VASPs was officially released in June 2019.
SEC
In July 2019, the Securities and Exchange Commission (SEC) published its draft Rules for Digital Asset Exchange. The SEC basically recast traditional securities law and principles to enable a regulatory framework for Digital Asset Exchanges. Some of the key proposals are to regulate Digital Asset Exchanges as Self-Regulatory Organization (SRO), consistent with the provisions of the Securities Regulation Code (SRC) on the regulation of Exchanges and other trading markets.
The proposed rules also include capital requirements, annual limitation on purchase of digital assets, and prohibitions on insider trading and market manipulation which are also consistent with the provisions of the SRC. The draft rules demonstrate SEC’s willingness to craft bespoke regulation for the emerging cryptoasset market. Incidentally, the International Organization of Securities Commission (IOSCO), an international association of authorities that regulate the securities and futures markets, also consulted in May 2019 on the regulatory considerations relating to Cryptoasset Trading Platforms (CTP). IOSCO’s Consultation Report could significantly influence SEC’s policy approaches in developing the licensing framework for Philippine-based CTPs or digital asset exchanges.
One of the key highlights of 2019 is SEC’s Memorandum Circular No. 22 (2019) issued in November 2019. In the Circular, the SEC adopted the Philippine Interpretations Committee (PIC) on the accounting implications of cryptoassets. PIC Q&A 2019-02 recognized the growing market adoption of cryptocurrencies: “in the Philippines, the use of cryptocurrencies particularly Bitcoin is becoming popular.”
According to the PIC, the characteristics that are most relevant for classifying cryptoassets for accounting purposes its primary purpose and how it derives its inherent value. For a business entities engaged in cryptoasset business, consideration should be given to the entity's purpose for holding the cryptoassets to determine the relevant accounting model. Thus, depending on specific facts and circumstances, cryptocurrencies can be treated as Inventory under Philippine Accounting Standards (PAS 2) or as Intangible Asset (under PAS 38). For token issuers, they should assess whether a token meets the definition of a financial liability, which would trigger a different accounting treatment in accordance with the Philippine Financial Reporting Standards (PFRS 9).
Finally, in 2019, the SEC continued its vigilance in issuing a number of public advisories in relation to unregistered cryptocurrency cloud mining contracts (MYBITCLAIM) and cryptocurrency-related investment scams (PAYA Coins and Coin De Oro).
Economic Zones
The term “cryptocurrency” finally entered the proverbial Statute Book when Congress enacted R.A. 11453 on 30 August 2019 that granted the Authority of the Freeport Area of Bataan (AFAB) the power “to act as an offshore financial center that engage in…” “cryptocurrency mining”. Also in the same month, AFAB enacted its Policy and Licensing Framework for Offshore Blockchain and Financial Technology Solutions which could complement the licensing regime for Offshore Virtual Currency Business / Financial Technology Solutions pioneered by the Cagayan Economic Zone Authority (CEZA).
The Aurora Pacific Economic Zone and Freeport Authority (APECO) is also studying the creation of an investment promotion and licensing framework for digital asset business activities which would likely be introduced by 2020.
Proposed Legislation
2019 is also the year where a comprehensive bill for cryptocurrencies was proposed in Congress. The proposed bill, entitled “Digital Assets Act of 2019” delineated the regulatory authority of the BSP and SEC with respect to digital asset business activities.
Prospects
Looking forward, we foresee that another bill will be filed in Congress between 2020 and 2021, proposing for the amendment of the Anti-Money Laundering Act (R.A. 9160) to include Virtual Asset Service Providers (VASP) among Covered Persons which will trigger requirements for Know-Your-Client, record keeping, covered transactions and suspicious transactions reporting as well as appointment of AML compliance officer.
While we think it may be unlikely, it is also possible that another proposal will be put forward for the creation of a blockchain-based digital peso. Considering the rising popularity of the subject of Central Bank-issued Digital Currency (CBDC) among central bankers and monetary policy experts, it will be exciting to see another lawmaker resurrect the idea of a “logchain”-based “E-Peso” which was first proposed in Congress as early as 2014.
Rafael Padilla is a commercial attorney who specializes in financial technology, cryptoassets, and blockchain. He works with many of the blockchain projects and financial technology startups in the Philippines, serving their legal and compliance requirements. He is also a special consultant of the Aurora Pacific Economic Zone Authority (APECO) on financial technology and digital assets.
Rafael is an adjunct Professor of Law at San Beda Alabang School of Law where he teaches Legal Interpretation, Constitutional Law, Tax and Transport Las. He co-founded Blockchain Association of the Philippines, a non-profit group that represents the interests of the local blockchain community, and the Fintech Philippines Association. Recently, he co-founded Block Devs Asia, Inc., a professional association of blockchain developers.
Rafael is also a regular lecturer at Mandatory Continuing Legal Education (MCLE) seminars for lawyers where he talks about the legal, regulatory and policy implications of blockchains, cryptoassets and distributed ledgers.