Will New Regulations Help or Hurt Bitcoin Startups in the Philippines?

Luis Buenaventura is CTO of BloomSolutions, a Philippines-based remittance firm, and the author of the e-book "Reinventing Remittances with Bitcoin".

In this CoinDesk opinion piece, Buenaventura gives his take on new regulations aimed at bitcoin businesses in the Philippines. Cost burden aside, he argues, there's reason for entrepreneurs to be optimistic about the changes.

With everyone from Abra to ZipZap using it as either a launch market or a base of regional operations, the Philippines has long been the hub of innovation for bitcoin remittance companies.

Local founders have said it was only a matter of time before the central bank, Bangko Sentral ng Pilipinas (BSP), would come around to regulating the industry, and that process finally began in early February of this year.

That's when when BSP deputy governor Nestor Espenilla announced the central bank would issue a circular that intended to clear up the government's position on bitcoin and other cryptocurrency exchanges.

At the time, Espenilla noted that monthly domestic bitcoin volumes in the Philippines had jumped from $1m in 2015, to $5m–$6m the following year, and it was time for guidelines. That circular is now available (BSP Circular No 944), and will take effect by the end of the month.

On the surface, the circular appears to take some of its cues from the Japanese Financial Services Agency, which published its own set of regulations for bitcoin exchanges last year, and that take effect this April.

But, there are differences as well.

Overall, the preamble emphasizes the BSP's position around encouraging innovation and financial inclusion – a welcome, if somewhat perfunctory, statement in light of what else the circular contains.

The release reads:

"The Bangko Sentral recognizes that virtual currency systems 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."

Casting a broad net

That's not to say the circular is without its weak spots.

Because of the way Philippine startups have been using bitcoin over the past three years, it appears that the BSP has latched on to this single use case more than any other.

The BSP does not appear to have a regulatory position on virtual currencies as an investment, a payment rail, a gambling platform or as a mechanism for offshoring personal assets – all of which are more common use cases for the technology than remittances.

And what exactly is a virtual currency, in the eyes of the central bank?

Here, the BSP is casting an extremely broad net.

"VCs shall be broadly construed to include digital units of exchange that (1) have a centralized repository or administrator; (2) are decentralized and have no centralized repository or administrator; or (3) may be created or obtained by computing or manufacturing effort."

Perhaps it’s in the interest of efficiency – these guidelines cover both centralized and decentralized currencies, blockchain-based or not.

It potentially also covers technology that doesn’t even exist yet, as it’s not entirely clear what it even means to 'manufacture' a virtual currency.

Exchange rules

But, the BSP does take care to distinguish 'virtual currencies' from 'mobile money' – Warcraft gold, Starbucks points and frequent-flier miles. (In the Philippines, mobile money is covered by a different, arguably more stringent, set of regulations.)

Elsewhere, the definition of 'virtual currency exchange' proves tricky.

For one, it does not just cover 'VC exchanges' in the way one would expect. It's been written to include bitcoin wallets and bitcoin payment processors – indeed, any service that facilitates currency conversion. (A wallet provider would be exempt if they did not exchange bitcoin for fiat, but those types of services would have little use in the Philippines.)

Virtual currency exchanges will further have to obtain a certificate of registration (CoR) with the Anti-Money Laundering Council Secretariat, and also pay annual service fees.

The document it refers to is a previous circular (No 942), which breaks down the various fees that need to be paid. In most cases, the registration fees come out to a little over $2,000, with annual service fees amounting to the same.

Essentially, all VC exchanges are now to be treated as remittance companies.

Effects on the industry

On the face of it, a first-year fee of $2,000 is no higher than any traditional money services business in the Philippines would be expected to pay, so it’s not altogether unfair.

The bigger challenge will be figuring out how to incorporate the mandatory compliance and reporting workflow without affecting costs. In most cases, this would involve hiring additional personnel and retaining legal advice.

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

Overall, it’s good news that the government is finally recognizing startups that have been laboring in a legal gray area since 2013. It’s also encouraging that they’ve spent enough time to learn about bitcoin to understand what it’s good at.

It certainly appears like the intention is to treat any business dealing with bitcoin as a remittance agent, even if remittances aren’t the primary purpose of that company. But perhaps most importantly, they do not offer a temporary sandbox status to startups with more experimental models.

It will take a while to fully understand the impact of all these new regulations.

For now, the hope is that it won’t decelerate the innovative momentum that has built up over the past few years in one of the most important regions in the world’s most populous continent.

Philippines police car image via Shutterstock