The Philippines Has Decided to Regulate Bitcoin Exchanges as Remittance Companies

The Philippines has long been one of the hubs for Bitcoin remittance innovation, and local founders have always said that it was only a matter of time before our central bank (Bangko Sentral ng Pilipinas, or BSP) would come around to regulating our growing industry.

A little over a week ago, Deputy Governor Nestor Espenilla of the BSP announced that they would soon be issuing a circular that cleared up the government’s position on Bitcoin and other cryptocurrency exchanges. Espenilla noted that monthly Bitcoin volumes in the Philippines had jumped from $1M a month in 2015 to $5–6M a month the following year, and it was time to set some guidelines. (It’s not clear where he got those numbers from though.)

Surprisingly, that circular is now available (BSP Circular №944), and takes effect within the next two weeks.

On the surface, the BSP’s guidelines appear to take its cues from the Japanese Financial Services Agency, which published its own set of regulations for Bitcoin exchanges back in June 2016.

But there are some fundamental differences.

… the Bangko Sentral recognizes that Virtual Currency (VC) 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

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

The Bangko Sentral does not intend to endorse any VC, such as bitcoin, as a currency since it is neither issued or guaranteed by a central bank nor backed by any commodity.

Bitcoin is referred to by name here, although it’s clear that the guidelines are meant to refer to all virtual currencies (which it shortens to VC throughout the document). They can’t ever be seen as endorsing a currency that they did not themselves create, so that’s fine.

The Bangko Sentral recognizes that once fiat currency is exchanged or converted into VC, it becomes easily transferable, facilitating expedient movement or transfer of funds …

Because of the way Philippine Bitcoin startups have been using crypto over the past three years, it appears that the BSP has latched onto this single use case more than any other. They do not appear to have a regulatory position on using Bitcoin as a speculative investment or as a payment rails, for instance.

But what is a virtual currency, in the eyes of the Philippine Central Bank?

VC refers to any type of digital unit that is used as a medium of exchange or a form of digitally stored value created by agreement within the community of VC users. VCs are not issued nor guaranteed by any jurisdiction and do not have legaltender status. 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

It’s an extremely broad net that’s being cast here. Perhaps it’s in the interest of efficiency — these guidelines cover both centralized and decentralized currencies, blockchain-based or not. It potentially also includes stuff that doesn’t even exist yet, as I’m not entirely sure what it means to “manufacture” a virtual currency.

It shall not be construed to include e-money […], digital units used solely within online gaming platforms and are not convertible to fiat currency or real-world goods or services, digital units with stored value redeemable exclusively in goods or services and limited to transactions involving a defined merchant such as rewards programs

They do take care to differentiate VCs from mobile money, Warcraft gold, Starbucks points, and/or Mabuhay Miles, however. (Mobile money is covered by a different, arguably more stringent, set of regulations.)

“VC exchange service” refers to the conversion or exchange of fiat currency or other value into VC, or the conversion or exchange of VC into fiat currency or other value
“VC exchange” refers to any entity that offers services or engages in activities that provide facility for the conversion or exchange of fiat currency to VC or vice versa.

This is a tricky definition, as this does not, strictly speaking, just cover “VC exchanges.” It’s written to include Bitcoin wallets or Bitcoin payment processors, as well as the more obvious order-book exchanges. Essentially, any company who performs “conversion” is potentially covered by these definitions.

So what does a VC exchange need to do in order to become compliant?

A VC exchange shall obtain Certificate of Registration (COR) to operate as a remittance and transfer company […]
The provisions of Subsec. 4511.N.2 on issuance of Bangko Sentral COR, accreditation of remittance sub-agents, registration with the Anti-Money Laundering Council Secretariat and mandatory training shall also apply to VC exchanges.

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

A VC exchange shall pay the registration and annual service fees as provided under Subsec. 4511N.8

The document they refer to is a previous circular (№942, available here), 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, and the annual service fees would probably be about the same.

On the face of it, a first-year cost of $4,000 is no higher than any traditional money services business would be expected to pay in this country, so it’s not altogether unfair. The difficult part is not knowing how long the registration process will take, especially considering that the oldest Bitcoin startups in the Philippines have been operating for about three years, and have been applying for remittance licenses for just as long.

So what does this mean for the Philippine Bitcoin industry?

From one angle, it’s good news that the government is finally recognizing that we exist and acknowledge that our efforts do have a positive social impact on our country.

It’s also encouraging that they’ve spent the time to learn enough about Bitcoin to understand what it is good at, even though they appear to have vastly overestimated how much of it is actually used for remittances.

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. The new guidelines do not offer any concessions for order-book exchanges that have no international footprint, nor do they clarify the situation for sole proprietors buying and selling BTC on LocalBitcoins.

I’m unsure what kind of impact this will have on the Bitcoin startups operating within our borders, but I hope that it won’t put the brakes on the innovative momentum that has been building up over the past few years. We’ve been making a lot of progress since 2013, but there’s still a ton more work to be done.

For more information on the Bitcoin Remittance industry — both in the Philippines and elsewhere — check out my first book “Reinventing Remittances with Bitcoin,” available for free here.