BSP issues rules on virtual currency exchanges, first to do so in Asia

The Bangko Sentral ng Pilipinas (BSP) has crafted a set of rules that will cover virtual currency (VC) exchanges – the first VC regulation in Asia – to address risks to financial consumers.

BSP Circular No. 944 or the “Guidelines for Virtual Currency Exchanges” was approved last Monday to “encourage financial innovation” but not to abuse the flow of money since VCs have a higher degree of anonymity, volatility and accessibility and thus prone to money laundering and terrorist financing activities.

The BSP said the approved regulatory framework primarily ensures that consumers will be protected and that the Philippines will not be a hot bed for money laundering or terrorist financing activities.

According to the BSP, VC-based payments and remittance transactions have been monitored at $5 million to $6 million per month and this “rapid growth” has prompted the central bank to implement formal regulatory measures.

“The new regulation, a pioneer in Asia, seeks to balance the interests of promoting technological innovations with the potential to improve the level of inclusion and efficiency in the financial system, and to proactively address emerging risks to the system arising out of these new technologies,” said the BSP.

In the circular memo, the BSP clarified that it does not endorse VCs such as bit coins as a currency and they do not issue or guarantee any VC. "Rather, the BSP aims to regulate VCs when used for delivery of financial services, particularly for payments and remittances which have material impact on anti-money laundering and combating the financing of terrorism, consumer protection, and financial stability."

The BSP rules will only cover entities that transact the exchange or conversion of VC which are “crucial links” with the financial system, and not the so-called VC creators.

“Conceptually, these VC exchanges are considered to be and are similarly treated as companies offering money or value transfer services,” the BSP noted.

Entities that deal in VC exchanges will be considered as companies transacting money or value transfer services and as per BSP rules on money businesses, these will be categorized as remittance and transfer companies (RTCs).

“The basic requirements for RTCs such as registration, minimum capital, internal controls, regulatory reports and compliance with the Anti-Money Laundering Act, as amended, and its implementing rules and regulations, shall likewise apply to VC exchanges,” the BSP explained.

The new rules are consistent with the Financial Action Task Force Guidance for a Risk-Based Approach to VCs (June, 2015). It requires VC exchanges to execute a Deed of Undertaking to “implement, among others, minimum standards of consumer protection.”

Transactional requirements for large value pay-outs were also adopted to manage money laundering/terroristfinancing risk, the BSP added. “(The) technology risk management is a minimum requirement for VC exchanges given the nature of their business.”

The central bank also stated they will cancel certificates of registration for violations of the rules or non-compliance with the Deed of Undertaking. “BSP-registered financial institutions, particularly banks, are prohibited from dealing with unregistered VC exchanges or similar entities.”