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BITCOIN AND CRYPTOCURRENCY REGULATION IN THE PHILIPPINES

By Russell Stanley Q. Geronimo*

On February 6, 2017, the Bangko Sentral ng Pilipinas (“BSP”)1 issued the


Guidelines for Virtual Currency Exchanges (BSP Circular No. 944, or “Circular”), providing
the rules and regulations governing operations of Virtual Currency (“VC”) Exchanges in
the Philippines. The Circular is incorporated as Section 4512N of the Manual of
Regulations for Non-Bank Financial Institutions (“MORNBFI”).

I. Definition of VC

A. Digital Units of Exchange

VC is “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.” It includes
digital units of exchange that: (i) have a centralized repository or administrator; (ii) are
decentralized and have no centralized repository or administrator; or (iii) may be created
or obtained by computing or manufacturing effort.2
VCs do not include: (i) e-money as defined under Section X780 of the Manual of
Regulation for Banks (“MORB”); (ii) digital units used solely within online gaming
platforms and are not convertible to fiat currency or real-world goods or services; and (iii)
digital units with stored value redeemable exclusively in goods or services and limited to
transactions involving a defined merchant, such as rewards programs.3

B. Neither Fiat Currency nor Legal Tender

VCs are not issued nor guaranteed by any jurisdiction and do not have legal tender
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status. The Circular provides that “[t]he 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.” The purpose of the Circular is merely “to regulate
VCs when used for delivery of financial services, particularly, for payments and
remittances, which have material impact on anti-money laundering (AML) and combating
the financing of terrorism (CFT), consumer protection and financial stability.”5


*
Juris Doctor, University of the Philippines – College of Law.
1
BSP is the central monetary authority in the Philippines.
2
Subsection 4512N.2(a), MORNBFI.
3
Subsection 4512N.2(a), MORNBFI.
4
Subsection 4512N.2(a), MORNBFI.
5
Section 4512N, MORNBFI.

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II. Definition of VC Exchange

A. Conversion or Exchange of Fiat Currency to VC or vice versa

The Circular defines a VC Exchange as “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.”6 It also defines VC Exchange Service as 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.”7 Fiat currency refers to “government-issued currency that is designated as
legal tender in its country of issuance through government decree, regulation, or law.”8

B. Similar to Remittance and Transfer Companies

The BSP recognizes the similarity between VC Exchanges and Remittance and
Transfer Companies (“RTC”). This is because “once fiat currency is exchanged or
converted into VC, it becomes easily transferrable, facilitating expedient movement or
transfer of funds and payment services[.]”9
RTCs are entities that provide money or value transfer services (“MVTS”). They
are regulated by Republic Act (“R.A.”) No. 9160 (Anti-Money Laundering Act of 2001, or
“AMLA”) as amended, its Revised lmplementing Rules and Regulations (“RIRR”), and
other related implementing regulations issued by the BSP. Duly registered VC Exchanges
may perform other MVTS, but duly registered RTCs may not engage in VC Exchange
Services unless registered as an RTC operating as a VC Exchange.10

III. Registration of VC Exchanges11

A. Certificate of Operation

VCs must be registered with the BSP before operation. Registration constitutes a
2-stage process. The first stage is a preliminary screening process for BSP to determine
if the applicant is eligible for registration. The new applicant shall submit the following for
evaluation: (i) Application letter; (ii) Business plan, including target market; and (iii) List of
owners/controlling shareholders, directors, and principal officers.
In the second stage, the eligible applicant is invited to submit supporting
documents to complete the registration process, as follows:

1. Incorporation papers duly authenticated by the Securities and Exchange


Commission (for corporation/ partnership); or copy of the Certificate of
Registration duly authenticated by the Department of Trade and Industry


6
Subsection 4512N.2(f), MORNBFI.
7
Subsection 4512N.2(b), MORNBFI.
8
Subsection 4512N.2(c), MORNBFI.
9
Subsection 4512N.1, MORNBFI.
10
Subsection 4512N.1, MORNBFI.
11
Subsection 4512N.3, MORNBFI, adopting Subsections 4511N.2 and 4511N.8, MORNBFI, and Appendix
N-8-a, to VC Exchanges.

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(for single proprietorship); or proof of registration with the Cooperative
Development Authority (for cooperative);

2. Copy of business registration/permit from the city or municipality having


territorial jurisdiction over the place of establishment and operation of
the office for the current period, which should indicate the line of
business of the registered entity;

3. Notarized deed of undertaking of the entity and members of the board


of directors/partners, signed by the proprietor, partner/s, president
and/or directors, as the case maybe;

4. Proof of attendance of the proprietor/partners/directors/principal officers


and other personnel directly involved in VC Exchange operations to the
required AMLA Seminar conducted by the AMLC, BSP, or BSP-
accredited person, or for persons registered prior to 04 February 2017,
a certification of compliance with this requirement executed by the
President and Compliance Officer;

5. Sworn certification, signed either by the proprietor, managing partner, or


president, that a Money Laundering and Terrorist Financing Prevention
Program (“MLPP”) has been developed, adopted and disseminated to
all employees;

6. Clearance from NBI, or its equivalent in foreign jurisdictions, of all


directors and principal officers; and

7. Duly notarized certification from the proprietor/managing


partner/president, as to compliance with the required minimum capital.

Upon approval, the BSP will issue a Certificate of Registration (“COR”) to the
applicant, which shall commence operation within 3 months from the date of issuance of
the COR.
Grounds for denial of Application for Registration are: (i) failure to provide the
complete required documents, and (ii) any of the prospective VC Exchange’s proprietors,
or any of its partners, directors, or principal officers, as applicable, is not fit and proper. In
determining whether a person is fit and proper, regard shall be given to: (i) integrity or
probity, (ii) market reputation, (iii) competence, and (iv) financial capacity.

B. Minimum Capital

VC Exchanges may be classified as Large-Scale Operators or Small-Scale


Operators. Large-Scale Operators are those with average monthly network volume of
transactions of at least P75 million and have a benchmark capital of P50 million. Small-
Scale Operators are those with average monthly network volume of transactions of less
than P75 million and have a benchmark capital of less than P50 million. During application

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for registration, the VC Exchange registrant is required to submit a duly notarized
certification from the proprietor, managing partner, or president, as to compliance with the
said capital.

C. Accreditation of VC Exchange Agents

Duly registered VC Exchanges may accredit their own agents. An agent shall be
treated as an extension of the VC Exchange and shall be subject to the same obligations
of a VC Exchange under the MORNBFI (as amended by the Circular) and under the Deed
of Undertaking executed by the VC Exchange applicant. The VC Exchange shall ensure
that it conducts appropriate due diligence in the accreditation and shall provide effective
continuing oversights of its agents.

D. Registration with the Anti-Money Laundering Council Secretariat

VC Exchanges are also required to register with the Anti-Money Laundering


Council Secretariat (“AMLCS”) within 30 calendar days from the actual date of
commencement of VC Exchange operations. The VC Exchange shall then submit to the
SES a proof of registration with AMLCS, within 5 business days from registration thereat.
Failure to register shall result in the automatic cancellation of the VC Exchange
registration.

E. Mandatory Training

All proprietors, partners, directors, officers, and other personnel directly involved
in VC Exchange Services shall attend a BSP- or AMLC-accredited seminar before start
of operations, on the requirements of the AMLA, as amended, particularly on customer
due diligence, reporting of covered and suspicious transactions, and record-keeping.
Refresher training shall likewise be conducted at least every 2 years.

F. Registration and Annual Service Fees

The registration fee is P100,000 for Large-Scale Operators and P20,000 for Small-
Scale Operators. A non-refundable P1,000 shall also be paid for each office other than
the head office. VC Exchanges shall also pay, not later than March of every year,
commencing in 2018, an annual service fee of P100,000 for Large-Scale Operators and
P20,000 for Small-Scale Operators.

IV. Operation of VC Exchanges

A. Transactional Requirements

Large value pay-outs of more than P500,000 (or its foreign currency equivalent) in
any single transaction with customers or counterparties, shall only be made through
check payment or direct credit to deposit accounts.12

12
Subsection 4512N.5, MORNBFI.

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B. Technology Risk Management and Internal Control

A VC Exchange must establish adequate risk management and security control


mechanisms. VC Exchanges providing wallet services for holding, storing, and
transferring VCs must have an effective cybersecurity program. VC Exchange with simple
operations must have up-to-date anti-malware solutions, periodic back-ups, and constant
awareness of emerging risks and other cyberattacks.13
All VC exchanges shall maintain an internal control system commensurate to the
nature, size and complexity of their respective businesses. All VC exchanges shall adhere
to the guidelines issued by the BSP on the minimum control standards that VC Exchanges
are expected to observe on their operations.14

C. Notification and Reporting Requirements15

1. Major Business Events

VC Exchanges shall inform the SES of the following events:

a. Commencement of operations. – The VC Exchange shall notify within


five business days from the start of operations of each of its offices.

b. Newly-accredited VC Exchange Agents. – The VC Exchange shall notify


within five business days from contract signing of its newly accredited
VC Exchange agents.

c. Change of tie-up partner/s. – The VC Exchange shall notify within five


business days from the addition and/or termination of tie-up partner/s
and shall submit the following documents, if applicable:

(i) Notarized tie-up agreement/s which shall be consularized if


originated/signed abroad; and

(ii) Proof that the VC Exchange or counterparty is authorized to


engage in VC Exchange Services and is subject to the anti-
money laundering laws of the country where it operates.

d. Transfer of location. – The VC Exchange shall notify within five business


days from actual date of transfer.

e. Closure of office. – The VC Exchange shall notify within five business


days from the actual date of closure.

13
Subsection 4512N.6, MORNBFI.
14
Subsection 4512N.7, MORNBFI.
15
Subsection 4512N.8, MORNBFI, adopting Subsections 4511N.3 to 4511N.5, MORNBFI, to VC
Exchanges.

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f. Closure of business. – The VC Exchange shall notify within five business
days from the actual date of closure and shall submit the following
documents:

(i) Certification by the owner or partnership/board resolution, as the


case may be, authorizing/attesting the closure of the VC
Exchange; and

(ii) Original copy of BSP COR issued to the VC Exchange.

2. Change of Registered Name

The VC Exchange shall not change its registered/business name without


submitting to the SES the following documents:

a. COR from the Department of Trade and Industry (DTI), Securities and
Exchange Commission (SEC) or Cooperative Development Authority
(CDA), as the case may be, indicating the new business/registered name;
and

b. Original copy of BSP COR issued under the old name.

The BSP shall issue a new COR indicating the new registered/business name of
the VC Exchange.

3. Change of Ownership or Control

The VC Exchange shall obtain prior approval from the BSP for any change in:
ownership of a sole proprietorship or partnership, or control of a corporation. Control shall
refer to any transaction involving voting shares of stock of a VC Exchange that will result
in ownership or control of at least 20% of voting shares of stock of the VC Exchange by
any person, whether natural or juridical, or which will enable such person to elect, or be
elected as, a director of such VC Exchange. The VC Exchange shall submit the names
of its proposed new owner/s or controlling shareholder for evaluation. Failure to seek prior
approval may result in cancellation of registration.

4. Other Periodic Reports

The VC Exchange shall also maintain records and submit the following reports to
the SES: (i) Annual Audited Financial Statements, not later than the 30th of June following
the reference calendar year; (ii) Quarterly Report on Total Volume and Value of VCs
transacted, within 10 business days from end of reference quarter; and (iii) Quarterly list
of operating offices and websites, within 10 business days from end of reference quarter.
The last two requirements must be duly certified by the proprietor, managing partner,
president, or any officer of equivalent rank.

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V. Sanctions

Operating without prior BSP registration shall warrant: (i) disqualification from
registration, and (ii) fine of not less than P50,000 nor more than P200,000, or by
imprisonment of not less than two years nor more than 10 years, or both, at the discretion
of the court. Violation of any provisions of the AMLA, as amended, and its RIRR, shall
warrant: (i) cancellation of registration, (ii) applicable penalties prescribed under AMLA,
(iii) disqualification from holding any position in any BSP-supervised or -regulated
institution, or (iv) written reprimand. Erroneous, delayed, or unsubmitted reports, and
violation of any provisions or requirements of the Circular, shall warrant: (i) cancellation
of registration, and (ii) monetary penalties.16

VI. Possible Legal Issues

A. Legal Concept of Virtual Property

To date, there is no Supreme Court (“SC”) Decision recognizing the concept of


virtual property. It must be noted, however, that Article 414, R.A. 386 (Civil Code of the
Philippines, or “Civil Code”) defines “property” as any object susceptible of appropriation.
Moreover, Article 416 classifies all those that are susceptible of appropriation, but are not
included in Article 415, as “personal property”. VCs and other virtual properties do not fall
under the enumeration in Article 415, which pertains to “real property”. Hence, insofar as
VCs are susceptible of appropriation, they may be considered personal property.

B. Taxation of Bitcoin Trading and Other Cryptocurrency Transactions

To date, the Bureau of Internal Revenue (“BIR”) has not yet issued any revenue
regulation, memorandum circular, or ruling on the taxation of VCs. It must be noted,
however, that if VCs are considered personal properties, then VC Exchange transactions
may result in income taxes, transfer taxes, and value-added taxes (“VAT”), as follows:

1. Income tax. – VCs may be classified as ordinary or capital assets. If they


are ordinary assets (e.g. VCs in the hands of regular VC dealers), the
gain from the sale, transfer, or exchange of VCs is considered an
ordinary gain forming part of the gross income and taxable at the regular
income tax rate. However, if they are capital assets (e.g. VCs in the
hands of occasional VC traders), the gain from the sale, transfer, or
exchange of VCs is considered a capital gain, which also forms part of
the gross income and also taxable at the regular income tax rate17, but
subject to the holding period rule, capital loss limitation, and net capital
loss carry-over.18

16
Subsection 4512N.15, MORNBFI.
17
There is no final capital gains tax provision governing VC transactions, unlike real estate and shares of
stock not listed in the local stock exchange, under R.A. No. 8424 (Tax Reform Act of 1997 or “Tax Code”).
18
See Section 39, Tax Code, as amended.

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2. Transfer tax. – Donation of VCs may be subject to a donor’s tax of 6%
of net donations in a year, amounting to more than P250,000 and
regardless of the donor’s relationship to the donee. On the other hand,
acquisition of VCs by way of inheritance may be subject to an estate tax
of 6% of net value of the estate.19

3. VAT. – Since there appears to be no VAT exemption for VCs, the sale
of VCs in the regular course of business by a VAT-registered enterprise
meeting the P3 million VAT threshold may be subject to 12% of gross
sales and receipts.20

C. Security Registration for Initial Coin Offerings

Through an Initial Coin Offering (“ICO”), an enterprise issues digital tokens to


investors in exchange for capital. The tokens yield monetary returns based on the
profitability of a project or business, which are then payable in bitcoins or other
cryptocurrencies. While the Securities and Exchange Commission (“SEC”) has not issued
any memorandum circular or opinion on whether ICOs and equivalent transactions are
registrable securities offerings, Section 3.1 of R.A. No. 8799 (Securities Regulation Code
or “SRC”) provides a broad definition of “securities”, as follows:

“‘Securities’ are shares, participation or interests in a corporation or


in a commercial enterprise or profit-making venture and evidenced by a
certificate, contract, instruments, whether written or electronic in character.”

Securities include “investment contracts”.21 The SC has adopted the Howey Test
in determining whether an agreement constitute an investment contract, as follows:

“[F]or an investment contract to exist, the following elements [...]


must concur: (1) a contract, transaction, or scheme; (2) an investment of
money; (3) investment is made in a common enterprise; (4) expectation of
profits; and (5) profits arising primarily from the efforts of others.”22

There is no doubt that an ICO is a contract for the investment of money in a


common enterprise, with the expectation of profit arising from the effort of others. Hence,
an ICO may be considered as a securities offering under the SRC, which requires
registration with the SEC, violation of which may result in criminal and civil penalties.23


19
See Sections 84 and 99, Tax Code, as amended by R.A. No. 10963 (Tax Reform for Acceleration and
Inclusion or “TRAIN”).
20
See Sections 105, 106, and 108, Tax Code, as amended by TRAIN.
21
Section 3.1(b), SRC.
22
SEC v. Prosperity.com, Inc., G.R. No. 164197, January 25, 2012.
23
See Sections 8, 54, 57, and 73, SRC.

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D. Validity of Bitcoin Futures

Bitcoin futures are futures contracts, with bitcoins as the underlying asset. The
SRC provides that “[n]o person shall offer, sell or enter into commodity futures contracts
except in accordance with the rules, regulations and orders the [SEC] may prescribe in
the public interest. The [SEC] shall promulgate rules and regulations involving commodity
futures contracts to protect investors to ensure the development of a fair and transparent
commodities market.”24 To date, the SEC has not promulgated rules and regulations
allowing the trading of commodity futures contracts. Accordingly, such activities remain
prohibited under the SRC.


24
Section 11, SRC.

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