Ateneo

de Davao University
College of Law

a written report on

Blockchain and Cryptocurrency

in partial fulfillment of the requirements in
Banking Laws (LLB 316)

Submitted by:
Astillo, Jay
Castro, Mary Caroline
Chanyee, Kathia
Chua, Ingrid Corinne
De los Santos, Lara Aurea
Fabe, Betty Belle
Grancho, Gillian Ruth
Gementiza, Yveza June
Martinez, Mizzy Maree
Puerin, Jessalyn






February 20, 2019

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 Table of Contents


A. Overview 3
B. History of Blockchain and Cryptocurrency 4
• The History of Blockchain 4
• Cryptocurrency 5
C. Kinds of Cryptocurrency 7
• Characteristics 7
• Advantages and Disadvantages 8
D. Applicability of Cryptocurrency in the Philippines 12
• Cryptocurrency Laws and Regulations in the 12
Philippines
• Regulation as Investment Contracts 12
• Virtual Currency Exchanges 13
• The 6 Cryptocurrency Exchanges In Philippines 15
Registered With BSP
• Top 5 Blockchain and Cryptocurrency Companies 17
in the Philippines
• Other Blockchain Businesses and Crypto 18
Companies in the Philippines
• Taxation of Cryptocurrencies in the Philippines 19
E. The Blockchain and Cryptocurrency 20
• How does Blockchain work? 20
• Cryptocurrency 22
F. Legal Implications of Cryptocurrency 24
• Legal Implication in other Jurisdictions 24
• Bangko Sentral’s regulatory approach to Virtual 38
Currencies (VC)
G. Summary 44

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A. Overview

The concepts “blockchain”, “cryptocurrency” and “bitcoin” had garnered attention and interest
worldwide. The terms are often repeated by news reports, social media notifications and even from our
friends or family but not the technicalities and procedures behind it. For one, we heard the term “bitcoin”
and basically knew that this is a currency that is being traded online and we may have heard from our
friends or from social media that owning a handful of this type of currency will significantly improve
one’s wealth.

Arguments in favor or against the use of cryptocurrencies are both at the extremes. A person may
argue and highlight the potential benefits of the blockchain technology to the extent that its positive
effects and benefits will greatly outweigh its negative effects but another may argue that the disruptive
capacity of using the blockchain technology has the power to single-handedly destroy the global
economy. The reservation of most countries in adopting this method is understandable as the
technology itself is new and mainly against the current economic practices. Until now and to the
uncertain future, the benefits and the burdens of the blockchain technology and cryptocurrency in the
economy will be continually debatable.

The legitimate promise of the blockchain technology is to provide safe, inexpensive and
efficient transactions. The transaction is directly between two people thus it eliminates the need
for an additional entity not primarily interested in the transaction. It also eliminates costs and
the hassle of having an intermediary to facilitate the transaction. Basically, the blockchain
technology and the use of cryptocurrencies, if mostly accepted by countries, will enhance not
only the financial industry, but as well as our methods of storing data and maintaining privacy.

Accompanying the significant innovation made by the technology, specifically in the area
of privacy and anonymity, several debates and opinions as to the necessity of continuing such
technology is also a debatable issue. Others are mainly concerned that the use of
cryptocurrencies will also effectively and successfully facilitate the commission of crimes in the
same way that the technology be used in providing secure legitimate transactions.

In the Philippines, the Bangko Sentral had formulated regulations to give protection to
the public. Through the issuance of these regulations, although contrary to the main nature of
blockchain and concept of cryptocurrencies, it helps its citizens who engages in such
undertaking, transact only to those entities engaged in legitimate cryptocurrency trading in
order to and promote financial innovation and to prevent its citizens in becoming instruments
to perpetrate criminal acts. As of now, the Bangko Sentral’s main objective for the issuance of
these regulations is to protect its citizens.

The application of blockchain in the financial industry will revolutionize the way we
handle our transactions, our behavior towards this innovation and as well as the laws that will
govern such. Since the innovation is global, there is a need to formulate a whole new set of law
to safeguard property rights and to impose penal sanctions. As of now there is no law created
for such purpose. We leave that part to the future.

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B. History of Blockchain and Cryptocurrency

B.1: The History of Blockchain

B.1.1: 1991-2008

In 1991, Stuart Haber and W. Scott Stornetta mentioned of a structure similar to that of
Blockchain in their research paper titled “How to Time-Stamp a Digital Document”. This structure
involved working on a cryptographically secured chain of blocks whereby no one could tamper with
timestamps of documents.

According to that paper, a client sends a document to timestamp to a timestamping server and
the server would sign the document with the current timestamp. Also, the server would link the
document to the previous document. The pointers pointed to specific data and not the location of the
document. So if the data changed, the pointer would become invalid. It ensured no one could tamper the
data that had once passed through the server.1

The following year, they upgraded their system to incorporate Merkle trees2 that enabled the
collection of more documents in a single block.


B.1.2: 2008-2013

It was in 2008 that Blockchain became relevant. Satoshi Nakamoto, whose real identity is
unknown, published a paper entitled “Bitcoin: A Peer to Peer Electronic Cash System”. The paper
introduced the concept of the Bitcoin which revolved a technology based on decentralization. It enabled
a user to transact directly without the need for a third party.


B.1.3: 2013-2015

Vitalik Buterin, a developer, introduced a blockchain that can perform various functions in
addition to being a peer-to-peer network. Ethereum was introduced to the market in 2013.

Ethereum allowed people to record other assets such as slogans as well as contracts. It expanded
cryptocurrency to be a platform for developing decentralized applications as well. On its official launch in
2015, Ethereum further evolved to support smart contracts for various functions.


B.1.4: 2018

Numerous projects have emerged to further improve the deficiencies of Bitcoin and Ethereum.
New blockchain applications have also cropped up such as NEO and IOTA.

Companies have already accepted the concept of blockchain networks and have adopted the
technology internally to enhance the efficiency of their day to day operations.



1 https://www.quora.com/What-is-the-history-of-blockchain-technology
2 Merkle tree is a tree in which every leaf node is labelled with the hash of a data block, and every non-leaf node is labelled with the
cryptographic hash of the labels of its child nodes. (https://en.wikipedia.org/wiki/Merkle_tree)

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B.2: Earlier Attempts at Cryptocurrency

Robberies at Petrol Stations were prevalent in the Netherlands during the 1980s. The stations at
remote areas could not afford to put guards at risk yet they had to stay open overnight for trucks to
refuel. An unnamed individual came up with the idea of having smartcards loaded with cash. This was
the birth of electronic cash. Albert Heijin, a dominant retailer pushed the banks to invent a way to allow
shoppers to pay directly from their accounts. This was known as POS or point-of -sale.


B.2.1: Electronic Cash

David Chaum’s name is also significant when talking about electronic cash. He is an American
cryptographer who believed that there was a need for token money that would imitate the physical coins
and paper notes. As an extension to the popular encryption algorithm RSA, Chaum started DigiCash in
the 1980s.

DigiCash became very popular with Microsoft even offering that it be put on every Windows PC.
Chaum didn’t seal the deal and at some point it ran out of money.


B.2.2: Second Wave

The first wave of cryptocurrencies died and was replaced by what is called the Second Wave or
web-based monies. Startups created payment solutions and virtual money systems. First Virtual was
formed but it didn’t last long. It was later on overtaken by Paypal.

Paypal became successful as it provided users with an online money transfer service. It offered a
peer-to-peer transfer mechanism.

A significant attempt in parallel to PayPal was called e-gold wherein physical gold was exchanged
for e-gold. E-gold ran in trouble as it allowed anyone to have an account. This attracted scams and other
ponzis. In 2005, the offices of e-gold were raided and the currency became ineffective.

Although the concept of a decentralised digital currency was proposed as early as 1998, the plans were
never implemented, in part because of an inability to ensure that transactions were secure and verifiable.


B.2.3: Bitcoin

In 2008, a paper written by an anonymous programmer under the pseudonym Satoshi Nakamoto
was published in the internet. He introduced Bitcoin, the first cryptocurrency. The domain name
bitcoin.org was registered. The Bitcoin software was then implemented and was released in January
2009.


B.2.4: Bitcoin Over the Years

The first Bitcoin transaction took place on January 12, 2009 as Nakamoto sent Hal Finney, a
computer programmer, 10 Bitcoin.

The following year, in 2010, Bitcoin transactions for value took place through the Bitcointalk
forum with one of the first transactions being a purchase of pizza for 10,000 Bitcoin.

5

Other rival cryptocurrencies debuted in 2011. Despite this, the price of Bitcoin skyrocketed.
Bitcoin’s valuation peaked at almost $30 in June 2011 and ended 2011 at just over $5.

In 2012, online merchants began to accept Bitcoin as a mode of payment. The first major website
to facilitate such transactions was WordPress.

By December of 2013, the value of Bitcoin reached over $1000 as there was an increase in the
number of vendors who were willing to accept the Bitcoin as a currency.

Mt Gox became the largest Bitcoin exchange in the world. However, in February pf 2014, it had a
massive hack which resulted to theft of over 6% of the Bitcoin that was in circulation at that time. This
caused the value of the Bitcoin to decrease from $950 to only $200 by August 2015.

Other cryptocurencies were released in the years 2014-2015. A new cryptocurrency called
Ethereum (ETH) competed with Bitcoin for world dominance and popularity. It received unparalleled
support from developers, users and businesses. Bitcoin also improved its system and opened its first
ATM in the very same year.


B.2.5: The Peak

The value of the Bitcoin rose to its peak at $20,000 in December of 2017. Ethereum and Ripple
also rose its value during the year. Many industries had also opened up to the idea of adapting the
blockchain technology for improvement of their processes.

At present, a thousand coins are competing with each other in the stages of blockchain
development.

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C. Kinds of Cryptocurrencies

As of now, there are hundreds of coins available in the market. The most famous of all the
cryptocurrencies is the Bitcoin and from the Bitcoin, there emerged other cryptocurrencies
which is the alternative of Bitcoins known as Altcoins.

Top 103 Cryptocurrencies by Market Capitalization
Name Symbol Market Cap Price (USD)4 Price (PHP)5
1 Bitcoin (BTC) $70,193,137,450 $ 4,000. 26 P 205,944.26

2 Ethereum $15,598,543,970 $ 148. 67 P 7,602.79
(ETH)
3 Ripple (XRP) $13,919,776,226 $0.337792 P 17.33

4 EOS (EOS) $3,299,044,514 $3.64 P 185.149

5 Litecoin (LTC) $2,949,250,318 $48.72 P 2,499.792

6 Bitcoin Cash $2,606,143,051 $147.82 P 7,486.849
(BCH)
7 Tether (USDT) $2,036,977,860 $1.01 P 51.893

8 Stellar (XLM) $1,755,393,264 $0.091544 P 4.666

9 Tron (TRX) $1,712,780,034 $0.025686 P 1.315

10 Binance Coin S1,483,606, 274 $10.51 P 539.938


C.1 Common Characteristics6

C.1.1: Decentralization

The common characteristic existing from all of this cryptocurrencies is that they are
decentralized which means that there is no central or single authority that mainly controls or facilitates
the transanction of the currencies. So it does not trust a single entity in order for it to function

In the transaction, the traders instead uses what is called “consensus protocols” where several
users in the network validates the transaction. For instance someone purchased bitcoin. That transaction
is received by all those who are in the network. So every member in the network has a personal copy of
that transaction. Once it is validated, a new “block” is added in the blockchain which means that the new
transaction is recorded in the transaction ledger where other transactions were also recorded and which
can be viewed across the network.


C.1.2: Irreversability

Almost all of the cryptocurrencies pride itself for its transactional speed in order to eliminate
opportunity costs. It is a safer and efficient means of transferring “money” to faciliate online transactions.

3 Data retrieved on 19 February 2019 at 12:12 AM in coinmarketcap.com
4 as of 19 February 2019 at 12:12 AM in coinmarketcap.com
5 as of 19 February 2019 at 4:22 PM in currencio.co
6 https://www.investopedia.com/

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Once the transaction is made, as represented by a block, that block added in the chain cannot be
corrected as it will disrupt the other blocks subsequent to it. It is one of the advantages in using the
blockchain technology as it makes tampering of the “blocks” impossible. So once a transaction is made,
even be it an erroneous transaction, it is irreversible.

This effect is a result of the lack of centralized authority that controls the currencies. Yes it is safe
as the transactions cannot be fabricated or manipulated unlike those of banks where there is the
possibility of being interfered or fabricated by a third person or the bank itself, as a consequence of such,
records of the transactions cannot be changed. Moreover, the blockchian technology makes it impossible
for a single person to edit the “block” as it will entail change to all the other members of the network
with respect to that transaction and also it will compromise the subsequent transactions as well. In this
way, the integrity of the transaction is maintained.


C.1.3: Anonymity

When trading the cryptocurrency, the identity of the traders are anonymous. as the transaction
and account is not linked to a particular person. In the transaction, the traders uses “usernames” and
they are not required to disclose their identities before they can transact. The disclosure of personal
information is left to the discretion of the traders.

This characteristic of cryptocurrencies has a downside as its anonymous nature can be used to
facilitate illicit transactions. The anonymous nature of cryptocurrency transactions makes it hard to
track illegal transanctions and moreover, as a consequence of the cryptocurrency being freely globally
traded, it makes it even harder to catch and make a trader liable for the illicit transanction.


C.2: Advantages and Disadvantages of Cryptocurrencies

Nowadays, the term “cryptocurrency” has been rapidly gaining more attention and understanding of its
use and value in the public eye for its convenience and accessibility. However, cryptocurrency
transactions have its own advantages and disadvantages, to wit:

ADVANTAGES DISADVANTAGES

PREVENT FRAUD CAN BE USE BY CRIMINALS IN ILLEGAL
Cryptocurrencies are digital. It cannot be ACTIVITIES, such as:
counterfeited or reversed arbitrarily by the 1. Money Laundering;
Sender, as with credit card charge-backs. 2. Terrorist Financing;
3. Tax Evasion;
ANONYMITY 4. Scams (the so-called crypto experts can
The User is completely anonymous and at take advantage of lack of regulation to
the same time fully transparent. Any purchase a lot of cheap tokens and then
company can create an infinite number of hype them in mainstream media.
bitcoins addresses without reference to
name, address or any other information.

INSTANT MODE OF PAYMENT REFUND IS NOT GUARANTEED
Cryptocurrency offer instant transfer of If the user mistakenly pays someone using
money from the buyer to the seller. cryptocurrency, there is no way to get a
refund of the amount paid.
NO RESTRICTION ON PAYMENT

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 The user of the cryptocurrency can send The remedy of the payor is to request for a
money at any time from anywhere to refund. However, if turned down, there is no
everywhere. In other words, no time other way to recover the money paid.
boundaries like bank working days/hours.

EASY AND LOWER FEES FOR LACK OF KNOWLEGDE
TRANSACTIONS People investing with cryptocurrencies
Anybody can do transactions using without proper background or sufficient
cryptocurrencies. Unlike in transacting with knowledge about the processes or
a bank which requires a lot, in transactions end up losing money.
cryptocurrency transactions a user needs
approximately 5 minutes to create a BTC Cryptocurrencies are digital money, thus,
wallet (Wallet for Bitcoin) and immediately one before investing must thoroughly
starts to use it without any questions and understand the complex nature of
commissions. technology.

Moreover, cryptocurrency transactions are Further, in cryptocurrencies there is a limit
free. No need to pay commissions and fees to the speed and number of transactions it
to banks and other organizations. If there is can process at a time which has hindered
commission fee in this system, it is still the widespread adoption of digital
lower than that in any other. currencies unlike conventional credit card
transactions.

DECENTRALIZED THE GOVERNMENT CAN BAN
No central authority owned the Generally, the government cannot control
cryptocurrency/bitcoin. In other words, no cryptocurrency transactions. However, since
government regulation or anything can stop the government has the inherent power,
or influence such independent particularly the police power—the
cryptocurrencies. government can ban or illegalize
cryptocurrency transactions.
The only thing that a government can do is
restricting the conversion of cryptocurrency Also, since the government as a rule, has no
to a normal currency. But the government control over the cryptocurrency
cannot stop any of the transactions executed transactions—the injured party to the
through cryptocurrencies. transaction has no recourse to seek relief.

In short, Cryptocurrency belongs only to the In other words, since most of the
wallet owner. cryptocurrencies do not possess a central
authority for regulating, every user is
thereby responsible for keeping their
account safe and private.

NO INFLATION DEFLATION CAN HAPPEN
Most if the Cryptocurrencies have a fixed Cryptocurrencies are generally limited/fixed
number of currencies in their exchequer or in number. In case of bitcoin, if someone
treasury. In case of bitcoin, it is 21 Million. holds the bitcoin for a longer period, it
Once the entire thing has mined there would gradually reduces the supply rate. In case
no longer be newer bitcoins. Thus, there is there is an increase in demand with reduced
no chance of inflation. supply—it often results in a state of
deflation.

BENEFITS TO INTERNATIONAL TRADE LESS ACCEPTANCE IN INTERNATIONAL

9
 Cryptocurrencies transactions will help TRADE
international business to reduce its burden, Although the demand for cryptocurrency is
like: steadily increasing, however, many
governments have not yet given official
1. High banking fees; approval for cryptocurrency transaction.
2. Terrible currency conversion rates; Thus, its usage is very limited to some
3. Human errors in documentation; specific countries. In short, cryptocurrency
4. Improper document storage; transaction is not yet internally accepted in
5. Slow payments and document dealing with business transactions.
transfers.

In addressing such problems,
cryptocurrency has given two main
technologies to streamline supply chains.

1) Blockchain – this is a digital public
ledger that records information
securely, publicly and with an
indisputable time stamp.

2) Smart Contract— this type of
contract allows for the distribution
and collection of digital or digitalized
assets. There is no need for a middle
man at all.

STRONG SECURITY AND PRIVACY CAN LOSE YOUR WALLET
Cryptocurrencies are one of the most secure If the user has put his money in the form of
currency systems today. Only the user can digital currency in his phone or computer,
access his account using his “wallet key.” there is a possibility that he will forget his
password. Thus, in case of losing the wallet
key, no one can help the user in retrieving it.
Moreover, when it comes to privacy—
while bank and central authority can tap Also, in case the owner or the user of the
every individual’s data whenever they want, Cryptocurrency died, and no one knows the
but in cryptocurrency the whole transaction password the account cannot be access or
is on the push basis. If the user does not open.
wish to give additional information in his
whole transaction, cryptocurrency allows Case: Customers of a Canadian
such luxury. cryptocurrency exchange were unable to
access $135 Million of funds after the
Cryptocurrency retains the user privacy and company’s founder of Quadriga CX (Gerald
freedom. Cotton) dies with the passwords needed to
access the money. Here, no one knows the
password. Thus, the firm is trying to access
the account. But for the meantime, the firm
declared insolvency.

Source

Quadriga: The cryptocurrency exchange that
lost $135M, Jessica Murphy, February 17,

10
 2019)
POTENTIAL OF CRYPTOCURRENCY IN CRYPTOCURRENCIES VALUE
OFF-SHORE BANKING LIMITATION
The Offshore banking industry, which is Off-shore banking industry is valued at $32
influenced by big financial institutions, is trillion, however, the valuation of the
structured around big large banks that are cryptocurrency market remains below half a
able to clear big sums of Money. But, the trillion. In this aspect, bank institutions are
transfer of millions to billions of dollars still in the advantage.
requires significant manual labor including
transaction verification, anti-money
laundering checks and payment clearing.

In cryptocurrencies its significance in
helping off-shore banking transactions are
its security, borderless transaction
settlement, efficient payment clearance, and
lack of dependence on central service
providers or entities.

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D. Applicability of Cryptocurrency in the Philippines

D.1: Cryptocurrency Laws and Regulations in the Philippines

With the current pace of global industrial development, cryptocurrency is becoming a global
phenomenon as several countries now recognize its importance. Cryptocurrency is a digital currency in
which encryption techniques are used to regulate the generation of units of currency and verify the
transfer of funds. It is a variety of virtual currency that uses cryptography for security and is neither
issued nor guaranteed by a Central Bank nor backed by any commodity. The most common type of
cryptocurrency is the Bitcoin.7

According to an article8, the Philippines, as projected by the World Bank in 2017, is to be the
world’s 10-fastest growing economy, with GDP growth at 6.7% – markedly higher than its 3.68%
average annual GDP growth rate between 1982 and 2016.
The fast-growing Philippine economy is built on remittances from overseas Filipino workers,
who contributed US$33 billion to the country’s US$400 billion GDP in 2017. However, access to financial
services is not universal, with the Bangko Sentral ng Pilipinas (BSP), estimating that 10% of local
government units remain unbanked. Despite being the third-largest country for remittance inflow,
Philippine remittance costs are high compared to the global average estimated by the World Bank, at
7.4% for every US$200.

It is in this situation that the usage of cryptocurrency in the Philippines has grown. But being
volatile inherent in a decentralized currency, concerns arises that cryptocurrency may be used to
defraud financially illiterate Filipinos. Moreover, that cryptocurrencies were designed precisely to
circumvent global governmental regulation poses serious challenges for a country that has only recently
skirted the money laundering blacklist and is beset by terrorism-financing propensities.

Hence, Philippine regulators are faced with essential difficulties in regulating cryptocurrencies
from a conflict between allowing access to financial services through cryptocurrencies and preventing
the Philippines from becoming a hotbed of money laundering, terrorism financing and cybercrime.

On March 6, 2014, alarmed by the Bitcoin exchanges in the Philippines, the Bangko Sentral ng
Pilipinas (BSP) issued a Warning Advisory for the public that exchanges of virtual currency, such as the
Bitcoin, are not regulated by the BSP or any other regulatory authority, and thus, there are no regulations
that would specifically protect consumers and businesses for financial losses from transacting with the
use of virtual currencies.9

D.2: Regulation as Investment Contracts

In a 2017 Securities and Exchange Commission Advisory on Initial Coin Offerings and the 2018
SEC Advisory warning the public on Bitcoin-related Ponzi Schemes, the SEC warned the public that
investment schemes with the use of cryptocurrencies or digital currencies are considered securities
transactions subject to its regulatory authority. Thus, such entities engaged in VC transactions should
secure prior registration and/or license to solicit investment or sell securities as required under the
Securities Regulation Code. Further, the SRC requires that cryptocurrencies or digital currencies, which
are treated as securities, should be registered with the SEC prior to its offer to the public.10


7 https://businessmirror.com.ph/2018/05/30/philippines-on-cryptocurrency/ by Atty. Septfonette Fe D. Balusdan, May 30, 2018.
8 https://www.vantageasia.com/cryptocurrency-law-philippines by Aida Araceli G Roxas-Rivera and Paolo S Tamase, Cruz Marcelo &
Tenefrancia, July 12, 2018.
9 Ibid.
10 Id. at 1.

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 Securities and Exchange Commission (SEC) has not yet released any rule specifically concerning
virtual currencies regulating the licensing of domestic and foreign corporations. Despite that fact, the
SEC’s Enforcement and Investor Protection Department (EIPD) maintained that virtual currencies fall
within the definitions of “security” and “investment contract” in the Securities Regulation Code (SRC),
thus, under the regulatory jurisdiction of the SEC. On January 8, 2018, the EIPD released an advisory that
virtual currencies must be registered and subjected to disclosure requirements under the SRC before
they are sold to the general public.

On January 23, 2018, the SEC issued a Cease and Desist Order in a matter of Black Cell
Technology Inc et al against four companies for selling and/or offering for sale Krop Tokens or
KropCoins, both of which are virtual currencies. On March 2, 2018, a resolution from SEC was issued, in
the case of In re: Black Cell Technology Inc., Black Sands Capital Inc., BlackCell Technology Limited and
Krops v. Enforcement and Investor Protection Department, SEC CDO Case 01-18-046, using the Howey
Test and Section 3.1 of the SRC, the SEC ruled that Kropcoins, a cryptocurrency, are considered
unregistered securities that are being offered and/or sold within the Philippines; and though the offer
was initiated by a Hong Kong company, it is accessible via the Internet to buyers in the Philippines. Based
on the foregoing, the Philippines treats cryptocurrencies as securities, which may be subjected to taxes
under the National Internal Revenue Code (NIRC), as amended by the Tax Reform for Acceleration and
Inclusion law.

On April 10, 2018, a similar advisory issued by EIPD for “cloud mining contracts”. Treating
cryptocurrency as securities or investment contracts has serious regulatory implications. Registration of
securities and investment contracts tediously involves the preparation of registration statements and
prospectuses, publications in newspapers of general circulation, disclosure requirements, and multiple
approval processes designed to protect the investing public. Once registered, these may only be sold by
salesmen, brokers and agents who must also be registered with the said regulator. The violation of these
requirements is criminal in nature, punishable by fines and/or imprisonment.

D.3: Virtual Currency Exchanges

Under the General Banking Law, the BSP has regulatory powers over the operations of finance
companies and non-bank financial institutions performing quasi-banking functions, including remittance
or transfer agents, money changers, or foreign exchange dealers. Because these entities may function as
virtual currency (VC) exchanges by converting or exchanging cryptocurrency to fiat currency (or vice-
versa), the BSP has issued circular No. 994 (2017) or the Guidelines for Virtual Currency Exchanges,
which will apply to virtual currency exchanges to obtain certificate of registration to operate as
remittance and transfer companies, money changers, or foreign exchange dealers. “Virtual currency
exchanges” used hereafter refers to those covered by BSP circular No. 994. As such, all VC Exchanges
shall adhere to the guidelines issued by the BSP. However, the BSP emphasized that this issuance is not
to endorse VCs as currencies but merely to regulate the use of VCs in financial or business transactions.
Thus, the BSP reminds the public to be cautious in entering into VC transactions as it is a risky
investment.

BSP circular No. 944 lays out various regulations that are now deemed incorporated as section
4512N of the Manual of Regulations for Non-Banking Financial Institutions (MORNBFI).

The MORNBFI now requires the registration of virtual currency exchanges upon compliance with
the requirements for registration of remittance and transfer companies, money changers, or foreign
exchange dealers. It also requires payment of registration and annual service fees corresponding to
remittance agents. Virtual currency exchanges are also further required to maintain risk management
and security control mechanisms to manage technology risks associated with virtual currencies,
including an effective cybersecurity programme (if the VC exchange provides for wallet services for

13
holding, storing and transferring virtual currencies) and an internal control system commensurate to the
nature, size and complexity of their respective businesses. Notification and reportorial requirements, in
the same form and manner as those required for remittance and transfer companies, money changers, or
foreign exchange dealers are also imposed on VC exchanges.

More importantly, the MORNBFI also requires VC exchanges to transact only via direct check
payments or direct credit to deposit accounts whenever a payout would amount to more than
PHP500,000 (about US$10,000) or its foreign currency equivalent.

The MORNBFI also requires VC exchanges to register with the Anti-Money Laundering Council
(AMLC). Notably, remittance and transfer companies, money changers and foreign exchange dealers are
themselves subject to the Anti-Money Laundering Act (AMLA) as covered institutions, under which they
are required to timely file reports for covered transactions (i.e. transactions involving a total amount in
excess of PHP500,000 within one banking day) and suspicious transactions, as defined in the AMLA. VC
exchanges are thus also subject to the AMLA’s know-your-customer and record-keeping requirements.

As of this moment, BSP circular No. 944 is the only regulation of national application that
specifically concerns cryptocurrencies and recognizing its potential while warning that they shall not be
used for criminal activities such as money laundering and terrorist financing.

Regulations for Virtual Currency Businesses in the Cagayan Special Economic Zone. While
national regulators are concerned with restricting cryptocurrency trading and businesses, the Cagayan
Special Economic Zone Authority (CEZA) has formulated rules permitting virtual currency businesses to
operate in the Cagayan Special Economic Zone (Cagayan Ecozone), a special economic zone and free port
established by law and located in the province of Cagayan in the northern part of the Philippines. In April
2018, the CEZA announced it will license 10 blockchain and virtual currency companies, which may then
conduct cryptocurrency mining or ICOs, or operate an exchange within the Cagayan Ecozone, provided
the exchange of money into virtual currency (and vice-versa) is done offshore.

The Cagayan Special Economic Zone and Freeport Financial Technology Solutions and Offshore
Virtual Currency Business Rules and Regulations of 2018 (CEZA VC rules) regulate Financial Technology
Solutions and Offshore Virtual Currency (FTSOVC) business-related activities within the Cagayan
Ecozone, and were issued to, among other things, ensure that adequate safeguards are established and
enforced to prevent these activities from being used for money laundering and other crimes, and digital
financial fraud.

It must be emphasized that the cryptocurrency businesses licensed by the CEZA are not allowed
to transact with clients in the Philippines, and licensees may thus provide FTSOVC services only to
overseas clients. The extraterritorial destination of such services results in the inapplicability not only of
BSP circular No. 994, but also the SRC, which requires registration only for securities that are sold or
offered for sale or distribution in the Philippines.

The CEZA VC rules require FTSOVC businesses to secure special licences to operate as such
entities, with registration requirements pertinently including an investment commitment in the Cagayan
Ecozone amounting to at least US$1 million spread over two years, and the registration of foreign
entities as financial technology solutions business enterprises, or offshore virtual currency exchanges in
their respective home jurisdictions.

Licensees are also required to develop anti-money laundering and counter terrorism-financing
rules, and maintain effective data privacy and cybersecurity programmes, and are subject to the
inspection and audit authority of the CEZA. Each licensee is likewise subject to the CEZA’s inspection and

14
audit authority, and must be connected to the CEZA’s Financial Technology Solutions Audit System and
maintain records relating to its FTSOVC activities.

FTSOVC licences may have a maximum renewable term of 25 years, subject to suspension or
revocation by the CEZA upon the grounds provided in the CEZA VC rules.
Overall, regulators remain cautious and have refused to endorse the use of cryptocurrencies as
new stores of value and mediums of exchange. While this regulatory disposition is not expected to
change soon, the approach taken by the CEZA shows that there are investment opportunities in this
industry, especially if other special economic zones follow suit. 11

Moreover, the Noah Foundation has a strong and keen interest in utilizing cryptocurrency, and
has developed the NOAHCOIN, which can be stored in the Ark Wallet, and can be used for any specific
Noah Project, which includes the development of Noah City in Metro Manila and in partnership with
Dakak Beach Resort in Zamboanga del Norte, which will utilize multiple modes of payment, including
NOAHCOIN.

The ideal scenario in general would be tourists travelling any part of the globe without bringing
cash or credit cards and going through the foreign exchange processes. All the tourist will need is their
digital wallet in the form of mobile device app and conduct transactions seamlessly.

Justo Ortiz, Chairman of UnionBank said, “Inclusive prosperity is an important goal that we need
to be actively in, because financial transactions underlines all commerce, so if there’s more commerce
done, if there’s more prosperity by more people then clearly we would benefit from it.

Miguel Cuneta, co-founder and Chief Community Officer of SCI Ventures, a company that uses
bitcoins for remittances abroad shared that, sending money from abroad will be charged up to 10%.
Through cryptocurrency that cost is reduced to one to 2%.12

D.4: The 6 Cryptocurrency Exchanges In Philippines Registered With BSP

While cryptocurrency enthusiasts may rejoice that the regulator is becoming increasingly
progressive towards cryptocurrency — BSP has made it very clear that it does not endorse Bitcoin or any
other form cryptocurrency as legal tender.
After a year since Bangko Sentral Ng Pilipinas (BSP) issued the guidelines for cryptocurrency
exchanges in the Philippines, and from then on, 6 companies have been registered with the regulator, as
follows13:

a.) Coins.ph via Betur Inc
Digital wallet and mobile payments app Coins.ph was the first to be registered as a cryptocurrency
exchange in BSP through its remittance arm Betur Inc. The latter offers cash in and cash out
services, mobile air-time top ups, remittance services, bill payments and Virtual Currency
exchange.
Betur is not a money transmitter but assists its users in digital currency transactions. But like
Coins, Betur provides a digital currency wallet service where you can store your digital currency.
It enables users make payments to and accept payments from third parties, as well as to buy and
sell digital currency.

b.) SCI Ventures via Rebittance Inc.

11 Id. at 1.
12 https://technology.mb.com.ph/2018/03/08/the-emergence-of-blockchain-and-cryptocurrency-in-ph/, published on March 8, 2018.
13 http://fintechnews.sg/24114/philippines/cryptocurrency-exchanges-philippines/ by Tom Noda, September 21, 2018.

15
 SCI Ventures, formerly Satoshi Citadel Industries Inc, through its wholly owned subsidiary
Rebittance Inc., is the second cryptocurrency exchange to be registered in the Philippines. Rebit
is just one of SCI’s several Bitcoin technologies that allows users anywhere in the world to send
money to the Philippines with Bitcoin. Rebit also offers international money transfers and bills
payments. SCI is focused to streamline financial services by creating Bitcoin solutions that reduce
the costs of using and transferring money. SCI’s other technologies include BuyBitcoin.ph,
PrepaidBitcoin.ph, payment solution Bitmarket.ph, and mobile wallet Bitbit.cash.

c.) BloomSolutions
BloomSolutions is the third fintech startup registered with the regulator, last May. The Manila-
based company provides blockchain solutions to money transfer businesses around the world.
Bloom claims its total volume processed since its inception in 2015 has exceeded US$125 million
as of March 2018, making it one of the most successful blockchain remittance startups globally.

Bloom co-founder Israel Keys recently asserted that they have been successful at reducing the
cost of remittances for thousands of migrant Filipinos worldwide by using cryptocurrencies as a
settlement mechanism for Money Transfer Operators (MTOs). Bloom last May likewise
announced its initial coin offering (ICO) called BX8, and officially launched its money services app
platform BloomX.

d.) ETranss

Officially launched in February 2016, ETranss Remittance International Corp (ETranss) recently
registered as a cryptocurrency exchange with the BSP, after having grown its fintech arm
ETranss Distributed Exchange (EDE) in the first quarter of 2018. EDE is designed to allow users
to securely trade fiat and crypto currency/tokens to facilitate remittance – supporting the
ETranss vision of financial inclusivity.

ETranss claims it utilizes cloud-based private network and latest blockchain protocols to provide
a centralized order book off-chain and on/off-chain transactions. EDE promises to provide a
secure decentralized settlement model driven by a centralized liquidity hub. As stock and for-
profit corporation, ETranss reported its remittance volume has reached P10 million and beyond
2,000 in monthly average, dealing with small-scale operators in Hong Kong, China and the
Philippines.

e.) Virtual Currency Philippines Inc
Cryptocurrency Exchange Philippines - VCHEXVirtual Currency Philippine Inc (VCPI) is a local
brand of VHCEx, a newly established cryptocurrency exchange launched in Malaysia last May.
VCPI announced on Facebook last July 7 of getting its license from BSP to operate its
international asset trading platform. VCPI CEO Jenn Lim recently said the new exchange platform
will include digital token like Bitcoin, Ripple, Ethereum, among others. VHCEx has its own
cryptocurrency VHC. Lim said they also offer multi-currency support which has digital wallet that
supports cryptocurrency for all traders. VCPI’s secured e-money issuing (EMI) allows you to
legally store customer funds in Philippine fiat (Pesos).

f.) Philippine Digital Asset Exchange (PDAX)
Touted as the first crypto-trading platform built for Filipinos, Philippine Digital Asset Exchange
(PDAX) is the latest blockchain-enabled startup registered with the central bank. PDAX is
working on its online, open marketplace for cryptocurrencies meant to facilitate the exchange of
Philippine Peso with cryptocurrencies, tokens, and other forms of virtual currency, like Bitcoin,

16
 Ethereum, Ripple, Bitcoin Cash, Litecoin, and other locally in-demand coins. Blockchain
influencers Nichel Gaba, Krystian Kucharzyk, and Yang Yang Zhang co-founded PDAX in 2017
under a legal entity name Fyntegrate Incorporated.


D.5: Top 5 Blockchain and Cryptocurrency Companies in the Philippines

Philippines has lot of companies which are developing the technology. Here are the top 5 leading
DLT-based corporations, as follows:14

a.) Coins.ph
Coins.ph – the financial services platform founded in Philippines in 2014. Using the platform, it is
possible to do the online shopping, pay bills, buy game credits, get digital currencies and make
P2P wallet transfers.
The wallet is officially recognized by the country’s Central Bank – Bangko Sentral ng Pilipinas
(BSP). The business is legal and has a licence to operate.
The platform provides a special solution for businesses. Corporations which use Coins.ph can
quickly and conveniently collect payments from their users via the platform. Moreover, no fees
are charged for creating and maintaining a business account with the company.
The wallet has BTC, BCH and ETH listed. It is used by over 5 million people and is available on
web, Android and iOS.

b.) AppsolutelyAppsolutely
Appsolutely is the Philippines-based platform which aims to help businesses to improve
relationships with their customers. For this purpose, the platform develops digital strategies and
assists with creation of rewards programs, websites and apps.
The aim of the company is to help organizations to make their customers loyal, engaged, and
valuable. The main product of Appsolutely is LoyalCoin which enables users to send, receive and
exchange rewards.

Then, among the offers of the company there is also a creation of customized DLT-based
platform, front and back-end integration and Blockchain-as-a-Service.

Appsolutely also provides solutions for digital marketing and e-commerce to allow businesses to
drive more internet traffic.

c.) BlockchainSpaceBlockchainSpace
BlockchainSpace is the first coworking space dedicated to DLT in the country. It has been opened
in Makati City in June with the aim to support DLT-based startups allowing them to freely
exchange experience and share knowledge.
Generally, BlockchainSpace brings fintech companies together throughout the whole Southeast
Asia. Such coworking spaces are opened in Bangkok, Jakarta and Kuala Lumpur.

The members of the organization get informed about all the recent news and developments of
the industry. Moreover, they participate in workshops and networking.

d.) BloomSolutionsBloomSolutions

14 https://philippines.bc.events/news/top-5-blockchain-and-crypto-companies-in-the-philippines-93297, December 6, 2018.

17
 BloomSolutions is the startup based in Manila which allows its clients to transform remittance
business.
The platform unites DLT with traditional compliance tools. Such a mix results in cost reduction
and instant funds depositing.

The company allows making fast payments across the Philippines and Vietnam, and also has an
office in Singapore.

On its LinkedIn page, the company says that its total volume processed since inception has
exceeded $125,000,000 as of March 2018, making it one of the most successful blockchain
remittance startups in the world.

e.) MergeCommitMergeCommit
It is the DLT software development company which has an office in the Philippines. It also
provides such services as crypto exchange, for instance, it has developed Andromeda – a
decentralized exchange. This product is easy to set up and provides a secure cold-wallet storage.
By 2025, the company plans to become the most successful DLT-based corporation in Southeast
Asia with millions of users.

The country has many DLT-based startups being launched, and the authorities start supporting
their development in order to bring Philippines to the new level in the blockchain industry.

D.6: Other Blockchain Businesses and Crypto Companies in the Philippines

In the Philippines, there are more businesses, firms, and foundations that use the blockchain for a
number of different services, as follows:15

1.) Abra
Abra has a buy and sell bitcoin and ethereum app in the country. Users can fund their accounts
through pawnshops and then easily convert fiat money into bitcoin. The app can act as a mobile
bitcoin and ethereum wallet.

2.) Global Crypto Hub
Recently opened in the metro, Global Crypto Hub Co-Founder Mr. Jagdish Pandya, also aims to
launch an ICO called Usereum. Its primary use-case is for day-to-day payment of bills and
utilities.

3.) Moneybees.ph
Filipinos can now get their hands on bitcoin and ether through over-the-counter transactions
with the help of Moneybees.ph. As of this writing, Moneybees has five over-the-counter locations
and transactions should be familiar to those who frequent money changers and remittance
centers. Moneybees.ph’s owner is Mr. Jay Ricky Villarante, the founder of Paylance and 8Ventures
Pte Ltd.

4.) NEM Philippines
The NEM Foundation has a presence in the country through NEM Philippines. While its team is
the one responsible for the foundation’s business dealings in the country, NEM’s other, and
probably more important mission is to promote awareness and correct knowledge about bitcoin,
cryptocurrency, and the blockchain.

15 https://bitpinas.com/feature/blockchain-startups-philippines/ by Je Gino-Gino, January 26, 2019.

18

5.) Paylance
Paylance, also found by Mr. Jay Villarante, allows businesses and individual to settle payrolls and
payments through its platform. All users can fund their accounts with PHP, USD, and bitcoin.

6.) Qwikwire
Qwikwire is currently developing AQwire. AQwire is a property developer’s friend that allows
one to sell units to people all over the world. It is a real-estate transactions platform using the
blockchain technology. By using AQwire, you don’t need to worry about updating all sites about
the status of the sale.
Currently, the company has announced its ICO pre-sale on February 26, 2018 under the token
name Qey. The ICO will start on March 26, 2018.

7.) Salarium
Making salaries easier with Salarium. It is a payments solutions company aimed at SMEs like
BPOs, manufacturing, retail, IT, etc. Through the SALPay ecosystem, it helps over 500 companies
with more than 10,000 employees with their timekeeping and payroll solutions. Aside from that,
Salarium is also integrating a blockchain remittance service to receive payments from multi-
national businesses across the globe.

8.) Tagcash
Founded by Mr. Mark Vernon, a British entrepreneur, Tagcash is a micropayments platform and a
company that builds apps, websites, and application program interface (API) for fintech. Its aim
is to help the regulators with an easy management of money and private currencies for rewards
and tokens.

D.7: Taxation of Cryptocurrencies in the Philippines

The National Internal Revenue Code (NIRC) states that any income of an individual or
corporation, in whatever form, obtained in the Philippines, is taxable in general. Thus, depending on the
type of cryptocurrency transactions, the Philippine Bureau of Internal Revenue (BIR) may impose an
income, percentage, or other business tax under the NIRC regulation.

However, the BIR has not yet issued any clear rules or guidelines on the tax treatment of
cryptocurrency transactions, despite the emerging interest on the VC exchanges in the Philippine
market.. However, looking at the internal revenue laws, one may know that any type of income earned
shall be taxed unless expressly exempted. The taxes collected may potentially depend on how the BIR
will decide to classify cryptocurrency. If crypto coins are considered property, they will come under the
capital gains tax.

However, if cryptocurrency transactions are taxed as stocks, a fixed percentage tax may also be
imposed depending on the transaction involved using cryptocurrencies, income, percentage and other
business taxes provided under the NIRC. Then, the income from mining shall be considered as well. The
BIR may treat crypto coins as securities, as Securities and Exchange Commission (SEC) does, therefore,
they will be taxed as securities as well.

It is likely that fintech companies currently fall under the taxation rules of any other corporation,
therefore, they are subject to regular income tax based on net taxable income at the rate of 30%.
Although there are no clear guidelines on crypto taxation in the Philippines, the country’s officials are
working on the regulations of crypto exchanges and ICOs. 16

https://philippines.bc.events/news/taxation-of-cryptocurrencies-in-the-philippines-how-are-virtual-currencies-regulated-, December 6,
16

2018

19
E. The Blockchain and Cryptocurrency

E.1: HOW DOES BLOCKCHAIN WORK?
A ‘blockchain’ is a particular type of data structure used in some distributed ledgers which stores
and transmits data in packages called “blocks” that are connected to each other in a digital ‘chain’.
Blockchains employ cryptographic and algorithmic methods to record and synchronize data across a
network in an immutable manner.17

Blockchains have increased its popularity nowadays. People became interested in the
technological advantages it provides. But what is a blockchain? How does a blockchain work and
collectively, how blockchains function? What problems do they solve? How can they be used?

Like the name it suggests, a Blockchain is a chain of blocks that contains information. This
technique was originally described in 1991 by a group of researchers and was originally intended to
timestamp digital documents so that it’s not possible to backdate them or tamper with them. It is almost
like a notary of lawyer that records past transactions with difficulty of tampering them. However, it went
by mostly unused until it was adapted by Satoshi Nakamoto in 2009 to create a digital cryptocurrency
called Bitcoin.

A Blockchain is a distributed ledger that is completely open to anyone. Anyone who participates
in the activity can possible have the copy of the ledger .Blockchains have interesting property; once some
data has been recorded inside a blockchain, it becomes very difficult to change it.

So how does that work? Well, let’s take a
closer look at a block. Each block contains 1)
some data, 2) the hash of the block and 3) the
hash of the previous block. 18 The data that is
stored inside a block depends on the type of
blockchain. The Bitcoin blockchain for example
stores the details about a transaction in here,
such as the sender, receiver and amount of coins.
A block also has a cryptographic identifier called
a hash. A hash is a function that converts one
value to another. A hash function can be used to
generate a value that can only be decoded by looking up the value from a hash table.19 You can compare a
hash to a fingerprint. It identifies a block and all of its contents and it’s always unique, just as a
fingerprint. Once a block is created, its hash is being calculated. Changing something inside the block will
cause the hash to change. So in other words, hashes are very useful when you want to detect changes to
blocks.


If the fingerprint or the hash of a block is altered or modified, it no longer is the same block and
will not be aligned to the other blocks in the chain, hence succeeding blocks become invalid. The third
element inside each block is the hash of the previous block. This effectively creates a chain of blocks and
it’s this technique that makes a blockchain so secure. Let’s take an example.

17 http://documents.worldbank.org/curated/en/177911513714062215/pdf/122140-WP-PUBLIC-Distributed-Ledger-Technology-and-Blockchain-Fintech-
Notes.pdf, 1. See also: CPMI, “Digital currencies”, November 2015, https://www.bis.org/cpmi/publ/d137.pdf,
18 https://www.childrescue.eu/2018/11/16/the-use-and-benefits-of-blockchain-technology-in-supporting-childrescue/
19 https://techterms.com/definition/hash

20
 Here we have a chain of 3
blocks. Each block has a hash and the
hash of the previous block. So block
number 3 points to block number 2
and number 2 points to number 1. Now
the first block is a bit special, it cannot
point to previous blocks because it’s
the first one. This block is called the
Genesis Block. Now let’s say that you
tamper with the second block. This
causes the hash of the block to change
as well. In turn that will make block 3
and all following blocks invalid because they no longer store a valid hash of the previous block. So
changing a single block will make all following blocks invalid.

However, using hashes is not enough to prevent tampering. Computers these days are very fast
and can calculate hundreds of thousands of hashes per second. You could effectively tamper with a block
and recalculate all the hashes of
other blocks to make your
blockchains valid again. So mitigate
this, blockchains have something
called Proof of Work.

Proof of Work is a
mechanism that slows down the
creation of new blocks. In Bitcoins
case: it takes about 10 minutes to
calculate the required Proof of
Work and add a new block to the chain. This mechanism makes it very hard to tamper with the blocks,
because if you tamper with one block, you will need to recalculate the Proof of Work for all the following
blocks. So the security of a blockchain comes from its creative use of hashing and the Proof of Work
mechanism.

But there’s one more way that blockchains secure
themselves and that’s by being distributed. Instead of
using a central entity to manage the chain, blockchains
use a peer-to-peer (P2P) network and anyone is allowed
to join. When someone joins this network, he gets the
full copy of the blockchain. The node can use this to
verify that everything is still in order.

21

Now let’s see what happens when someone creates
a new block. The new block is sent to everyone on the
network. Each node then verifies the block to make sure
that it has not been tampered with. If everything checks
out, each node adds this block to their own blockchain. All
the nodes in this network create consensus. They agree
about what blocks are valid and which are not. Blocks that
are tampered with will be rejected by other nodes in the
network. So to successfully tamper with a blockchain you will need to tamper with all blocks on the
chain, redo the Proof of Work for each block and take control of more than 50% of the peer to peer
network. Only then will your tampered block become accepted by everyone else. This is almost
impossible to do. Blockchains are also constantly evolving. One of the more recent developments is the
creation of smart contracts. These contracts are simple programs that are stored on the blockchain and
can be used to automatically exchange coins based on certain conditions. The creation of blockchain
technology peaked a lot of peoples interest. Soon, others realized that the technology could be used for
other things like storing medical records, creating digital notary or even collecting taxes.


E.2: CRYPTOCURRENCY
Cryptocurrencies are a subset of digital currencies that rely on cryptographic techniques to
achieve consensus, for example Bitcoin and ether. 20

Cryptocurrency includes, purchasing, selling and can also be traded with other cryptocurrencies
or be exchanged into ordinary money. In cryptocurrency, as a digital form of currency, is a peer to peer
transaction. A “Peer-to-Peer” transaction (P2P) or decentralized exchanges are operated and maintained
exclusively by software without a central banking authority. An example of which is when a person goes
into a coffee shop to get his morning latte and uses a bank card to pay. Normally, in this situation, a bank
card represents the bank who pays the coffee shop. In a cryptocurrency transaction, there is no bank or
middleman but a direct transaction.










Behind this transaction, there is what we call a blockchain. The Blockchain is a decentralized
system that is independent of central bank or government. The block chain represents all the
transactions that involved cryptocurrency exchanges, purchases, etc. Once the transaction is validated it
gets into the block with a chain of several other transactions.

E.2.1: So how does cryptocurrency work?

All confirmed transactions from the start of a cryptocurrency’s creation are initiated by a request
either to pay debts or simply to transfer funds. In the case of Bitcoin or Ethereum, it is used as a digital

20 http://documents.worldbank.org/curated/en/177911513714062215/pdf/122140-WP-PUBLIC-Distributed-Ledger-Technology-and-Blockchain-Fintech-
Notes.pdf, 1. See also: CPMI, “Digital currencies”, November 2015, https://www.bis.org/cpmi/publ/d137.pdf,

22
currency to settle bills of customers from their vendors. The request for payment is broadcasted to
anyone in the Peer to Peer Network consisting of Nodes. The computer network or the Nodes validates
the transactions using algorithms. Validation will simply check the status of the user, the balances,
transactions and amount involve in the transaction. Everyone in the P2P network must verify the
transaction. Here, the identities of the coin owners are encrypted, and the system uses other
cryptographic techniques to ensure the legitimacy of record keeping. The ledger ensures that
corresponding “digital wallets” can calculate an accurate spendable balance. Also, new transactions can
be checked to ensure that each transaction uses only coins currently owned by the spender. When
validation is complete, the transaction initiates the block creation and is added to the existing blockchain.
The transaction is then complete

Another player in this transaction is the “miner” who participates in validating transactions on
the blockchain by solving a “cryptographic puzzle”. A miner supports the network by harnessing
computer power to
validate the transaction
and is rewarded
by newly mined
coins. The miner
verifies these
individual

transactions. This process aims to avoid any fraudulent transaction takes place. Mining is the process of
confirming transactions and adding them to a public ledger. To add a transaction to the ledger, the
“miner” must solve an increasingly-complex computational problem (like a mathematical puzzle). Mining
is open source so that anyone can confirm the transaction. The first “miner” to solve the puzzle adds a
“block” of transactions to the ledger. The way in which transactions, blocks, and the public blockchain
ledger work together ensure that no one individual can easily add or change a block at will. Once a
block is added to the ledger, all correlating transactions are permanent, and they add a small transaction
fee to the miner’s wallet (along with newly created coins). The mining process is what gives value to the
coins and is known as a proof-of-work system.21

21 https://cryptocurrencyfacts.com/how-does-cryptocurrency-work-2/

23
F. Legal Implications of Cryptocurrencies

F.1 LEGAL IMPLICATION IN OTHER JURISDICTIONS

F.1.1: International Regulation of Cryptocurrency 22

Since cryptocurrency is an emerging technology, there are yet no norms on the use of Cyrptocurrencies
in the international trade. According to the creator of the Bitcoin system (Nakamoto,2009), the economic
system is too fragile in that it exposed society to inherent risks. To reduce those risks, the crypto
currency was created with one goal in mind: to promote disintermediation in the execution of
commercial transactions. The effect of which is for buyers and sellers to carry into effect their
transactions independently and without need of financial institutions.
The intermediation transactions has the following characteristics (EIZIRIK et al, 2011, page 4):
a. Activity of giving and receiving financial resources wherein the intermediary acts ad creditor and
debtor of both parties at the ends of the operation that is taking place
b. Mandatory participation in the chain
c. Such operations must be carried out constantly
d. Professionalism in carrying out such operations
Many types of entities may develop the role of financial intermediary, such as credit institutions
(commercial banks, leasing companies, among others), brokerage firms and securities distributors and
even qualified investors (Yazbeck, 2007, p. ).

Thus cryptocurrency performs the same functions as the instruments used in trade.

In a context where there is clear legal uncertainty and a lack of close supervision, we are faced
with a high risk situation. We can justifiably claim that Bitcoin is a high risk system for its users from a
financial perspective, and that it could collapse if people try to leave the system and are not able to do so
because of their lack (European Banking Authority, 2012).

The means of operations and issuance of cryptocurrencies pose a variety of challenges to the
international regulatory bodies.

There are some important points that deserve to be highlighted when dealing with the risks
generated by the use of virtual currencies:
(i) preservation of the unit of account,
(ii) risks to the effectiveness of monetary policy and its implementation, and
(iii) Distortions to the informative content of monetary aggregates.
Conceptually, the aforementioned virtual currency schemes could have an impact on price stability
and national monetary policy insofar as they could affect the demand for central bank money and
interfere with the control of the money supply through open market operations . That is, from the
moment a parallel coin starts to compete with the national currency, the use of the obligatorily national
currency is diminished and all the planning carried out by the government organs to control the money
supply is affected once the demand is diminished (HAYEK, 2003).

In general, these regimes may affect price stability if:
(a) They substantially alter the quantity of currency in circulation;
(B) Have an impact on the speed of money circulation, the use of money, and / or influence the
measurement of monetary aggregates;

22 (DOLES_SILVA, 2009)

24
 C) There is an interaction between virtual currencies and the real economy (European Banking
Authority 2015).

Other great difficulty in regulating this type of scenario is due to that the State will have to
institute procedures to be followed within a system that is outside its sphere of action, maintained and
managed by the users themselves and by an independent system over which he has no influence at all
while observing the principles inherent in all activities that can use cryptocurrency.

Therefore, given that self-regulation plays a very important role in scenarios in which the State
has not yet manifested itself or has difficulty manifesting itself, this is the main way in which
cryptocurrency has been approached internationally.
According to the lesson of Otavio Yazbek (2014): "By the term self-regulation, basically means the
regulation and supervision, by the members of the industry organized in institutions or private
associations, of their activities, in order to maintain high ethical standards.

Self-regulation has a major impact on the cryptocurrency market as national regulatory bodies
have not yet issued relevant decisions on the subject. Thus, in order to generate greater credibility to the
market, the participants themselves issued rules to regulate the activity, uniformizing the applicable
standards.

There are a lot of measures undertaken to regulate cryptocurrencies. Some of which are as follows:
1. Every company acting as intermediary or is using cryptocurrencies must have a compliance
program and a money laundry prevention program.
The adoption of an effective compliance and money laundering prevention policy greatly decreases
the possibility of use of cryptocurrencies for illegal activities, such as it is the case with banking activities.
Therefore, a solid compliance program, which means the adoption of a compliance policy, due diligence
of major customers, elaboration of forms such as know your costumer, and reporting of information
should be adopted by all involved companies, especially companies that act as intermediaries in these
transactions.

Also, if possible, companies and people interested in making use of this technology in transactions
should always have a solid legal view of the transaction and how cryptocurrencies are treated in each
applicable jurisdiction. The lack of consensus regarding how this instrument should be treated may
make it difficult to perform some acts in different jurisdictions. Therefore, it is advisable that this aspect
in special is treated in a legal opinion elaborated by and accredited lawyer, versed in the laws of the
jurisdiction involved in the transaction that shall make use of cryptocurrencies.

These measures decreases the legal risks involved in the use of this kind of instrument and shall
make it easier to use of it as time goes by and a solid understanding regarding it is achieved.
The regulation and uniformity of practices and process of its use pose a great challenge to both States
and international institutions given the new paradigms generated by this technology.

The unique characteristics of cryptocurrencies , such as the independence of any State, agility in
performing operations, issuance of units of value in mathematical form, among others, were never
observed on such a scale in the capitalist system. The very union of a means of payment, custody and
creation of value, roles that were previously fulfilled individually by different legal entities, in a sole
instrument generated and still generates discussion.

With this, in the absence of state regulation, the market has to organize and implement a self-
regulation of the use of cryptocurrencies so that this promising market is not negatively affected by the
state omission. This kind of market organization can be achieved locally, through the issuance of State
regulation, or internationally, through the issuance of recommendations by international entities
25

F.1.2: TAX IMPLICATIONS OF CRYPTOCURRENCIES 23

One of the many questions that arise from allowing investments in and the use of
cryptocurrencies is the issue of taxation. In this regard the challenge appears to be how to categorize
cryptocurrencies and the specific activities involving them for purposes of taxation. This matters
primarily because whether gains made from mining or selling cryptocurrencies are categorized as
income or capital gains invariably determines the applicable tax bracket. The surveyed countries have
categorized cryptocurrencies differently for tax purposes, as illustrated by the following examples:
Tax Implications in Several Countries
Israel taxed as asset
Bulgaria taxed as financial asset
Switzerland taxed as foreign currency
Argentina & Spain subject to income tax
Denmark subject to income tax and losses are deductible

United Kingdom corporations pay corporate tax,
unincorporated businesses pay income tax,
individuals pay capital gains tax

In most of the countries surveyed for this report that have or are in the process of devising
taxation rules, the mining of cryptocurrencies is also exempt from taxation. However, in Russia mining
that exceeds a certain energy consumption threshold is taxable.

In a small number of jurisdictions surveyed cryptocurrencies are accepted as a means of
payment. In the Swiss Cantons of Zug and a municipality within Ticino, cryptocurrencies are accepted as
a means of payment even by government agencies. The Isle of Man and Mexico also permit the use of
cryptocurrencies as a means of payment along with their national currency. Much like governments
around the world that fund various projects by selling government bonds, the government of Antigua
and Barbuda allows the funding of projects and charities through government-supported ICOs.

F.1.3: EUROPEAN UNION; CRYTOCURRENCY EXEMPT FROM VAT 24

In 2015, the Court of Justice of the European Union released a statement regarding the exchange
of traditional currencies of the bitcoin currency as exempt from VAT. The case in point in that press
release was Judgment in Case C-264/14 Skatteverket v David Hedqvist.

In that case, the court was confronted with the issue as to whether the sale exchange of bitcoin
virtual currency is a vatable transaction.

Mr David Hedqvist, a Swedish National was the major proponent of the case who sought a
decision from the Swedish Internal Revenue commission regarding the VAT application on the sale of
Bitcoin. According to the Swedish commission, ‘bitcoin’ is a means of payment used in a similar way to
legal means of payment and the transactions that Mr Hedqvist intends to effect must, consequently, be
exempt from VAT.
In that case, the court ruled that:

23
https://www.loc.gov/law/help/cryptocurrency/world-survey.php
24 Court of Justice of the European Union.Press Release.October 22, 2015

26
 The Court holds that transactions to exchange traditional currencies for
units of the ‘bitcoin’ virtual currency (and vice versa) constitute the supply of
services for consideration within the meaning of the directive, since they
consist of the exchange of different means of payment and there is a direct link
between the service provided by Mr Hedqvist and the consideration received
by him, namely the margin created by the difference between, on the one hand,
the price at which he purchases currencies and, on the other hand, the price at
which he sells them to his clients.
The Court also holds that those transactions are exempt from VAT under
the provision concerning transactions relating to ‘currency, bank notes and
coins used as legal tender’. To exclude transactions such as those envisaged by
Mr Hedqvist from the scope of that provision would deprive it of part of its
effects having regard to the aim of the exemption, which is to alleviate the
difficulties connected with determining the taxable amount and the amount of
VAT deductible which arise in the context of the taxation of financial
transactions

F.1.4: LEGALITY OF CRYPTOCURRENCIES IN OTHER COUNTRIES

Most authorities all over the world does not yet have an established legislation and system of
regulating cryptocurrencies. But most central banks warned about the possible risks related to its use.

F.1.4a: Bolivia
The use of virtual currencies is prohibited in Bolivia. The Central Bank has stated that the use of
currency not issued by the monetary authority is not allowed in the country. Cryptocurrencies such as
Bitcoin are not regulated and therefore, the Central Bank warns about the possible losses that people
using them are exposed to.

F.1.4b: Brazil
On November 16, 2017, the Brazilian Federal Reserve Bank (Banco Central do Brasil) issued
Notice No. 31,379 alerting citizens to the risks arising from the custody and trading operations of virtual
currencies. The notice stated in part as follows:
Considering the growing interest of the economic agents (society and institutions) in so-called
virtual currencies, the Brazilian Federal Reserve Bank warns that these are neither issued nor
guaranteed by any monetary authority, so they have no guarantee of conversion to sovereign currencies,
nor are they backed in real assets of any kind, being the entire risk of the holders.

…
4. Companies that negotiate or keep so-called virtual currencies on behalf of users, natural
persons or legal entities are not regulated, authorized, or supervised by the Brazilian Federal Reserve
Bank. There is no specific regulation on virtual currencies in the legal and regulatory framework related
to the National Financial System. The Brazilian Federal Reserve Bank, in particular, does not regulate or
supervise operations with virtual currencies.

5. So-called virtual currency is not to be confused with the definition of electronic money referred
to in Law 12,865 of October 9, 2013, and its regulation by means of normative acts issued by the
Brazilian Federal Reserve Bank, according to the guidelines of the National Monetary Council.

F.1.4d: Canada
Canada allows the use of cryptocurrencies, including Bitcoin. According to a Financial Consumer
Agency of Canada webpage on digital currencies, “[y]ou can use digital currencies to buy goods and
services on the Internet and in stores that accept digital currencies. You may also buy and sell digital

27
currency on open exchanges, called digital currency or cryptocurrency exchanges.”[23] However,
cryptocurrencies, including Bitcoin, are not considered legal tender in Canada; “[o]nly the Canadian
dollar is considered official currency in Canada.”[24] The Currency Act defines legal tender as bank notes
issued by the Bank of Canada under the Bank of Canada Act coins issued under the Royal Canadian Mint
Act.

Canada’s tax laws and rules also apply to digital currency transactions, including those made with
cryptocurrencies, and digital currencies are subject to the Income Tax Act. The Canada Revenue Agency
(CRA) “has characterized cryptocurrency as a commodity and not a government-issued currency.”
Accordingly, the use of cryptocurrency to pay for goods or services is “treated as a barter transaction.”
According to the Financial Consumer Agency,

[g]oods purchased using digital currency must be included in the seller’s income for tax
purposes. GST/HST also applies on the fair market value of any goods or services you buy using digital
currency.
…

When you file your taxes you must report any gains or losses from selling or buying digital
currencies.

On the issue of taxation, the Canada Revenue Agency adds that,

[w]here digital currency is used to pay for goods or services, the rules for barter transactions
apply. A barter transaction occurs when any two persons agree to exchange goods or services and carry
out that exchange without using legal currency. For example, paying for movies with digital currency is a
barter transaction. The value of the movies purchased using digital currency must be included in the
seller’s income for tax purposes. The amount to be included would be the value of the movies in
Canadian dollars.

On June 19, 2014, the Governor General of Canada gave his assent to Bill C-31 (An Act to
Implement Certain Provisions of the Budget Tabled in Parliament on February 11, 2014, and Other
Measures),which includes amendments to Canada’s Proceeds of Crime (Money Laundering) and
Terrorist Financing Act. The new law treats virtual currencies, including Bitcoin, as “money service
businesses” for the purposes of the anti-money laundering law. The Act is regarded as the “world’s first
national law on digital currencies, and certainly the world’s first treatment in law of digital currency
financial transactions under national anti-money laundering law.”

On August 24, 2017, the Canadian Securities Administrators (CSA) published CSA Staff Notice 46-
307 on Cryptocurrency Offerings,“which outlines how securities law requirements may apply to initial
coin offerings (ICOs), initial token offerings (ITOs), cryptocurrency investment funds and the
cryptocurrency exchanges trading these products.” On February 1, 2018, The Globe and Mail reported
that the Ontario Securities Commission had approved the country’s first blockchain fund—Blockchain
Technologies ETF.

The Bank of Canada, Payments Canada, and R3, a distributed database technology company, are
involved in a research initiative called Project Jasper “to understand how distributed ledger technology
(DLT) could transform the wholesale payments system.” Phases 1 and 2 of the project are “focused on
exploring the clearing and settlement of high-value interbank payments using DLT.” Phase 3 explores
“the potential benefits from integrating this “cash on ledger” with other assets such as foreign exchange
and securities.”

F.1.4e: Ecuador

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 The Central Bank of Ecuador has stated that Bitcoin is not an authorized payment method in
Ecuador. It further clarified that the bitcoin, as a cryptocurrency, is not backed by any authority, because
its value is based merely on speculation. Furthermore, financial transactions with bitcoins are not
controlled, supervised, or regulated by any Ecuadoran entity, and therefore they represent a financial
risk for those who invest in them.

The Central Bank also stated, however, that the purchase and sale of cryptocurrencies such as
bitcoin through the internet are not forbidden, but it reiterated that bitcoin is not legal tender and is not
an authorized payment method for goods and services according to the Código Orgánico Monetario y
Financiero (Organic Monetary and Financial Code).

F.1.4f: Belgium
Cryptocurrencies remain unregulated in Belgium, and there appear to have been very few official
pronouncements on the subject.

In January 2014, the Belgian National Bank (Banque nationale de Belgique, BNB) and the
Financial Services and Markets Authority (Autorité des services et marchés financiers, FSMA) issued a
joint press release warning consumers about the risks of cryptocurrencies. Their main points were that
cryptocurrencies are not legal tender, and that they are completely unregulated and do not fall within the
purview of any monitoring or regulatory authority. More recently, in December 2017, the governor of the
BNB, Jan Smets, repeated in an interview that bitcoin is not an actual currency, as it is not guaranteed by
a central bank or a government as a means of payment.

The Belgian Finance Minister, in response to a question by a Belgian senator, stated in July 2013
that while bitcoin seems to be somewhat problematic as a tool for money laundering and other illegal
activities, such problems should not be overstated. He also said that, based on studies by the BNB and
the European Central Bank, bitcoin does not present any significant risks to price stability, to the
financial system in general, or to its individual users. Finally, in this same statement, the Minister of
Finance indicated that government intervention with regard to bitcoin does not appear necessary given
how small the bitcoin market was at the time.

In April 2017, Belgian Minister of Justice Koen Geens announced that he plans to establish a legal
framework for cryptocurrencies. One of the Minister’s main objectives is to set up a mechanism to verify
the conversion and exchange rates of cryptocurrencies, similarly to what exists for traditional financial
circuits. He also would like to better monitor those who promise unrealistic returns and conversion
rates, as well as find ways around the anonymity of cryptocurrency payments so as to curtail their use as
vehicles for money laundering. Additionally, Geens would like to establish a mechanism for the courts to
properly evaluate cryptocurrencies when they are seized as part of criminal investigations. This plan
seems to be mostly aspirational, and no action appears to have been taken in furtherance of it so far.

F.1.4g: France
Cryptocurrencies remain largely unregulated in France, with two ordinances on blockchain
technology being the only legislative action taken so far. However, the French government is actively
moving towards establishing a regulatory regime.

A 2016 ordinance included two provisions that allowed the use of blockchain technology for a
specific type of zero-coupon bond called a “mini-bond” (minibon). The main impact of this ordinance was
to provide the first definition of blockchain in French law, but otherwise these provisions only had a very
narrow application. Another ordinance, from December 2017, went further and will make it possible to
use blockchain technology for a broader range of financial instruments. This ordinance will come into
force when the application decree is published, or on July 1, 2018, at the latest.

29
 The French Financial Market Authority (Autorité des marchés financiers, AMF) and Prudential
Supervisory Authority (Autorité de contrôle prudentiel et de resolution, ACPR) recently issued a joint
notice to investors, warning about the current unregulated nature of cryptocurrencies. This document
notes that bitcoin and other cryptocurrencies are not considered financial instruments under French
law, and therefore do not fall under the regulatory framework of actual currencies or under the AMF’s
supervision. The AMF and ACPR recognize the potential benefits that blockchain technology can hold for
companies, but warn that cryptocurrencies are unregulated and particularly volatile investments.

This document is reminiscent of a slightly longer report that the French Central Bank (Banque de
France) published in December 2013. That report explained that bitcoin cannot be considered a real
currency or means of payment under current French law, and criticized it as a vehicle for speculation as
well as an instrument for money laundering and other illegal activities. The 2013 report also suggested
that the conversion between bitcoin and real currencies should be considered a payment service, which
therefore could only be performed by payment service providers authorized and supervised by the
ACPR. The ACPR acknowledged this position in a 2014 document in which it stated that entities that
habitually engage in the activity of purchasing or selling cryptocurrencies in exchange for actual legal
tender must be licensed as payment services providers by the ACPR. However, the AMF and ACPR’s 2017
joint notice recognizes that “the purchase/sale of and investments in bitcoin currently operate outside of
any regulated market.”

In parallel to the independent regulatory institutions mentioned above, the French legislative and
executive branches are actively investigating how best to regulate cryptocurrencies. To that purpose, the
National Assembly (Assemblée nationale, one of the two houses of the French Parliament) has initiated a
fact-finding mission on cryptocurrencies, and a separate fact-finding mission on “blockchains and other
technologies for the certification of ledgers.” Additionally, the Minister of the Economy has recently
tasked a former deputy governor of the Banque de France with researching how to best regulate
cryptocurrencies to “better control their development and to prevent their use for tax evasion, money
laundering, or the financing of criminal or terrorist activities.”

It is also worth noting that France and Germany have jointly requested that cryptocurrencies be
discussed by the G-20, so that coordinated initiatives may be taken at the international level.

F.1.4h: Germany
The German Federal Financial Supervisory Authority (Bundesanstalt für
Finanzdienstleistungsaufsicht, BaFin) qualifies virtual currencies/cryptocurrencies as units of account
and therefore financial instruments. Undertakings and persons that arrange the acquisition of tokens,
sell or purchase tokens on a commercial basis, or carry out principal broking services in tokens via
online trading platforms, among others, are generally required to obtain authorization from BaFin in
advance.

In February 2018, the German BaFin published information on the regulatory assessment of ICOs
and the tokens, coins, and cryptocurrencies they are based on.[218] It stated that firms involved in ICOs
need to assess on a case-by-case basis whether the ICOs qualify as financial instruments (transferable
securities, units in collective investment undertakings, or investments) or as securities and therefore
trigger the need to comply with the relevant financial legislation.

Also in February 2018, the German Federal Ministry of Finance published guidance on value-
added-tax (VAT) treatment of bitcoin and other virtual currencies. It determined that transactions to
exchange a traditional currency for bitcoin or other virtual currencies and vice versa constitute the
taxable supply of other services for consideration, but fall under the exemption from VAT.

30
 It stated that bitcoin or other virtual currencies that are used simply as a means of payment are
treated the same as traditional means of payment. Using bitcoin or other virtual currencies for no other
purpose than as a means of payment is therefore not taxable. This guidance is in line with the European
Court of Justice (ECJ) decision Hedqvist from October 22, 2015. Virtual gaming money, meaning in-game
currencies, particularly in online games, is not exempt, because it does not constitute a means of
payment within the meaning of VAT law. The Ministry also addressed several follow-up questions
regarding the taxation of mining, digital wallets, and online trading platforms.

The German Bundesbank stated that bitcoin cannot be qualified as a virtual currency. According
to Dirk Schrade, Bundesbank expert in the area of payments, bitcoin is neither a virtual currency nor
digital money, because it does not fulfill the typical functions of a currency, nor is it part of the national
monetary system. The Bundesbank recommends using the term “crypto token.”

In an article published in the newspaper Frankfurter Allgemeine Zeitung (FAZ), Carl-Ludwig
Thiele, a member of the executive board of the German Bundesbank, warned investors in bitcoin and
other cryptocurrencies to beware of their riskiness, fluctuations in value, costliness, and high-energy-
need for mining, among other concerns. However, he also pointed out that blockchain technology
promises great potential for innovation and mentioned a joint project with the German stock exchange
group (Deutsche Börse Gruppe) that tests the application and performance of blockchain technology in
the settlement of securities transactions between banks.

F.1.4i: United Kingdom
The United Kingdom does not have any laws that specifically regulate cryptocurrencies, such as
bitcoin, ethereum, litecoin, etc. The governor of the Bank of England reportedly stated that regulation of
cryptocurrencies is necessary:

A better path would be to regulate elements of the crypto-asset ecosystem to combat illicit
activities, promote market integrity, and protect the safety and soundness of the financial system.
Section 2A of the Bank of England Act 1998 specifies that the Bank of England has responsibility
to both protect and enhance the stability of the financial system of the UK. Pursuant to this objective, the
Bank has considered the risk cryptocurrencies pose to the stability of the UK’s financial markets and
determined that the size of the cryptocurrency market is currently not large enough to pose a “material
risk to monetary or financial stability in the UK.”
Other concerns raised by the use of cryptocurrencies include ensuring consumers are protected
when using this form of payment, money laundering, taxation, and the use of these systems to finance
terrorism and other crimes.

With regard to taxation, Her Majesty’s Revenue and Customs notes that “[c]ryptocurrencies have
a unique identity and cannot therefore be directly compared to any other form of investment activity or
payment mechanism.” The taxability of income received from cryptocurrencies is dependent upon the
“activities and parties involved.” Value added tax (VAT) (approximately equivalent to US sales tax) is
only chargeable from suppliers for any goods or services sold in the UK in exchange for cryptocurrency.

Corporate tax rules apply to businesses for the profits or losses in currency exchanges, which
includes cryptocurrencies. HM Revenue and Customs has stated, “[f]or the tax treatment of virtual
currencies, the general rules on foreign exchange and loan relationships apply. We have not at this stage
identified any need to consider bespoke rules.” Any company that enters into transactions that involves
cryptocurrencies are thus treated in the same manner as regular transactions under the current
corporate tax rules, and any gains made are taxed accordingly.

For unincorporated businesses, income tax is chargeable to the profits and losses that can be
attributed to cryptocurrency transactions. The UK also taxes the earnings of transactions in which a gain

31
is realized after a transaction with cryptocurrencies if an individual user buys and sells coins as an
investor. Such gains fall within capital gains tax, and this tax is chargeable to any gain made that involves
a cryptocurrency.

F.1.4j: Switzerland
The Swiss Canton of Zug is trying to establish itself as a hub for cryptocurrencies and Fintech
start-ups. On November 2, 2017, the Commercial Register Office in the Canton of Zug started accepting
bitcoin and ether as payment for administrative costs. Furthermore, the Commercial Register accepts
cryptocurrencies as a contribution in kind for purposes of forming a company. In the city of Zug,
municipal services (resident registration) of up to CHF200 (about US$210) can be paid with bitcoin.

On January 1, 2018, the municipality of Chiasso, in the Swiss Canton of Ticino, started accepting
bitcoin as tax payments for amounts of up to CHF250 (around US$263).
On February 16, 2018, the Swiss Financial Market Supervisory Authority (Eidgenössische
Finanzmarktaufsicht, FINMA) published guidelines on the regulatory treatment of ICOs, which
complement its earlier FINMA Guidance from September 2017. Currently, there is no ICO-specific
regulation, nor is there relevant case law or consistent legal doctrine. FINMA stated that due to the fact
that each ICO is designed in a different way, it must be decided on a case-by-case basis whether and
which financial regulations are applicable.

In an ICO, investors receive blockchain-based coins or tokens in exchange for the funds they
transfer. The tokens are created and stored either on a blockchain specifically created for the ICO or on a
pre-existing blockchain FINMA differentiates between payment tokens (cryptocurrencies), utility tokens,
and asset tokens. Payment tokens (cryptocurrencies) are defined as tokens that are used as a means of
payment or as a means of money or value transfer. Utility tokens are those that provide digital access to
an application or service by means of a blockchain-based infrastructure. Asset tokes represent assets
such as a debt or an equity claim against the issuer. According to FINMA, asset tokens are analogous to
equities, bonds, and derivatives.

Operators of financial market infrastructures are subject to authorization by FINMA. If the tokens
received in an ICO qualify as securities, trading will require authorization. Securities are defined as
“standardised certificated or uncertificated securities, derivatives and intermediated securities which
are suitable for mass standardised trading,” meaning they are “publicly offered for sale in the same
structure and denomination or are placed with more than 20 clients, insofar as they have not been
created especially for individual counterparties.” FINMA does not treat payment tokens or utility tokens
whose sole purpose is to confer digital access rights as securities. However, utility tokens that have an
additional investment purpose or a sole investment purpose at the time of issue, as well as asset tokens
that are standardized and suitable for mass standardized trading, are classified as securities.

Funds raised in an ICO generally do not qualify as deposits within the meaning of the Banking
Act. However, if there are liabilities with debt capital character, for example a promise to return capital
with a guaranteed return, then such an ICO would require the organizer to obtain a banking license.
When assets collected as part of the ICO are managed externally by third parties, the provisions of the
Collective Investment Schemes Act apply. Provisions on combating money laundering and terrorist
financing, which give rise to a range of due diligence requirements, apply to the ICO of a payment token
(cryptocurrency) as soon as the tokens can be technically transferred on a blockchain infrastructure. In
addition, the exchange of a cryptocurrency for fiat money or a different cryptocurrency as well as the
offering of services to transfer tokens if the service provider maintains the private key (custody wallet
provider) equally trigger the due diligence requirements according to the Anti-Money Laundering Act.

In September 2017, FINMA closed down the unauthorized providers of the fake cryptocurrency
“E-Coin”, liquidated the companies, and issued a general warning about fake cryptocurrencies to

32
investors. Furthermore, three other companies were put on FINMA’s warning list due to suspicious
activity and eleven investigations were conducted into other presumably unauthorized business models
relating to such coins.

In Switzerland, the individual cantons, the Swiss states, are obligated to levy income tax and
wealth tax on the total property (assets and rights with a cash value) of taxpayers that are resident in
their canton. Tax rates vary between the individual cantons. Cryptocurrencies are treated like foreign
currencies for tax purposes and are subject to wealth tax. Holders of bitcoin or other cryptocurrencies
are taxed at the rate determined by the tax authorities on December 31 of the fiscal year. As an example,
the tax rate for bitcoin determined on December 31, 2017, by the Swiss Federal Tax Administration was
CHF13,784.38 (about US$14,514). This rate is a recommendation for the cantonal tax authorities.

In January 2018, the Swiss State Secretariat for International Finance (Staatssekretariat für
internationale Finanzfragen, SIF) reported that it would set up a working group on blockchain and ICOs.
The working group will work together with the Federal Ministry of Justice and FINMA and involve
interested businesses. It will study the legal framework for financial sector-specific use of blockchain
technology with a particular focus on ICOs and report back to the Federal Council, the Swiss government,
by the end of 2018.

F.1.4k: India
The government of India stated in early 2018 that cryptocurrencies such as bitcoin are not legal
tender in India. While the government has not yet enacted a regulatory framework for cryptocurrencies,
the Reserve Bank of India (RBI) has advised caution on their use and has issued three notifications that
“cautioned users, holders and traders on the risk of these currencies and clarified that it has not given
any licence or authorisation to any entity or company to operate such schemes or deals.”

Most recently, on April 6, 2018, the RBI issued a notification prohibiting banks, lenders and other
regulated financial institutions from “dealing with virtual currencies,” which stipulated that “[i]n view of
the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve
Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or
settling VCs. Such services include maintaining accounts, registering, trading, settling, clearing, giving
loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with
them and transfer / receipt of money in accounts relating to purchase/ sale of VCs.”[598] Moreover, the
RBI stated that “[r]egulated entities which already provide such services shall exit the relationship
within three months from the date of this circular.”

However, Deputy Governor B.P. Kanungo, in a policy press conference, did “recognize that the
blockchain technology or the distributed ledger technology that lies beneath the virtual currencies has
potential benefits for financial inclusion and enhancing the efficiency of the financial system” and stated
that the RBI has “constituted an inter-departmental committee in Reserve Bank of India who will
produce a report and they will explore the feasibility and desirability of issuing a digital currency by the
central bank.”

Reports in early 2018 indicated that the government is in the process of drafting a law to regulate
trade of cryptocurrencies in India and “has formed a committee to fast track the process,” according to
the Hindustani Times. The government has expressed two main concerns that the law will address: “the
source of money being used to trade in [cryptocurrencies]; and regulation of exchanges of VC [virtual
currency] to protect the common man,” one government official was quoted as saying.

An interdisciplinary committee, chaired by the Special Secretary (Economic Affairs), was
established in April 2017 “to examine the existing framework with regard to Virtual Currencies.” The
committee has nine members including representatives from the Department of Economic Affairs,

33
Department of Financial Services, Department of Revenue (CBDT), Ministry of Home Affairs, Ministry of
Electronics and Information Technology, Reserve Bank of India, National Institution for Transforming
India (NITI Aayog), and State Bank of India. The role of the committee is to
(i) take stock of the present status of Virtual Currencies both in India and
globally;
(ii) examine the existing global regulatory and legal structures governing Virtual
Currencies;
(iii) suggest measures for dealing with such Virtual Currencies including issues
relating to consumer protection, money laundering, etc.; and (iv) examine any
other matter related to Virtual Currencies which may be relevant.
On August 7, 2017, Business Line reported that the committee had submitted its report, but
details of the report had not been made available to the public.

On December 29, 2017, India’s Ministry of Finance released a press statement that cautioned
investors about the “real and heightened” risks of trading in cryptocurrencies such as bitcoin, saying
virtual currency investments are similar to “Ponzi schemes.” According to a February 1, 2018, news
report, the Minister of Finance told lawmakers in Parliament that “[t]he government does not consider
cryptocurrencies legal tender or coin and will take all measures to eliminate use of these crypto-assets in
financing illegitimate activities or as part of the payment system,” but “[t]he government will explore use
of blockchain technology proactively for ushering in [the] digital economy.

On November 13, 2017, the Supreme Court of India admitted under article 32 of the Constitution
a Public Interest Litigation writ petition against the Union of India and issued a notice[608] to the
Ministry of Finance, Minister of Law and Justice, Ministry of Electronics and Information Technology,
Securities and Exchange Board of India, and Reserve Bank of India. The petition seeks “a regulatory
framework to be laid down on Crypto Currency and wanted that the virtual currency be made
accountable to the exchequer.”

The Supreme Court previously heard a petition in July 2017 that sought “a similar kind of
regulatory framework”:

A Public Interest Litigation [PIL] was filed (Writ Petition (Civil) no. 406 of 2017) under Article 32
of the Constitution against Union of India, Ministry of Finance and the Reserve Bank of India over the use
and business of Bitcoins, Litecoins, Ethereum etc. The Supreme Court on July 14, 2017, directed the RBI
and the other concerned ministries to clarify their stance and enact a bill on the same before disposing
off the PIL.

F.1.4l: Japan
In Japan, cryptocurrency exchange businesses are regulated. The Payment Services Act was
amended in June 2016 and the amendment took effect on April 1, 2017. The amended Payment Services
Act defines “cryptocurrency” as property value that can be used as payment for the purchase or rental of
goods or provision of services by unspecified persons, that can be purchased from or sold to unspecified
persons, and that is transferable via an electronic data processing system; or property value that can be
mutually exchangeable for the above property value with unspecified persons and is transferable via an
electronic data processing system.

The Act also states that cryptocurrency is limited to property values that are stored electronically
on electronic devices; currency and currency-denominated assets are excluded.

Under the Payment Services Act, only business operators registered with a competent local
Finance Bureau are allowed to operate cryptocurrency exchange businesses. The operator must be a
stock company or a “foreign cryptocurrency exchange business” that is a company, has a representative
34
who is resident in Japan, and an office in Japan. A “foreign cryptocurrency exchange business” means a
cryptocurrency exchange service provider that is registered with a foreign government in the foreign
country under a law that provides an equivalent registration system to the system under the Japanese
Payment Services Act.

The Act requires cryptocurrency exchange businesses to separately manage customer’s money or
cryptocurrency apart from their own. The state of such management must be reviewed by certified
public accountants or accounting firms. The exchange business must have a contract with a designated
dispute resolution center with expertise in cryptocurrency exchanges. The exchange business must keep
accounting records of its cryptocurrency transactions and submit a report on the business to the
Financial Services Agency (FSA) annually. The FSA is authorized to inspect exchange businesses and
issue orders to improve their practices. The FSA may rescind the registration of a cryptocurrency
exchange business or suspend its business for up to six months in cases where the exchange business
loses one of the requirements for registration; it turns out that the exchange business made the
registration illegally; or the exchange business violates the Payment Services Act or orders based on the
Act.

On January 26, 2018, Coincheck, one of Japan’s biggest cryptocurrency exchange businesses, lost
about $400 million in NEM (cryptocurrency) tokens. The local Finance Bureau ordered Coincheck to
submit a report on the same day, examined it, and issued an order of business improvement on January
29, 2018. The following day the FSA requested all cryptocurrency exchange businesses to review their
system-risk management plans and report the results to the FSA. On March 2, 2018, the FSA conducted
an on-site inspection of Coincheck. On March 8, 2018, the local Finance Bureaus issued business-
improvement orders to seven exchange businesses, again including Coincheck.

A group of cryptocurrency exchange businesses publicized their decision to form a new self-
regulating body on March 2, 2018, that all registered exchange businesses will join. The body aims to
obtain authorization from the FSA under the Payment Services Act.

In addition, under the Act on Prevention of Transfer of Criminal Proceeds, cryptocurrency
exchange businesses are obligated to check the identities of customers who open accounts, keep
transaction records, and notify authorities when a suspicious transaction is recognized.

According to the National Tax Agency (NTA), the profit earned by sales of cryptocurrency is, in
principle, considered miscellaneous income, rather than capital gains, under the Income Tax Act. The
NTA compiled questions and answers regarding the tax treatment of cryptocurrency and posted it online
on December 1, 2017. Miscellaneous income is added to the amount of other income, excluding specified
capital gains, when a person’s taxable income is calculated and taxed.

F.1.5: CRYPTOCURRENCIES VIS-À-VIS CAPITAL GAINS TAX 25

From a federal income tax standpoint, bitcoin and other cryptocurrency are not considered
“currency.” On March 25, 2014, the IRS issued Notice 2014-21, which, for the first time, set forth the IRS
position on the taxation of virtual currencies, such as bitcoin. According to the IRS Notice, "Virtual
currency is treated as property for U.S. federal tax purposes." The notice further stated, "General tax
principles that apply to property transactions apply to transactions using virtual currency." In other

https://www.forbes.com/sites/greatspeculations/2017/07/10/what-you-need-to-know-about-
25

cryptocurrencies-and-taxes/#51ae7dde1a95

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words, the IRS is treating the income or gains from the sale of a virtual currency, such as bitcoin, as a
capital asset, subject to either short-term (ordinary income tax rates) or long term capital gains tax rates,
if the asset is held greater than twelve months (15% or 20% tax rates based on income). By treating
bitcoins and other virtual currencies as property and not currency, the IRS is imposing extensive record-
keeping rules and significant taxes on its use.

The IRS tax treatment of virtual currency has created a favorable tax environment for retirement
account investors. In general, when a retirement account generates income or gains from the purchase
and sale of a capital asset, irrespective of whether the gain was short-term (held less than twelve
months) or long-term (held greater than twelve months), the retirement account does not pay any tax on
the transaction and any tax would be deferred to the future when the retirement account holder takes a
distribution (in the case of a Roth IRA or Roth 401(k) plan no tax would be due if the distribution is
qualified). Hence, using retirement funds to invest in cryptocurrencies, such as bitcoin, could allow the
investor to defer or even eliminate in the case of a Roth, any tax due from the investment. Note that
retirement account investors interested in mining bitcoins versus trading, could become subject to the
unrelated business taxable income tax rules if the “mining” constituted a trade or business.

F.1.6: ON FINANCIAL STABILITY 26

Virtual currency schemes may be inherently unstable. Nevertheless, for the time being they do
not jeopardize financial stability, given their limited connection to the real economy, the low volumes
traded and the lack of wide user acceptance. However, developments should be carefully monitored, as
the situation could change substantially in the future.

There are established principles that establishes as to How Payment systems should operate.

Core Principles for Systemically Important Payment Systems (BIS, 2001)
I. The system should have a well-founded legal basis under all relevant
jurisdictions.
II. The system’s rules and procedures should enable participants to have a clear
understanding
of the system’s impact on each of the financial risks they incur through
participation in it.
III. The system should have clearly defined procedures for the management of
credit risks and
liquidity risks, which specify the respective responsibilities of the system
operator and the
participants and which provide appropriate incentives to manage and contain
those risks.
IV.1 The system should provide prompt final settlement on the day of value,
preferably during
the day and at a minimum at the end of the day.
V.1 A system in which multilateral netting takes place should, at a minimum, be
capable of
ensuring the timely completion of daily settlements in the event of an inability to
settle by
the participant with the largest single settlement obligation.
VI. Assets used for settlement should preferably be a claim on the central bank;
where other

26

https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf
36
 assets are used, they should carry little or no credit risk.
VII. The system should ensure a high degree of security and operational reliability
and should
have contingency arrangements for timely completion of daily processing.
VIII. The system should provide a means of making payments which is practical
for its users
and efficient for the economy.
IX. The system should have objective and publicly disclosed criteria for
participation, which
permit fair and open access.
X. The system’s governance arrangements should be effective, accountable and
transparent.

It is quite clear that virtual currency schemes do not comply with most of the Core Principles,
especially in relation to their legal basis (CP I); the rules and procedures in place in order to enable
participants to have a clear understanding of the risks they are taking (CP II); the procedures for the
management of credit and liquidity risks (CP III); the asset used for the settlement, i.e. the virtual
currency (CP VI); the degree of security and operational reliability (CP VII); and the governance
arrangements (CP X).

That being said, the Core Principles also provide three criteria in order to assess the criticality of
a payment system:
i) it is the only payment system in a country, or the principal system in terms of
the aggregate value of payments;
ii) it handles mainly payments of high individual value; and
iii) it is used for the settlement of financial market transactions or for the
settlement of the other payment systems.
From a global perspective, none of these criteria are met by virtual currency schemes, and
therefore they cannot be considered systemically important payment systems. Consequently, it is
absolutely clear that they would not be capable of triggering disruptions or transmitting shocks across
the financial system. However, they could cause a significant environment of instability within the virtual
community in which they operate. In this regard, virtual currency schemes can indeed be critical, but
only for their users within the virtual community. This issue might be of interest for other authorities
(e.g. in the context of market conduct regulation and supervision).

F.1.7: ON PAYMENT STABILITY

Virtual currency schemes seem to work like retail payment systems within the virtual
community they operate. However, in contrast to traditional payment systems, they are not regulated or
closely overseen by any public authority. Participation in these schemes exposes their users to credit,
liquidity, operational and legal risks within the virtual communities; no systemic risk outside these
communities can be expected to materialize in the current situation.

F.1,8: LACK OF REGULATION

The instability of virtual currency schemes can be explained by one of the most critical aspects
mentioned earlier, i.e. the lack of a proper legal basis for virtual currency schemes. The legal basis of a
payment system consists of framework legislation, as well as specific laws, regulations, and agreements
governing both payments and the operation of the system. Virtual currency schemes visibly lack a proper
legal framework, as well as a clear definition of rights and obligations for the different parties. Key
payment system concepts such as the finality of the settlement do not seem to be clearly specified.

37
 Furthermore, the global scope that most of these virtual communities enjoy not only hinders the
identification of the jurisdiction under which the system’s rules and procedures should eventually be
interpreted, it also means the location of the participants and the scheme owner are hard to establish. As
a consequence, governments and central banks would face serious difficulties if they tried to control or
ban any virtual currency scheme, and it is not even clear to what extent they are permitted to obtain
information from them.14 In the particular case of Bitcoin, which is a decentralized peer-to-peer virtual
currency scheme, there is not even a central point of access, i.e. there is no server that could be shut
down if the authorities deemed it necessary.


F.2: Bangko Sentral’s regulatory approach to Virtual Currencies (VC)

As early as 2014, the VC has caught the attention of the Bangko Sentral ng Pilipinas (BSP). It has
then warned the public that VC such as cryptocurrency exchanges are not regulated by them. A few years
later, with the rising use and acceptance coming from the international community, BSP has then
tempered its earlier stance and has adopted a more or less “balanced approach” to virtual currencies.
As of date, the BSP has issued three (3) responsive regulations:
1. Warning Advisory on Virtual Currencies dated 06 March 2014
2. BSP Circular No. 944 dated February 2017
3. Advisory on the Use of Virtual Currencies (dated 29 December 2017)

F.2.1: Warning Advisory on Virtual Currencies dated 06 March 201427

Alarmed by the growing use and exchange of virtual currencies in the country on 2014, BSP stated:
“The public is hereby warned that such exchanges are not regulated by the BSP or by any regulatory
authority in the country at this time. Thus, there are no existing regulations which would specifically
protect consumers from financial losses if an organization that exchanges or holds virtual currencies fails or
goes out of business. Moreover, there is no assurance that the value Bitcoin or any virtual currency would
be stable. In fact, its value can be highly volatile.
In the meantime, the public is enjoined to familiarize themselves with some basic information on the
subject. Further understanding can be gained through personal researches on the internet and other forms
of media.”

The BSP went on enumerate things to think before buying, holding or trading virtual currencies. Few of
the warnings are as follows:
• You can lose your money through a virtual currency exchange – Exchange platforms are
unregulated. If a virtual currency exchange loses or fails, there is no legal protection that covers
you for losses arising from any funds you may hold on the said exchange. At present, there have
already been a number of cases where virtual currency exchange platforms have gone out of
business or have failed.

• Virtual currencies in your digital wallet can get stolen – When buying virtual currencies,
the same are stored in a “digital wallet,” on a computer, laptop, PC tablet or smart phone. This
digital wallet makes use of public and private keys or passwords that allow you to secure your
wallet. Still, there have been a number of reported cases whereby consumers lost large amount
of virtual currencies from their wallets through hacking. Further, since virtual currencies do

27 This advisory can be accessed at: http://www.bsp.gov.ph/publications/media.asp?id=3377

38
 not have central organizations that hold and re-issue keys or passwords, losing the key or
password to your digital wallet would mean losing your virtual currency forever.

• You are not protected when using virtual currencies for payment –Payments made
through virtual currencies like Bitcoin are immediate, direct and non-reversible. Further, since
the use of virtual currencies is not regulated, there are no existing regulations to protect you in
case of unauthorized or incorrect debits made from your digital wallet.

• The value of your virtual currencies cannot be guaranteed and can change quickly – The
value of virtual currencies has shown several sharp increases for the past year, and several
sharp decreases as well. If you buy a virtual currency today, it is quite possible for its value to
drop sharply and permanently the next day.


F.2.2: BSP Circular No. 944 dated February 201728

Three years after its initial warning advisory, the use of virtual currencies for payments and
remittances in the country has even grown to a sizable extent. This prompted the BSP to establish its first
formal regulatory framework for VC exchanges – companies or businesses engaged in changing VC into
fiat currency (refers to government –issued currency that is designated as legal tender) and vice versa.

It must also be noted that the rules and regulations in this circular have been approved by the
Monetary Board to be incorporated as Section 4512 of the Manual of Regulations for Non-Bank Financial
Institution (MORNBFI). Thus, these VC exchanges are treated in the same manner as foreign exchange
dealers, money changers and/or remittance agents operations.
The salient features of this circular are as follows:
• Statement of Policy
• Scope
• Requirements for the issuance of a Certificate of Registration
• Risk management mechanisms
• Notification and reporting requirements
• Sanctions

In the Statement of Policy, BSP has recognized both the benefits of the use of Virtual Currency (VC)
systems in the delivery of financial services and its corresponding risks and consumer protection and
financial stability concerns. In fine, BSP stated:

Statement of Policy

“It is the policy of the Bangko Sentral to provide an environment that encourages financial
innovation while at the same time ensure that the Philippines shall not be used for money laundering (ML)
or terrorist financing (TF) activities and that the financial system and financial consumers are adequately
protected. Thus, 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.
These benefits, however, should be considered along with the corresponding risks in VC considering
the higher degree of anonymity involved, the velocity of transactions, volatility of prices and global

28 This advisory can be accessed at: http://www.bsp.gov.ph/downloads/regulations/attachments/2017/c944.pdf

39
accessibility. In particular, VC pose ML and TF risks, information technology risks, and consumer protection
and financial stability concerns, among others”
One of the oft-quoted statements from the media releases of the BSP is its non-endorsement of
any use of virtual currencies, which was also part of its statement of policy:
“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. Rather, the BSP aims to
regulate VC 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.”
Scope
“These guidelines shall cover VC exchanges in the Philippines offering services or engaging in
activities that provide facility for the conversion or exchange of fiat currency to VC or vice versa. The
Bangko Sentral recognizes that once fiat currency is exchanged or converted into VC, it becomes easily
transferrable, facilitating expedient movement or transfer of funds and payment services, among others.”

Requirements for the issuance of a Certificate of Registration
“A VC exchange shall obtain Certificate of Registration (COR) to operate as a remittance and
transfer company, pursuant to and upon compliance with the requirements of Subsec. 4511N.2 of MORNBFI
which provides:
The application for a certificate of registration to act as a Foreign Exchange Dealers/Money
Changers and/or Remittance Agent Operations, in the prescribed form must be duly supported by the
following documents:
a. Incorporation papers duly authenticated by the SEC (for corporation/ partnership); or copy of
the certificate of registration duly authenticated by the Department of Trade and Industry (DTI)
(for single proprietorship);
b. Copy of business license/permit from the city or municipality having territorial jurisdiction
over the place of establishment and operation;
c. List of stockholders/partners/ proprietor/directors/principal officers as the case maybe;
d. Notarized Deed of Undertaking to strictly comply with the requirements of all relevant laws,
rules and regulations, signed either by the owner, partner, president or officer of equivalent rank;
and
e. Any additional document which the BSP may require from time to time
A certificate of registration to act as FXD/MC or remittance agent shall be issued by the BSP and
shall become the basis for an electronic registry of all BSP registered FXDs/MCs and remittance
agents in the country.”

It must be emphasize that the VC exchange, in complying with the Application for Registration
and Notarized Deeds of Undertaking to the Bangko Sentral through the appropriate department of the
Supervision and Examination Sector (SES), they are also submitting themselves to the requirements of
all relevant laws, rules and regulations including RA 7653 (New Central Bank Act) and RA 9160 (Anti-
Money Laundering Act of 2001).

Risk management mechanisms
These VC exchanges are also required to put up adequate safeguards to address, manage and mitigate
different associated risks of VC. These include cyber security program, anti-malware solutions as well as
basic controls on anti-money laundering and terrorist financing, technology risk management and
consumer protection. The circular provides:
“Depending on the complexity of VC operations and business models adopted, a VC exchange shall
put in place adequate risk management and security control mechanisms to address, manage and mitigate
technology risks associated with VC. For VC exchanges providing wallet services for holding, storing and
transferring VC, an effective cybersecurity program encompassing storage and transaction security
requirements as well as sound key management practices must be established to ensure the integrity and

40
security of VC transactions and wallets. For those with simple VC operations, installation of up-to-date anti-
malware solutions, conduct of periodic back-ups and constant awareness of the emerging risks and other
cyberattacks involving VC may suffice.
Internal control
“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
Bangko Sentral on the minimum control standards that VC exchanges are expected to observe on their
operations

Notification and reporting requirements
Aside from being closely monitored by the Supervision and Examination Sector (SES) of the BSP
in its internal control, the SES also require VC exchange to maintain records and submit the following
reports to them:
Nature of Report Frequency Due Date
1. Audited financial Annually Not later than 30 June
statements (audited following the reference
by any of the Bangko calendar year
Sentral-selected
external auditors)
2. Quarterly Report on Quarterly Ten (10) business days from
Total Volume and end of reference quarter
Value of VC
transacted*
3. List of operating Quarterly Ten (10) business days from
offices and websites* end of reference quarter
*Duly certified by the Proprietor/Managing Portner/ President or ony officer of equivalent rank

Sanctions
Appropriate monetary penalties, sanctions and other enforcement action/s shall be imposed for the
following violation/s:
Nature of violation/exception Possible Sanctions/Penalties
a. Operating without prior Bangko Sentral - Applicable penalty prescribed under
registration Section 36 of R.A. No. 7653 (New
Central Bank Act)
- Disqualification from registration
b. . Violation of any of the provisions of - Written reprimand
R.A. No. 9160 (Anti-Money Laundering - Disqualification from holding any
Act of 2001), as amended, and its RIRR position in any Bangko Sentral
supervised or regulated institution
- Applicable penalty prescribed under
the AMLA, as amended
- Cancellation of registration
c. Erroneous/delayed/unsubmitted report - Monetary penalty of P60 for each
occurrence (in case of Erroneous
report) or for each day (in case of
Delayed or Unsubmitted reports)
which will accumulate until such time
the report has been determined
compliant with the reporting
requirements prescribed herein or in
subsequent guidelines; and/or
- Cancellation of registration

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 d. Violation of any - Penalties and sanctions under
provisions/requirements of this Section applicable laws, rules, and regulations
- Cancellation of registration


F.2.3: Advisory on the Use of Virtual Currencies (dated 29 December 2017)29

While BSP Circular No. 944 focused on the regulatory framework of the Virtual Exchanges, BSP in
its latest advisory, focused on advising the individual users and potential investors of VC pyramid
schemes disguised as initial coin offerings (ICOs) or VC investment products. It stated:

“The public is therefore advised to exercise caution regarding the acquisition, possession, trading of
VC or dealing with VC-related offers. Unlike stocks or debt issues, VC are not backed by any company or
commodity and the price is purely dependent on market demand and supply. As such, investing in VC
presents a highly speculative and risky undertaking which might result into huge financial losses.

Important security considerations for VC users:
• Set-up and use a dedicated email account. Avoid using the same email accounts or username that
you have used in public platforms such as social media.
• Keep your VC-related email account to yourself. In any VC transaction, users need their email
account and password. Thus, it is important to secure not only your password but also your email
account.
• Set a strong password. Use complex and hard-to-guess passwords (i.e. alphanumeric including
symbols, lower and upper cases). Avoid re-using the same password for more than one service.
• Observe basic internet security. Exercise caution in accessing your VC wallet especially when using
wi-fi connections. Avoid installing software, browser plugins or downloading attachments from
unknown or suspicious websites and emails. At the same time, do not leave your device unattended.
• Subscribe to multi-factor authentication (MFA) provided by the VC wallet provider. VC users should
enable, whenever available, MFA options to their VC accounts. Adding another layer of
authentication can provide increased security to your VC account and transactions.
• Separate your funds and use cold storage. VC funds should be separated in two or more digital
wallets for transactional purposes. The main wallet used to store VC funds for future use should be
kept offline or popularly known as cold storage wallet to minimize vulnerability to theft, hacking or
fraud.


F.2.4: Anti-Money Laundering Council Monitoring of the Virtual Currencies

As early as 2014, BSP had apprehensions of the possible use of virtual currencies to inject dirty
money in the country. In its warning advisory, it stated:
“The BSP will be closely monitoring developments on these virtual currencies particularly on their
possible use for money laundering and other illegal purposes, and will adopt appropriate measures as
needed.
VC may be used for money laundering and other illicit activities. VC provide consumers with high
degree of anonymity and therefore may be used for money laundering and other illicit activities. This illegal
use can affect you, as law enforcement agencies may decide to close exchange platforms and prevent you
from accessing funds that the platform may be holding for you.”

29 This advisory can be accessed at: http://www.bsp.gov.ph/publications/media.asp?id=4575

42

In fact in BSP Circular No. 944, Virtual exchanges are considered similar to remittance and
transfer companies making it a subject of the Anti-Money Laundering Act. The circular stated:
“The Bangko Sentral recognizes that once fiat currency is exchanged or converted into VC, it
becomes easily transferrable, facilitating expedient movement or transfer of funds and payment services,
among others. In this manner, they are considered similar to remittance and transfer companies, as
provided for under Section 3 in relation to Section 11 of Republic Act No. 9160 or the Anti-Money
Laundering Act of as amended, and its Revised lmplementing Rules and Regulations (RIRR), as well as
implementing regulations issued by the Bangko Sentral.”

Last year, several news outlets reported that the Anti Money Laundering Council sets its eyes on
virtual currencies such as bitcoins. Although no new developments has been release by the AMLC as of
date, it cannot be too far-fetched that it may also establish a regulatory framework, the same way the BSP
has had.

F.2.5: Legality of Virtual currencies/Crypto currencies in the Philippines

The remaining singular question now is whether VCs are legal in the Philippines? Yes. It is worthy to
reiterate that the BSP does not endorse virtual currencies for reasons already stated above. However, it
does not also prohibit its use. In fact, the BSP has recognized its potential benefits and the media releases
have been geared to minimize the risks related to its use. In its latest advisory, BSP highly encouraged all
VC users to:
• Deal only with BSP-registered VC exchanges and maintain only a sufficient amount of VC enough
to address transaction requirements; and

Secure their VC holdings and observe security tips to protect the confidentiality and integrity of personal
information and transaction details.

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G. Summary

In this age, it can likely be said that there are three types of currencies, first is the gold, second is
the paper money issued by the government and lastly, the cryptocurrencies, which has been made
possible by the blockchain technology, that has been currently accepted by merchants and has been used
for a while worldwide to facilitate purchases and investments. Cryptocurrency, in short, is the currency
created by the public. It has been around for more than ten years but it can be said that these digital
currencies is still in its infancy as compared to the paper money. There can be a lot of potential
advantages in the future or disadvantages waiting to be uncovered. In the end, the weighing of the
advantages and disadvantages of this virtual currencies or as to whether or not to trust these currencies
rests on the individual.

Other countries have adopted the technology and had been using cyptocurrencies for payment
but most countries are cautious and has warned its citizens when dealing with these instruments. It can
be said that it is the absence of a central bank or an authority, like a country for instance, to back-up
these currencies which made most of the countries including the Philippines hesitant in using virtual
currencies. In case of loss, no one can be held liable for such losses. No entity can be sued to recover such
losses. Most of the countries recognized the need for a regulation for these transactions. The absence of
a general regulation governing its transaction, each country has made the initiative to develop their own
regulations to protect its citizens from the dangers of cryptocurrency trading. So for now, the maximum
that these countries had done is to observe from a distance the cryptocurrency business as being traded
and used by other countries and from there, develop regulations and safeguards to protect its citizens
and to help deliver the blockchain technology’s promise which is to promote efficient, safe and
inexpensive transanctions.

In the Philippines, although these cryptocurrencies are not regulated by the Bangko Sentral, it
took extra actions in issuing Advisories in order to warn the public as regards to the dangers in the
trading of these instruments. Currently, the trading of virtual currencies here in the Philippines has been
allowed by the Bangko Sentral, and to some extent, regulated by it to minimize risks particularly to
hacking, theft and any other fraudulent activity. Although in the charter of the Bangko Sentral, it only
protects the Philippine Peso, in our opinion, although the nature of virtual currencies does not allow
intermediaries or an entity facilitating the transaction, it must extend the same protection it has on the
Philippine Peso. No matter how it can be said that the system is secure, there is still a possibility that it
will crash and will have a significant effect in the economy of the Philippines and of the world. As to how
the Bangko Sentral extends its protection to traders of cryptocurrency transactions is in the better
judgment of the Bangko Sentral. In a world where boundaries are becoming less relevant, there is an
opportunity and a threat; with virtual currencies it can be you either speculate, or it can be just another
form of gambling.

This game-changing technology available in the market carries with it the corresponding
responsibility that the individuals, particularly the Filipinos, must perform in order to keep transactions
safe and secure as promised by the technology. It is like, for example, before, people have to grab a
candle and light it in order to provide for light, but now, with the flip of a finger, there is already light. In
the same way with respect to virtual currencies, individuals should not just trust the system as it delivers
a promise of securing a safe transaction. Traders must also do their part to secure their transactions to
prevent theft, hacking etc. In the Philippine setting, with the advent of the internet and the smartphone, it
is not that hard to be informed anymore. A little diligence on the part of the trader goes a long way.

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