THE RISE OF VIRTUAL CURRENCIES: UNRAVELLING THE IDENTITY of

BITCOIN and THE IMPLICATIONS of ITS NEWLY ACQUIRED LEGAL STATUS

A Thesis presented to the

Faculty of the College of Law

De La Salle Lipa

In partial fulfillment of the

Requirements for the Degree

JURIS DOCTOR (JD)

By:

Richelle Ann A. Zamora

May 2018
 i

ABSTRACT

The innovation in financial computing brings a new method of payment and a new

form for a store of value. This innovation is also seen by the state and the monetary institution

as an alternative and cost efficient means to provide remittance service to the society. However,

it also paved to a novel and creative mode for money launderers and terrorist financing group

to successfully attain their criminal design.

This study examines the nature of bitcoins as virtual currency based on the present rules

and regulations and the treatment towards bitcoins of both local and foreign statutes to

determine how this technological innovation will fit into the country’s legal system. The study

extends to the scrutiny on the operations and transactions which involve bitcoins and the

underlying legal and economic theory which justify the people’s continued adoption to this

new financial innovation. Furthermore, this paper will analyze the legal and ethical

implications of bitcoin transactions to the existing laws on money laundering and terrorism.

Finally, the present approach of the Bangko Sentral ng Pilipinas of issuing Circular 944,

Circular 942, and Circular 950 to regulate bitcoin exchanges is inspected to validate whether

bitcoin exchanges will be sustained without undermining the laws on Anti-Money Laundering

and Anti-Terrorism.

The researcher used constant comparative analysis when examining the data gathered

from various sources and individual personal interviews with experts and authorities in the

Bangko Sentral ng Pilipinas, different financial technology experts, and operators of virtual

currency exchanges.
 ii

DEDICATION

This humble work is dedicated to the following:

To my loving, understanding, and supportive husband Brian for providing me

the opportunity to pursue my aspirations;

To my kind and sweet daughter Sophia, for preparing the family’s sumptuous

meal every time my busy academic schedule prevents me from performing my duty;

To my other daughter Patricia, for providing me a source of constant motivation

and inspiration;

To my spirited and cheerful son, Mateo, for making each and every day bright

and happy;

To my father, who single-handedly raised me into the person I am today and

who greatly influenced me in taking this path;

To my mother, who I know never ceased to care for me and watch over me even

from above;

And most importantly to God Almighty for giving me life, wisdom, and hope

and for bringing the persons above mentioned into my life who made my journey

meaningful and complete.

 iii

ACKNOWLEDGEMENT

The researcher would like to acknowledge the tremendous contributions of the

following persons without whom the completion of this paper would not have been possible:

To Atty. Emerito Enginco, our honorable dean in the College of Law, for his

never ending guidance and support in our academic endeavor;

To Dr. Hermogenes Panganiban, teacher in charge of the Juris Doctor Thesis,

for his seamless patience and hard work in imparting to us his experience and

knowledge in the field of research and thesis writing;

To Atty. Jillian De Veza – Macasaet, my thesis adviser, for her continuous

guidance and significant intellectual insights;

To all the interviewees who imparted their knowledge on the different aspects

of the study; and

To my JD family and friends for exhibiting the value of hope and perseverance

which motivated the researcher to complete the study.

 1

CHAPTER 1

BACKGROUND OF THE STUDY

1.1. Introduction

The birth of the World Wide Web in 1990s paved the way for the discovery of a new

and profound world where everyone can be connected and everything is within one’s reach.

This technology brought people online. It created a virtual world where people may rekindle

and build their relationships with one another or conduct their various business and commercial

activities. It is no doubt that the state recognizes the existence of this virtual world which even

led to the formulation of laws and policies to govern these activities performed online.

The internet’s contribution to business transactions cannot be overemphasized. The

process of payment which is one of the significant processes of commercial exchange was

greatly expedited. People can now transmit funds from their own bank account to that of

another in order to send money. They can also make payments through online banking to a

specific institution or entity for services or goods received. However, online bank payments

and remittance presuppose the existence of a person’s valid account with a specific bank or

financial institution.

It is noteworthy, that not only the citizens benefited from the convenience of online or

electronic money transfer but also the criminals or lawbreakers who are searching for an easy

means of sending, receiving, or hiding the money that they obtained from their illegal activities.

To remedy the problem and hinder the evil and corrupt individuals and entities in the society

in utilizing online banking to facilitate their illegal activities, the Central Bank of the
 2

Philippines, released a circular which updated the Anti-Money Laundering Rules and

Regulation. It requires every bank to establish and maintain a comprehensive information

security program. The said program should have at the very least an identification and

assessment of risks process which is related to e-banking products and services as well as

identification of risk mitigation actions with authentication technology and internal controls.

With the implementation of such rule one may think that the problem in unrestricted and

unregulated transfer of money was minimize, if not solved. The subsequent events however,

would prove otherwise.

Recently, virtual money circulating online has gained much attention throughout the

world. Among these virtual monies termed as “Virtual Currency” or VC, bitcoin is by far the

most popular. Unlike the other currencies which are circulating in different countries, these

cryptocurrencies have no physical form nor are they regulated by any financial institution or

any country. Existing in the virtual world, the value of money which they represent can freely

transfer from one virtual wallet to another regardless of the country of origin and

notwithstanding its illegal source or purpose. There are even websites such as the Silk Road

website which became a highlight in the news and multi – media until its closure in 2013. The

said website blatantly advertise illegal products such as prohibited drugs which can easily be

purchased with the use of bitcoins. One can imagine the numerous illegal activities that can be

facilitated with their aid such as money laundering and terrorism.

On February 6, 2017, the Monetary Board released Circular No. 944 which seeks to

regulate virtual currencies such as bitcoins. Subsequently, the Bangko Sentral ng Pilipinas

(BSP) approved two bitcoin exchange operators. Despite the statement of the BSP of its
 3

purpose in regulating virtual currencies to combat money laundering and to prevent the use of

these virtual currencies to finance terrorism, the said circular is highly questionable. For one,

due to the natural portability of these currencies, it is difficult to effectively regulate them

especially since not all countries recognize their legal existence. Some even expressly declared

their illegality. An issue thus, arises primarily, involving the validity of Circular No. 944 and

its possible conflict with other laws such as Republic Act No. 9160 or the Anti-Money

Laundering Act of 2001 and its implication to the established Anti-Terrorism Law or R.A

9372.

1.2. Statement of the Problem

This study will first and foremost unravel the nature and identity of bitcoins as the most

popular among the existing VCs and as one among those presently regulated by the Bangko

Sentral ng Pilipinas. Then this paper will examine the validity of Circular No. 944 and the

other relevant circulars and their interplay with the other laws.

In the process, the study will specifically answer the following:

I. How do the Philippine banking law define an acceptable currency in the country?

II. How do the existing rules and regulations in the country…

2.1. Treat the nature of bitcoin as a currency?

2.2. Treat the operations of virtual currency exchanges?

III. How do foreign law and jurisprudence treat the nature of bitcoin and the operations

of virtual currency exchanges?

IV. What legal and economic theories and principles justify the use of bitcoins?
 4

V. What are the legal and ethical implications of bitcoin exchanges to the laws and

policies on money laundering and terrorism?

VI. How can the use of bitcoin and virtual currency exchanges be sustained without

undermining anti-money laundering and anti-terrorism legislations?

2.1. Significance of the Study

The outcome of this study will be significant in gaining a deeper understanding of the

nature and characteristics of bitcoins as the most circulated cryptocurrency in the world. Such

is their popularity that they are the only ones mentioned in the recent regulation of the BSP.

The expanding circulation of cryptocurrencies in the current online commercial transactions

and activities makes the study timely and beneficial to the online users who are used to making

online payments. With this thesis, they will become aware of the advantages and disadvantages

of bitcoin as a mode of payment. This will also remind them to be on guard to the possible

risks associated with its use both on the legal and commercial aspect.

In addition, this study will also serve as a modest assessment of the current policy

implemented by the BSP. It may unveil certain strengths and weaknesses of the policy which

may significantly lead to its refinement or amendment to make it more compatible with the

other laws.

2.2. Scope and Limitation

This thesis is primarily focused on the nature of bitcoins as a medium of currency as

characterized by the existing rules and regulations in the Philippines. In the process, the study
 5

will delve with the rules and regulations governing VC transactions. To elucidate further on

their nature and character, the existing statutes and jurisprudence in the U.S., as the country

which has the most influence in the Philippine banking laws, will also be presented.

The study will scrutinize Circular No. 944 of the Bangko Sentral ng Pilipinas as well

as the other circulars complementing it to shed light on the rationale and motivation behind its

issuance. The scrutiny on the said provision of the circular would unfold the implication of the

regulations to the legality of bitcoins. The extent of regulation that an institution such as the

BSP may exercise over the bitcoins will also be dealt with in detail.

Lastly, this thesis aims to determine legal and ethical implications of bitcoin exchanges

and transactions to the laws and policies on money laundering and terrorism. It will establish

the stability of the use of bitcoins while co-existing and complying with the Anti - Money

Laundering Act and Human Security Act prevailing in the country.

 6

CHAPTER 2

REVIEW OF RELATED LITERATURE

2.1 Introduction

It has been a popular notion that money makes the world go round. In a materialistic

world such as what we now have, people invent and create new things; discover new ways of

doing and spending their time. Yes, these are all possible with money.

This chapter presents the evolution of money and the emergence of the different

currencies as regulated by the government of each country. This will highlight on the recent

development on the so – called virtual currencies or the cryptocurrencies and single – out

bitcoins as the most circulated cryptocurrency in the world. Not to mention that, it is the only

cryptocurrency so far that the Bangko Sentral ng Pilipinas has mentioned in its regulation. The

discourse on bitcoin will bring to light its advantages and disadvantages to the economic and

online players. Lastly, this chapter will elucidate the legal standing of the bitcoins in the

Philippines.

2.2 Evolution of Money to Currency

Money is a medium of exchange which facilitates the transaction and trade of

goods and services. Its value, especially in one’s own accepted currency, has far reaching

utility and can be used as a medium of payment. It evolved from the previous system of

exchange known as the barter system where people would trade goods directly for other goods.

However, for the barter system to be beneficial to the people, a condition termed by economists
 7

as double coincidence of wants must exist. This means that both traders should have something

that each one wants. As expected this condition rarely occurs and oftentimes would lead to

circumstances when the parties have nothing to offer that the other party would want to accept.

Under such condition trade would not take place. And so to resolve this kind of situation, an

indirect medium of exchange which we now know as money emerged. 1

Money is neither a creation of the state nor a result of acts of the legislative branch

of the government. In fact, no nationwide consensus was even required for its establishment

nor did it come into being by the imposition of any authority. It is a medium of exchange that

arouse out of necessity. 2

However, prior to its recognition, money was once considered a commodity. And

as the number of transactions involving money become widespread, it has acquired an

established value as a means of exchange. It was then recognized not for its value as a

commodity but for its service as money. An important implication of this acquired status of

money as a medium of exchange is that an additional supply in its quantity does not enhance

its usefulness --- a distinct and unique feature of money. Unlike other commodities which

become more useful when increased in number, the increase in its supply does not affect its

value. It follows that the benefits of money as a medium of exchange is the same and identical

in every trade such that the size of the availability of its supply becomes immaterial. 3

Despite the immateriality of its supply, it does not mean that a change in supply of

money has no effect at all. When the supply of money changes, its exchange value or its

1
Halaburda, H. 2016, “Digital currencies: Beyond bitcoin”. Communications & Strategies, (103), 77-92,213.
2
Id.
3
Id.
 8

purchasing power also changes. Unfortunately, such effect on the money’s purchasing power

would not have the effect of benefitting or damaging one’s economy. 4

Today, fiat paper currency is the most common form of money in the world. This

is regulated and issued by a central authority such as the country’s central bank. With the

emergence of online based currencies, the nature of money as a currency becomes more

complex if not problematic. It is to be noted that currency by itself can be defined as a medium

of exchange for trade and commerce which circulates in the global market. Thus,

cryptocurrencies, which bear in its term the nature of being a medium of exchange, cannot be

ignored or treated simply as a fad.5

2.3 What Virtual Currency or Cryptocurrency Is

Virtual Currency is a scheme in which transactions take place only within and through

internet. Payments through a virtual currency scheme are not denominated in any pre-existing

unit of account, such as US Dollars or Peso unlike the electronic money. Instead, payments are

denominated in the virtual currency itself. VCs are units of account associated with “wallets”,

which are digital identities, such as e-mail accounts. Transactions take place between the wallet

of the sender and the one of the receiver, by switching the wallet associated to a certain amount

of VC.6

4
Schlichter, Detlev S. 2014, “Paper Money Collapse:The Folly of Elastic Money”, John Wiley & Sons,
Incorporated
5
Id.
6
Rella, L. (2015). Transnational Political Regulation of Bitcoin . Lund University.
 9

The term Cryptocurrency, consists of two words, namely, Crypto which is a

contraction of the word cryptography, and currency. Cryptography is a Greek word which

means a “secret writing”. Virtual currencies are cryptocurrencies when they make use of the

process of cryptography. Cryptography as a process refers to the deciphering and enciphering

of information or communication in a code or a form of secret language. When combined with

the term currency, cryptocurrency may be defined as an internet based, peer–to–peer digital

currency with private and public keys, digital signature and encryption. 7 Since it is internet-

based, cryptocurrency is an open and borderless technology which can transmit and connect

data, communication, and information around the globe. Peer-to-peer or P2P network

architecture provides equality between each node of these interconnected networks. In effect,

there is no central server which dominates creating a flat topology which is exhibited by the

internet protocol. This characteristic allows successful file sharing such as that pioneered by

Napster and the other succeeding bittorrent.8

To date, the CryptoCurrency Market Capitalization website lists some 871

different cryptocurrencies with a total market cap of $136,996,987,190. These however are not

supported by any country’s government or central bank. Among these cryptocurrencies, bitcoin

is the most preferred and widely circulated accounting for some 72% of the world’s transaction.

Other players in the market which comes close to bitcoin are Ether with 16% market share,

Dash with 3%, Monero, Ripple, and Litecoin, each contributing 1% of the total number of

7
Making sense of bitcoin. 2014. Chatham: Newstex. Retrieved from
https://search.proquest.com/docview/1561487655?accountid=28547
8
Antonopolous, A. 2014. Mastering Bitcoin. O’Reilly Media, Inc. CA
 10

transactions.9 The remaining 6% is spread out to the other cryptocurrencies competing in the

global digital transactions.10

2.4 What Bitcoin is and How It Works

Even as far back as the 1990s an attempt to create a digital equivalent of cash or

an online currency was made. However, a major problem on counterfeiting had to be

overcome. Counterfeiting means making a single or multiple copy of a unit of digital currency

to be used as payment to different merchant or for various transactions. This kind of disaster

is known as “double spending”. Somehow a form of ledger must be established and relied upon

to track each unit of currency received by a person. At the same time such recording must also

be able to monitor and identify the amount which was already spent by the same individual.

This objective may be implemented by means of a third party or institution who will monitor

and will be tasked to safe keep the ledger as well as check whether the entries are correct and

in order. This is the system used in a typical bank and financial institution only that the object

is an electronic currency. 11

As a result, a number of virtual currencies were issued through different internet

platforms to link the two sides of the marketplace such as the buyers and sellers. This lasted

for a number of years until the emergence of the bitcoin. 12

9
Mari, Angelica. "Cryptocurrencies: A Niche Pursuit?" Computer Weekly, 22 Aug. 2017, pp. 20-24.
10
Id.
11
Supra at 1.
12
Id.
 11

The technology behind bitcoins was labeled as a “masterpiece of technology”

because it represents the ultimate and successful outcome of a number of failed attempts to

establish an online decentralized currency. The inception of the bitcoins in 2009 can be credited

a pseudonymous hacker Satoshi Nakamoto. He published a paper where he presented a system

which consists of a network of computers with a special software that can solve specific

algorithm. The process of solving these algorithm is known as mining. A success in the mining

process yielded a unique bitcoin and thus bitcoins were born. It can be deduced that bitcoins

are the product of the computer program created by Satoshi Nakamoto. 13

Consequently, the value of bitcoins is not backed by any commodity or precious

metals but by a fixed market price. Each unique bitcoin can only be held by one entity at any

given time and can be traded on an established P2P network just as traditional currencies. 14

The bitcoin is far different from the traditional banking and payment system and

outweighs the mechanism utilized by the previous virtual currencies. The bitcoin system was

able to find a way to rectify the problem in double spending but at the same time do away with

the need to have a centralized ledger. To achieve this, the bitcoin system utilizes what they call

as the blockchain. 15

The blockchain is based on a decentralized trust which is achieved as an emergent

property from the interactions of different participants in the bitcoin system. Each participants

own and has access to it making it a monopoly of no one. With the decentralized trust system,

online players shift from the traditional central trusted authority to the different online

13
Supra at 11.
14
Borroni, A. 2016. Bitcoins: Regulatory patterns. Banking & Finance Law Review, 32(1), 47-68. Retrieved from
https://search.proquest.com/docview/1843836885?accountid=28547
15
Id.
 12

participants. Hence, the interest of a single participant or a group does not control nor hold in

trust the system which prevents the occurrence of circumstances that may be detrimental to the

interest of the other participants.16

Bitcoins have a public persona which is known as an address, and a private persona

called the private key. The former is public and visible in the bitcoin network while the latter

can never be seen in the network. When combined they are known as a wallet analogous to a

typical checkbook. In the heart of the Bitcoin network is the blockchain which holds the

transactions that have occurred in the past as well as the current holders of the funds

chronologically and publicly. This database is distributed to each participant in the network or

node and keeps a copy of it. Notably, the users have control of their own funds, through a

cryptographic private key. So when a user wishes to spend some funds, the private key is used

to sign a message that states who will be the recipient of the funds including the specific

amount to be sent. The user broadcasts this signed message to the network, and every

participant in the network will be notified upon their receipt of their corresponding copy. Each

node can thereafter independently verify the validity of the notification and update its internal

database according to the recent transaction. The blockchain serves as a system of tracking the

information of the various digital transactions.17

The combination of the blockchain and miners is the bitcoin’s solution to the

counterfeit problem. The increase and progress of the different transactions makes the

blockchain virtually impossible to change or modify. It becomes the task of the miners to verify

16
Supra at 8.
17
Franco, P. 2014. Understanding Bitcoin: Cryptography, Engineering and Economics, Wiley, 2014.
 13

that the bitcoin being transferred is not counterfeit. Mining cannot be underestimated for it

takes powerful computers to solve a complex mathematical equation that is involved in the

process. The answer to the equation is crucial for it contains the key that verifies all the

previous transactions. The miners would then know if the bitcoin is counterfeit if the said key

does not match the previous transactions.18

Except for the identities behind every transaction, all the financial information flowing

through the Bitcoin network is public. “Bitcoin does not use personal information to identify

the holders of funds, but Bitcoin addresses. Addresses are long strings of seemingly random

letters and numbers, such as 13mckXcnnEd4SEkC27PnFH8dsY2gdGhRvM. Bitcoin is like

making everybody’s bank statements public online, but with the identity encrypted or

hidden.”19

2.5 The Ecosystem of Bitcoins

The rapid growth of the ecosystem where bitcoins are thriving can be attributed to three

major components which consist the system. They are:

1. The Bitcoin mining Community

2. Bitcoin Exchanges

3. Merchants 20

18
Kelly, B. 2014 The Bitcoin Big Bang: How Alternative Currencies Are about to Change the World, John Wiley
& Sons, Incorporated.
19
Supra at 18.
20
Kien-Meng Ly, Matthew. 2014. Coining Bitcoin’s “Legal Bits”: Examining the regulatory Framework for
Bitcoin and Virtual Currencies. Harvard Journal of Law and Technology.
 14

Bitcoin mining is a process of harvesting bitcoins through a computing process of

solving a complex mathematical problem. Each time a mathematical problem is solved,

bitcoins are created. The bitcoin algorithm is programmed to release bitcoins in decreasing

numbers with the mathematical problem getting more complex with each level. Operating a

bitcoin mine consumes a lot of energy or electricity since higher powered computers are

necessary as the problem gets more complex. 21

For people who do not want to obtain bitcoins through mining, they may opt to buy

bitcoins from bitcoin exchanges. Those who have excess bitcoins or just wanted to convert

their bitcoins to cash may also sell their bitcoins in these bitcoin exchanges. These exchanges

are the markets for bitcoins where buyers and sellers of bitcoins converge to do their

transactions. 22

The merchants are deemed to be the key component of the bitcoin ecosystem because

without them bitcoins would be of little use. They are the persons, businesses, or

establishments that accept bitcoins as payment of goods and services. There are also a number

of retailers which now accept bitcoins as payment. 23

2.6 Advantages of Adopting the Use of Bitcoin

In general, the common reasons for the continued patronage of the users of bitcoin

is its secure system since it uses public and private keys to protect each transaction. The

blockchain provides a transparent means of monitoring and verifying the validity of each

21
Supra at 20
22
Id.
23
Id.
 15

transaction. Also, not only is it easy to use but the fees for fund transfer and other transactions

are also kept at a minimum.24

Aside from savings, bitcoin is an effective means of payment for good or services.

In fact, several large merchants have already accredited bitcoin payments on their platforms.

Since bitcoin is global in scope, merchant can immediately accept payment from customers

worldwide. They utilize the push payment method. With push payments, the buyer receives

and approves the invoice and submits the payment. The transaction is processed automatically

and the funds are pushed directly into the vendor's account. Through such system a merchant

does not need to collect and the customer also does not provide sensitive payment credentials

to process a payment. The system provides an instant or real-time payments between accounts.
25

The common forms of costly, post-transaction payment reversal due to fraud

chargebacks or insufficient funds are not possible in bitcoin payment system because once a

payment was made it cannot be unilaterally taken back by the payer. 26

Moreover, the merchants are able to convert the bitcoins into their local currency

through the service providers. Such providers, like Coinbase, can then process the local

currency settlements to the merchant through cheap bank-to-bank transfers. The merchant then

receives payment in full in their own currency at a much lower transaction cost and with little

or no reversal risk through a swift settlement window. These result in significant decrease in

costs which translate directly into savings. 27

24
The risks and benefits of investing in cryptocurrency. (2017, Jul 31). Investorideas.Com Newswire Retrieved
from https://search.proquest.com/docview/1924628012?accountid=28547
25
Supra at 24.
26
Id.
27
Id.
 16

Virtual currencies provide a cost-efficient cross-border remittance service. The

enthusiastic acceptance of the world to bitcoin makes the means of payment simple and

effortless just like sending an email. This led to the establishment of firms which seek to unlock

cheap, global credit markets, or peer contractor services for the provision of tasks that can be

performed cheaply and remotely. 28

VC also serves as a “Micropayments Tool”. Bitcoin together with the virtual currencies

impressively allows online transactions even when the costs consists of as little as a fraction

of the local currency such as one penny or even less. In short, micropayments opens up to new

incentive schemes like monetary incentives for small scale or one-off content creation, or peer

tipping. Micropayment also allows new revenue models possible allowing content hosts to

collect a small fee from visitors who wish to view a webpage rather than by monetizing via ad

revenue. 29

VCs can also be utilize to “settle property transfers”. The bitcoin blockchain serves a

very secure record of all property transfers preventing disputes in the authenticity of a specific

transaction. This secure record is made possible by the institution of a hash value. Hash value

is a unique identifier of any dataset uploaded to the bitcoin blockchain and can then be

associated with every bitcoin transaction. The bitcoin blockchain is an immutable and

decentralized record of all transfers of such property such that several firms are investigating

the use of bitcoin and its technology. The behavior and response of the world to the technology

28
Supra at 24
29
Id.
 17

behind bitcoin is among the most historical breakthroughs in computer science, humanity and

the Internet.30

Lastly, but definitely not the least, is high level of privacy which VC provides its users.

The transferors and the person receiving the bitcoins remain nearly anonymous. No personal

information is recorded in the bitcoin ledger aside from the information similar to an account

number. Personal information will not be also available in reference to any account number.

In short, it is similar to paying in cash but the platform is done online. Transfers are conducted

nearly anonymously to anyone anywhere in the world.31

2.7. Disadvantages of Adopting the Use of Bitcoins

The disadvantage of bitcoin transactions can also be drawn in one of the mentioned

advantages which is privacy. This high level of privacy is what concerns the law makers and

enforcers for its vulnerability in being used a tool in the commission of illegal activities. A

concrete example is the Silk Road online marketplace launched in February 2011. The online

site facilitated the sale of illegal drugs and weapons with bitcoins as payment. Another is the

online currency named Liberty Reserve. It allowed users to transfer money with minimal

personal information recorded and did not even have user identity verification system. The co-

founder of Liberty reserve pleaded guilty in 2013, for money laundering, identity theft,

30
House energy and commerce subcommittee on commerce, manufacturing, and trade hearing. (2016).
Lanham: Federal Information & News Dispatch, Inc. Retrieved from
https://search.proquest.com/docview/1774151292?accountid=28547
31
Supra at 20.
 18

investment fraud, child pornography, and narcotics trafficking through the operations of

Liberty Reserve.32

Although the transaction with the use of bitcoins are secured the threat of an

intervention by hackers exists in the part of the bitcoin owners. These hackers are believed to

have the capability to produce money for themselves or to alter the amount of their credit. A

number of illegal access and compromised accounts of VCs were reported and have been

documented. In 2014, a case was reported where hackers used a vulnerability in the security

system. This vulnerability allowed them to change the transactions between the parties. 33

Among the various mentioned negative offshoots of the adoption of bitcoins in

trade and commerce, the one with the most adverse effect is the great risk it posed in the

propagation of money laundering. This is worsened when consequently utilize to fund

34
abhorrent and unimaginable criminal activities on top of which is terrorism.

Due to a lack of regulations, laws and control systems tax evasion is also one of the

negative consequences of bitcoins. The undeclared earnings of businessmen and merchants

can be considered as income which is untraceable and invisible to tax law enforcement. Also

since the government has not created yet an implementing law which will cover the earnings

from these kinds of transaction, an escape from tax payment is made possible.35

One of the Assistant Professors of Law at the University of Florida Levin College Of

Law, Omri Marian, believes that cryptocurrencies such as bitcoins will become the key vehicle

32
Supra at 20.
33
Richter, C., Kraus, S., & Bouncken, R. B. (2015). Virtual currencies like bitcoin as A paradigm shift in the field
of transactions. The International Business & Economics Research Journal (Online), 14(4), 575-n/a. Retrieved
from https://search.proquest.com/docview/1696895726?accountid=28547
34
Supra at 33.
35
Id.
 19

for tax evasion because of their important advantages over traditional tax haven. According to

Business Insider article tax havens are a “popular, legal and often secret instrument for

multinational corporations to move capital across borders. By taking advantage of loopholes

in various national legislations and placing operations in countries with low taxes, companies

can reduce their tax rate from around 35% to 25% to 15% or lower.” 36

2.8. Foreign Regulations Governing the Use of Bitcoins

In the US, the statutes and regulations governing bitcoins can be classified into two

categories. The first are those statutes and regulations that protect the society from those who

use or who might use bitcoins for unlawful activities such as drug dealers, terrorists, and violent

criminals. The second are those that protect the users of bitcoins including consumers and

investors. 37

2.8.1. Regulation to Protect the Society from Bitcoin Users

Federal agencies have enforced regulations in order to combat the rise of unlawful

activities through the use of bitcoins. Among which, is the regulation issued by Financial

Crimes Enforcement Network or FinCEN on March 18, 2013. FinCEN is the bureau under the

U.S. Department of Treasury and tasked to enforce the Bank Secrecy Act which is a

comprehensive anti-money laundering and counter-terrorism financing statute. The regulation

issued by FinCEN clarified that certain business or individuals who use or make a business of

exchanging, accepting, and transmitting virtual currency shall be subject to the requirement

36
Tsukerman, M. (2015). The Block Is Hot: A Survey Of The State Of Bitcoin Regulation And Suggestions For
The Future. Berkeley Technology Law Journal, 1152-1167.
37
Supra at 36
 20

under the BSA. Despite being potentially and admittedly difficult, this step will promote legal

responsibility in relation to e-currencies. It also imposes duties on businesses which make use

of bitcoin to make reporting, registration, and recordkeeping of their transactions.38

On another instance, the Federal Bureau of Investigation shut down “Silk Road”. Silk

Road is a website that acted as a virtual black market where people can purchase drugs, forged

documents, and even hire assassins in exchange for bitcoins. The alleged mastermind, Ross

Ulbricht, was arrested with his laptop purportedly a hub of USD 1.2 billion worth of illegal

transaction. With the confiscation of his device, the FBI was able to seize Ulricht’s personal

stash of bitcoins valued at USD 80 million.39

2.8.2. Regulation to Protect Consumers and Investors

In August 2014, The Consumer Financial Protection Bureau (“CFPB”) of the U.S.

issued a consumer advisory statement to warn the public of the risk in bitcoin transaction. The

CFPB is the institution tasked to “make markets for consumer financial products and services

work for Americans.” Although it did not issue any regulation, it contends in its advisory that

transaction using bitcoin apparently has higher scams and cost. The CFPB also begun

accepting complaint in relation to bitcoin transaction and issues on the virtual wallets of users.

This led them to propose to extend the scope of consumer protection to include digital wallets

of the consumers’ e-currencies or virtual currencies.40

38
Supra at 36.
39
Id.
40
Id.
 21

It is the New York State Department of Financial Services (“NYDFS”) that initiated

the issuance of a regulation as an attempt to control bitcoins. They proposed a licensing system

which will be applicable in their state for companies that secure, store, or maintain custody or

control of bitcoins. This system, called the BitLicense”, was published on July 23, 2014

imposes requirements on the said companies and exchanges involving bitcoins. The BitLicense

was even published in Reddit and Twitter for the licensing system to be visible to the entire

country in order that it might serve as a model for other states, the Securities and Exchange

Commission (SEC), and even for the Federal Reserve. The following are the main

requirements imposed on firms for the issuance of BitLicense:

1. “Capital holding requirements with a bond or trust account in US dollars;

2. Providing receipts on transactions;

3. Establishing a complaint policy;

4. Providing consumer disclosures on the risks inherent to virtual currency

compared to fiat currency;

5. Compiling information on transactions for anti-money laundering compliance

(essentially deanonymizing the parties involved);

6. Reporting fraud or suspicious activities;

7. Maintaining cyber security programs;

8. Designating a Chief Information Security Officer and Compliance Officer;

9. Being subject to NYDFS examinations;

10. Submitting quarterly financial statements; and

 22

11. Establishing business continuity and disaster recovery plans, with notification

to NYDFS during an emergency.”41

2.9. Bitcoins in the Philippines

The exchanges and transactions in the Philippines involving bitcoins which passes

through registered companies range between USD 2-3 million per month. It seems that the

Philippine government specifically the Bangko Sentral ng Pilipinas had a sudden change of

heart. It can be seen that in March 2014, the BSP came out with an advisory warning advising

the public to be cautious in the use of virtual currencies since they still remain unregulated.

With their current status, consumers are faced with the risk of loss since no such protection is

granted to them. Furthermore, Espenilla, the newly appointed BSP governor and Monetary

Board chair, stated that the purpose of these advisories on virtual currency is to get the public

to think first about the risks in utilizing these financial products. Among the risks that the BSP

is looking into is the increase in cases of money laundering. On the aspect of consumer

protection, the public may get the wrong impression that bitcoin prices are stable. Such belief
42
may induce them to invest and suffer the losses when their values fall in the market.

Despite these negative implications, the monetary officials have recognized a

possible advantage of bitcoins on remittance transactions. Its low-cost remittance service is a

possible answer to the problem on the present high rates in remittance service.43 As it happens,

on January 19, 2017 the BSP issued Circular 944 laying down the guidelines for virtual

41
Supra at 36.
42
Philippines: Philippines now a major player on virtual currency usage - BSP exec. (2016, Jun 08). Asia News
Monitor Retrieved from https://search.proquest.com/docview/1794173052?accountid=28547
43
Id.
 23

currency exchanges. The said circular emphasizes the policy of the central bank “to provide an

environment that encourages financial innovation while at the same time ensure that the

Philippines will not be used for money laundering or terrorist financing activities and that the

financial system and financial consumers are adequately protected”.44

Thus, the BSP as the country’s central monetary authority recognized that the

virtual currency systems have the potential to revolutionize the delivery of financial services.

It therefore acknowledges the ability of these virtual currencies to provide faster and more

economical transfer of funds whether domestic or international. The Bangko Sentral ng

Pilipinas has even approved the registration of two companies as initial operators in bitcoin

exchanges as part of its efforts to regulate the rapidly growing yet potentially risky virtual

currency industry.45

2.10. The Bangko Sentral ng Pilipinas

Under R.A. 7653 or “The New Central Bank Act”, the “Bangko Sentral ng Pilipinas”

was established as the central monetary authority of the country. It shall be an independent

body mandated with the primary responsibilities for all matters involving money, banking, and

credit. Despite being a government owned and controlled corporation, it is granted fiscal and

administrative authority. It is provided in Section 49 of the same law that “the Bangko Sentral

shall have the sole power and authority to issue currency, within the territory of the Philippines.

44
Bangko Sentral ng Pilipinas Circular No. 944 Series of 2017, “Guidelines for Virtual Currency (VC) Exchanges”
45
Agcaoili, L. BSP approves registration of 2 bitcoin exchange operators (2017, August 19). Philstar Global
Retrieved from http://www.philstar.com/business/2017/08/19/1730418/bsp-approves-registration-2-bitcoin-
exchange-operators
 24

No other entity, public or private, may put into circulation notes, coins or any other object or

document which, in the opinion of the Monetary Board, might circulate as currency, nor

reproduce or imitate the facsimiles of Bangko Sentral notes”. The monetary board which is

composed of seven members appointed by the President of the Philippines is the division that

is tasked with the exercise of its powers and function. 46

2.10.1. Warning Advisory on Virtual Currencies

On March 6, 2014, BSP released “Warning Advisory on Virtual Currencies”. It

emphasized that bitcoin exchange and transactions are not regulated by the said institution. On

such condition, the consumers and other party to the transaction are not protected from

financial losses due to failure of business or valuation plummet. In this advisory, the BSP

elucidated on what virtual currencies are. It stated that a virtual currency (“VC”) is a “form of

unregulated digital money, meaning it is not issued or guaranteed by a central bank. It allows

purchase of both virtual goods, such as in online gaming environments and social network, and

real goods and services, such as in retailers, restaurants and other establishments. Unlike

electronic money, which is backed by cash for 100% of its stored value, virtual currencies are

not backed by any commodity like cash, gold or silver. Rather, they are merely valued

subjectively according to one’s ability to exchange them for goods.”47

46
R.A. 7653, The New Central Bank Act
47
Media Releases, Bangko Sentral ng Pilipinas, March 6, 2014, “Warning Advisory on Virtual Currencies”,
http://www.bsp.gov.ph/publications/media.asp?id=3377
 25

2.10.2 Circular No. 944: Guidelines for Virtual Currency (VC) Exchanges

The BSP changed its treatment towards these virtual currencies and released Circular

No. 944 dated January 19, 2017. The circular generally provides for the rules and regulations

governing operations of VC exchanges in the Philippines. In the circular’s statement of policy,

it expounded on the purpose of its issuance which is first and foremost to combat anti-money

laundering or terrorist financing activities. It also provides that the said regulation would also

protect the country’s financial system and financial consumers. Despite its attempt to control

the transaction involving virtual currencies, the BSP posed a disclaimer that it does not intend

to promote or endorse any VC, specifically citing bitcoins as among these VCs.48

In the circular the characterization of virtual currency is further refined as:

“…any type of digital unit that is used as a medium of exchange or a form of digitally

stored value created by agreement within the community of VC users. VCs are not

issued nor guaranteed by any jurisdiction and do not have legal tender status. VCs shall

be broadly construed to include digital units of exchange that (1) have a centralized

repository or administrator; (2) are decentralized and have no centralized repository or

administrator; or (3) may be created or obtained by computing or manufacturing effort.

It shall not be construed to include e-money as defined under Sec. X780 of the Manual

of Regulations for Banks, digital units used solely within online gaming platforms and

are not convertible to fiat currency or real-world goods or services, digital units with

stored value redeemable exclusively in goods or services and limited to transactions

involving a defined merchant such as rewards programs.” 49

48
Bangko Sentral ng Pilipinas Circular No. 944 series of 2017
49
Supra at 48.
 26

The circular further requires that any VC exchange shall obtain a registration in order

to operate as such in accordance with the procedures provided by the BSP. Circular 944 defines

a VC exchange as “… any entity that offers services or engages in activities that provide facility

for the conversion or exchange of fiat currency to VC or vice versa”. It also imposes upon the

VC exchange a transactional requirement which limits to check or direct credit to deposit

accounts those which involve large value pay-out of more than Php 500,000.00 or its foreign

currency equivalent. It is also requires the VC exchange to establish an adequate risk

management and security control mechanisms to address, manage and mitigate technology

risks associated with VCs. Similar with the banking institution, the VC exchange is not

excluded from the requirement of notification and reporting its transactions to the BSP. 50

2.10.3. Anti - Money Laundering (AML) and Counter Terrorism Financing (CTF)

Money laundering is generally an activity which has for its object the concealment of

money obtained through unlawful source. To facilitate concealment, funds obtained through

unlawful sources are employed in commercial transactions before they are invested and

eventually becomes virtually untraceable. Through money laundering, organized crimes

expands its financial sources and enlarges its scope. Now that crimes are becoming organized

like business enterprises, it is not far-fetched that these criminal organization may eventually

penetrate the legitimate economy. This consolidation with the criminal organization with

economic power is one of the social danger which must be avoided.51

50
Supra at 48.
51
Savona, E. (2005). Responding to Money Laundering. Routledge
 27

Physical cross-border transportation of money has been the preferred mode by terrorist

organizations, jihadist, and terrorism financers. With the recent strict laws involving Anti-

Money Laundering (AML) and Counter Terrorism Financing (CTF), utilizing the conventional

banking system became problematic for the terrorist organizations. The laws allowed the

government to detect suspicious transactions and unusual business dealings and effectively

prosecute them.52

Under the AMLC and CTF, it is an indispensable requirement for banks and other

financial institution to comply with the “Know Your Customer” (KYC) and “Customer Due

Diligence” (CDD) protocol. The purpose of the KYC and CDD is mainly to identity the

customers engage in business or commercial transactions involving money to facilitate

reporting and disclosure of any suspicious dealings. Consequently, they expose the terrorist

organizations and those who intend to support them to law enforcement and intelligence

agencies. The concerned bodies are alerted to possible threat to the security of the operation of

the terrorists. Due to this risk, the terrorist group IS or Islamic State, has been searching for

alternative technologies or other forms of payment that will mitigate the threat of exposing the

location of their operation. The group posted YouTube videos highlighting on the anonymity

provided with the transactions using bitcoins. They addressed all their supporters around the

world to support a global jihadist campaign with the use of bitcoins in the article entitled “

Bitcoin and the Charity of Violent Struggle”.53

52
Irwin, A., & Milad, G. (2016). The use of crypto-currencies in funding violent jihad. Journal of Money
Laundering Control, 19(4), 407-425
53
Supra at 52.
 28

Several claims from various anti-terrorist group that the said terrorists already utilize

bitcoins in raising their funds were disclosed. For one, the Ghost Security Group, a computer

hacktivist anti-terrorism group reported that they found a chain of transactions to a bitcoin

wallet believed to be owned by the ISIS having a total amount of USD 20.4 M. Another is the

claim was reported by Deutsche Welle in the amount of USD 23 M. All these information were

reported in 2015. The reports also suggests that these funds were utilized in the bombing

attacks in Indonesia in 2015 on a shopping mall in Jakarta. It also funded the November 2015

coordinated terror attacks in France. Some websites associated with the terrorist group, such

as kavkazcenter.com, has started to collect bitcoins as donations to fund its operation. 54

54
Supra at 52
 29

CHAPTER 3

RESEARCH METHODOLOGY

3.1 Introduction

This chapter presents the methods and procedures utilized by the researcher in order

to gather the necessary and pertinent information regarding the nature and characteristics of

the different existing virtual currencies in the world. In providing for a deeper foundation of

the study, the researcher adopted techniques to elucidate how such technological creation

affects our country and the extent of regulation that an institution such as the BSP may exercise

over them. Finally, the researcher analyzed the implication of the passing of the BSP circular

944 as the government’s attempt to place it within the ambit of its jurisdiction through a

systematic approach herein provided.

This chapter establishes the research design and the sources of data employed by the

researcher. This includes the manner on how the data gathered through the methods and

procedures would be treated and processed.

3.2 Research Design

With the end goal of having a comprehensive summarization in simple and concise

language from the people skilled and knowledgeable in VCs, bitcoins, and BSP system, the

researcher will be using a qualitative research method in determining the implications and

scope of the relevant BSP Circulars.

This type of research design is deemed to be the best method to employ for this study

since it provides the three essential elements necessary for the effective study of the topic at
 30

hand. First, the said design lends better understanding on the meanings and perspective of the

people in relation to the subject matter of the study. The different perspective opens a new way

of seeing things aside from the researcher’s own point of view. Second, it places the

information gathered into perspective and defines the context from which they are derived

considering social and cultural aspects. And lastly, it is intended to help in better understanding

the specific processes that are involved in maintaining and altering these technological

phenomena and relationship.55

In line with the researcher’s objective of determining the implications and scope of

the relevant BSP Circulars with respect to VCs and bitcoins, a constant comparative analysis

was utilized in examining the data. Thus for this study, the analysis of laws, jurisprudence, and

various data collected in the process was employed by the researcher as a method.

3.3 Sources of Data

In line with the qualitative method to be employed in this study, the researcher

gathered the data through or from the following primary sources: (1) Interview with at least

two experts in the field of VCs and bitcoins (Mr. Luis Buenaventura, Mr. Nigel Hughes, and

Atty. Richard David Funk II), at least one legal officer and authority in the Bangko Sentral ng

Pilipinas (Atty. Mel Georgie B. Racela and Mr. Mhel Plabasan), Representatives from the first

two authorized virtual currency exchange centers in the country (Mr. Ron Hose and Atty.

Rafael Padilla); (2) Statutes; (3) and other implementing rules and regulations.

55
Maxwell, J. A. (2013). Qualitative Research Design, an Interactive Approach. California: Sage Publication.
 31

Among the secondary sources, the researcher will utilize (1) Published law books; (2)

Published articles in law journals; (3) Previous theses and research papers; (4) Credible

newspaper articles and other media reports; and (5) Relevant articles in the internet.

3.4 Treatment of Data Gathered

The researcher collated all the relevant laws, both domestic and foreign, and articles

related to the employment of VCs and bitcoins in online transactions in the U.S. and in the

Philippines. The data contributed by the interviewees was examined and analyzed thoroughly

in order to determine the legal implication of the use of these VCs and bitcoins in the process

of business transaction. As a final note, the researcher referred to the established statement of

the problem in synthesizing the information and data gathered in order to draw conclusions

and provide any recommendations when applicable.

 32

CHAPTER IV

DISCUSSION OF RESULTS

This chapter of the paper seeks to satisfy the problems stated at the beginning of the

paper. This defines currency based on the existing law in the Philippines and discusses how

the present rules and regulation treat bitcoins as a form of currency. This chapter also explains

the treatment of foreign law and jurisprudence to bitcoin transactions. The legal and economic

aspect of the existence of bitcoins is also presented to justify their continued existence in the

world market, discussing as well, the relevant laws and regulations which permits virtual

currency transactions. This will also shed light on the implications of bitcoin transactions to

the existing laws on money laundering and terrorism. Finally, the present approach and strategy

of the Bangko Sentral ng Pilipinas on dealing with the circulation of virtual currencies will be

discussed and the two virtual currency exchange centers, which are first given authority in the

country will be presented to show how they operate without undermining the laws on Anti-

Money Laundering and Anti-Terrorism.

4.1. Currency Defined and Characterized by the Philippine Banking Law

4.1.1. Definition of Currency

The term currency was first elucidated in an earlier law which is R.A. 265 or The

Central Bank Act of 1948. It was later amended by R.A. 7653 or The New Central Bank Act

of 1993. Significantly, the definition of currency as provided by these laws has not changed.

The term Currency is defined by the two laws as “all Philippine notes and coins issued or
 33

circulating in accordance with the provisions of this act”. When it comes to Philippine

currency, the BSP has the sole power and authority to issue currency within the territory of the

Philippines. 56

4.1.2. Characteristics of Currency

Currencies have legal tender status. The notes and coins issued by the Bangko

Sentral have the legal tender power which makes them acceptable in the Philippines for all

debts, both public and private. However, coins for denominations of twenty-five centavos and

above shall be considered legal tender in amounts not exceeding fifty pesos (₱50). For

denominations of ten centavos or less, the coins shall be considered legal tender only in

amounts not exceeding twenty pesos (₱20). The notes and coins which are for replacement

shall still remain a legal tender but only for a period of one (1) year from the date it was called

in for replacement. After the one year period, those notes and coins shall no longer be liabilities

of the Bangko Central and will then be demonetized. 57

The characteristics of the Philippine Currency is also under the control of the BSP.

With the approval of the President, the Monetary Board shall prescribe the denominations,

dimensions, designs, inscriptions, and other characteristics of notes issued by the BSP. The

said notes should bear the signatures of the President of the Philippines and the Governor of

the Bangko Sentral. They should also indicate that notes are liabilities of the Bangko Sentral

and must be fully guaranteed by the government. Said notes and coins fully guaranteed by the

government shall be legal tender in the Philippines for all debts whether public and private. In

56
Republic Act No. 7653, The New Central Bank Act.
57
Id.
 34

the same manner, the Monetary Board shall also prescribe the weight, fineness, designs,

denominations, and other characteristics of the coins. However, the minting of the coins shall

be dependent on the availability of the suitable metals and the relative prices and costs of

minting. The Monetary Board is also left with the discretion to prescribe the amounts of notes

and coins to be minted as well as the conditions for the printing of notes and minting of coins.

Incidental to the authority to print notes and mint coins, the Monetary Board may contract with

institutions, mints or firms for the said operations.58

The New Central Bank Act provides for replacement of Currency which has

become unfit for circulation. Thus all notes and coins which have become unfit for circulation

due to any reason will be withdrawn from circulation and be demonetized by the Bangko

Sentral. However, when the identification of notes and coins is impossible such as when the

coins shows sign of filing, clippings, or perforation or when the notes have lost more than two-

fifths (2/5) of their surface or all the signatures inscribed thereon, the Bangko Sentral shall not

replace them. When the notes of any series or denomination are more than five years old and

coins are more than ten years old, the Bangko Sentral may call in for replacement the said

notes and coins.59

The above sections talks about real currency or fiat currency which is managed,

controlled, and regulated by a central authority established by law. The BSP controls its supply

and influences the value of the currencies.

58
Supra at 56.
59
Id.
 35

4.2. Treatment on the nature of Bitcoins and on the Operations of Virtual Currency

Exchange by the existing Rules and Regulations in the country

4.2.1. Treatment on the nature of Bitcoins by the existing Rules and Regulations in the

country

Bitcoins are treated as currencies --- virtual currencies to be exact. If the real currency

operates in the real world, technology gives birth to what is known as virtual currency which

operates in the virtual world where online activities take place. In an interview conducted by

the researcher with Luis Buenaventura, the author of the book entitled, “"Reinventing

Remittances with Bitcoin," he explained the nature of bitcoin as a kind of virtual currency

which is used as a store of value and a potential investment. It comes under the broad category

of virtual currency which unlike others of its kind is based on cryptography. The nature of

bitcoins being a virtual currency as established in the technical field is consistent with how the

rules and regulations treat bitcoins.

There is no doubt that based on the circular, bitcoins are virtual currencies when the

circular stated verbatim, “The Bangko Sentral does not intend to endorse any VC, such as

bitcoin…” Circular 944 provides for the definition of virtual currency and presents how they

will be treated as such in the Philippines. In the interview of the researcher with Mr. Mhel

Plabasan, the IT Supervisor of the Bangko Sentral ng Pilipinas and also one of the people who

penned BSP Circular 944, stated that Virtual Currency as provided in the circular, is any type

of digital unit that is used as medium of exchange or a form of digitally stored value created

by agreement within the community of VC users. It can be gleaned in the circular itself that

VCs also “include digital units of exchange that:

 36

(1) have a centralized repository or administrator;

(2) are decentralized and have no centralized repository or administrator; or

(3) may be created or obtained by computing or manufacturing effort.”60

However, digital units which are used solely within online gaming platforms which are

not convertible to fiat or real world goods and services shall not be considered as VC. Neither

are the digitals units with stored value which may be redeemable in goods and services but

only in limited merchants such as rewards programs may be considered as VC. 61

Bitcoins are digital in form without any physical configuration and are stored in virtual

wallets. Their value is based on the agreement of the users within a community which adopts

the use of bitcoins. Bitcoins are also VCs that are decentralized and have no centralized

repository or administrator created by computing efforts of the bitcoin mining community.

4.2.1.1. Types of VC According to the BSP

In addition to the characterization on the nature of bitcoins as a VC in the rules and

regulation, Plabasan explained that virtual currencies in the Philippines are of three types and

bitcoins are of the third type.

The first type is what is called the “Closed Virtual Currency”. This is very popular in

online games. When players download a game online and play the game, they earn rewards or

points which they in turn can use to acquire certain privileges in that online game or

community. In the said set up, the VCs do not intersect with the real world. They are limited

in that online community.

60
Subsec. 4512N.2. BSP Circular No. 944
61
Id.
 37

The second type of VC is the “Unidirectional Virtual Currency”. In Unidirectional, a

person pays for certain privileges in an online application with the use of his or her credit card.

The credit card used represents fiat money in the real world however once it was used to pay

online, its entirety must be consumed only in the virtual world. There is a conversion rate for

purchasing the virtual currency, which can subsequently be used to buy virtual goods and

services. An example is purchasing certain points, rewards, or privileges in an online

application like Facebook.

The third one concerns most regulators and law enforcement agencies. It is the virtual

currencies in “Bi-directional” flow. The virtual currency of this type acts like any other

convertible currency, with two exchange rates, one for buying and the other for selling. This

can subsequently be used to buy virtual goods and services or purchase real goods and services.

This is the type of VC that intersects with the real world. The classic examples are bitcoins and

other VCs being exchanged into fiat currencies in certain jurisdiction. Just like in Japan,

bitcoins are accepted as payment for goods and services even in small stores. It is in this scheme

where people can convert their VCs in their local currency. When in the form of local currency,

the funds may be used for both lawful and unlawful purpose. The risks that people may violate

Anti-Money Laundering and Anti-Terrorism laws become most apparent in this virtual

currency scheme.
 38

4.2.2. Treatment on the Operations of Virtual Currency Exchange of the Existing Rules

and Regulations in the Country

The Philippines have become an ideal market for these virtual currencies because of

the high penetration in our market of the different gadgets such as smart phone. The internet is

also more accessible today than five or ten years ago. Another reason cited by Plabasan is the

existence of a certain segment of the society who are without bank accounts and therefore

underserved. Thus, virtual currencies are positioning themselves as an alternative means to

store and remit money. They are positioning themselves as companies that would help the BSP

in the financial inclusion of the underserved sector of the society. He also cited that next to

China and India, the Philippines is the third in the world in terms of the amount of money being

remitted to the Philippines.

4.2.2.1. VC Transactions Covered by the BSP Rules and Regulations

Plabasan discusses the existing different kinds of transactions involving these virtual

currencies which was considered in the issuance of the BSP Circular. First is “Full VC”. It

means that if one person has a VC wallet and another person also has his own VC wallet, one

can just transfer his VC to the other’s VC wallet. Second is “VC to fiat currency”. This mode

applies when a person who does not have cash needs to make a payment to another in cash as

well but what that person only has is virtual coins. This method will then allow a person to

utilize the service of a VC exchange center by selling his or her bitcoins. The person may then

ask the VC exchange to deposit the proceeds of the sale to the bank account of the said person

or directly to the bank account of the creditor. So after the VC exchange has deposited the
 39

money in the bank account, the person can now make a payment. The third type is “Fiat

Currency to Fiat Currency”. Fiat currency as mentioned earlier is what is known as cash and

is dependent on the national currency of a specific country. In the Philippines, the fiat currency

is the money in Peso. In this type of transaction both the sender and the receiver does not own

VC nor do they have their own VC wallet. The sender will approach a VC exchange in another

location within the country or even in another country which has a local branch in the

Philippines. The sender will give fiat currency to the VC exchange and instruct them on the

specific currency of fiat money it will provide the receiver.

Those are the means by which VC can be used as a platform for exchange. The BSP

have been monitoring these kinds of transactions as early as 2013. They have also been

communicating and coordinating with the different players. Despite a number of countries

ordering the ban or shut down of a lot of VC exchange in their jurisdiction, the monetary board

agreed in 2014 not to restrict bitcoins since according to Plabasan, the BSP actually sees their

potential. While there are risks, there are also benefits associated with the use of the VC so the

BSP’s strategy is just to issue public advisory. It cautioned the public that if they want to deal

with bitcoin, they have to employ the principle “caveat emptor” which literally means, “Buyers

beware”. The BSP also continuously monitors the developments and employs a proportionate

application of regulation. That is the reason why in 2017 BSP issued circular 944.

4.2.2.2. Virtual Currency Operations are treated as Remittance Exchange Service

As can be gleaned in the BSP Circular 944, VC such as the bitcoins, are treated as

remittance service in their operation. A “Remittance and Transfer Company (RTC) refers to
 40

any entity that provides money or value transfer service”. 62 By issuing Circular 944, the BSP

is explicit in stating that it does not endorse any VC. Despite such caution, it recognizes the

potential of VCs in revolutionizing the delivery of financial services in relation to payments

and remittance because of their fast and economic system of transferring funds in any part of

the globe. This is under the assumption that the transferee has internet service which is more

likely than not to happen. Otherwise, as what Mr. Nigel Hughes, a designer of various

cryptocurrency-based applications, pointed out, VC transaction would not be possible. Thus

Circular 944 was issued to regulate VCs when used in payment and remittance in order to

prevent money laundering, combat financing terrorism, to protect the consumers, and to

maintain financial stability.

In general an authorized VC exchange in the Philippines can only engage in the

conversions of fiat currency to VC or vice versa when it complies with the operation and

reporting obligation imposed by the BSP as provided for under the said circular. A VC

exchange is an entity authorized by the BSP to provide facility in the conversion or exchange

of fiat currency to VC or vice versa.

4.2.2.3. VC Exchanges as Remittance Service must Comply with the Reporting and

Operations Requirements in Accordance with the BSP Rules and Regulation

A. Registration of VC Exchanges

A VC exchange may operate as a remittance and transfer company upon the issuance

of a Certificate of Registration (COR) from the BSP. The registration constitutes a 2-stage

process. The first stage is a preliminary screening process for BSP to determine if the applicant

62
Subsec. 4512N.2 (d). BSP Circular No. 944 Series of 2017.
 41

is eligible for registration. The applicants shall submit an Application letter, their Business

plan, which includes target market, and the list of owners or controlling shareholders, directors,

and principal officers of the business. In the second stage, the eligible applicant is invited to

submit supporting documents to complete the registration process. The following are the said

documents:

“1. Incorporation papers duly authenticated by the Securities and Exchange Commission (for

corporation/ partnership); or copy of the Certificate of Registration duly authenticated by the

Department of Trade and Industry (for single proprietorship); or proof of registration with the

Cooperative Development Authority (for cooperative);

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

jurisdiction over the place of establishment and operation of the office for the current period,

which should indicate the line of business of the registered entity;

3. Notarized deed of undertaking of the entity and members of the board of directors/partners,

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

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

directly involved in VC Exchange operations to the required AMLA Seminar conducted by the

AMLC, BSP, or BSP accredited person, or for persons registered prior to 04 February 2017, a

certification of compliance with this requirement executed by the President and Compliance

Officer;

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

Money Laundering and Terrorist Financing Prevention Program (“MLPP”) has been developed,

adopted and disseminated to all employees;

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

officers; and
 42

7. Duly notarized certification from the proprietor/managing partner/president, as to

compliance with the required minimum capital.” 63

The VC exchange may begin to operate within three months upon the approval of the

BSP and issuance of a Certificate of Registration (COR) to the applicant.

However, the application for VC exchange may be denied on the certain grounds such

as failure to provide the complete required documents or if any of the prospective VC

Exchange’s proprietors, or any of its partners, directors, or principal officers, as applicable, is

not fit and proper. In determining whether a person is fit and proper, factors such as the

integrity or probity, market reputation, competence, and financial capacity shall be

considered.64

The required minimum capital for the establishment of VC Exchanges depend on their

classification. VC Exchange may be classified as Large-Scale Operators or Small-Scale

Operators. Large-Scale Operators are those with average monthly network volume of

transactions of at least P75 million and have a benchmark capital of P50 million. On

the other hand, Small-Scale Operators are those with average monthly network volume of

transactions of less than P75 million and have a benchmark capital of less than P50 million.

During application for registration, the VC Exchange registrant is required to submit a duly

notarized certification from the proprietor, managing partner, or president, as to compliance

with the said capital.65

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

Secretariat (AMLCS) within 30 calendar days from the actual date of commencement of VC

63
Subsection 4512N. Manual of Regulations for Non-Bank Financial Institutions.
64
Supra at 63.
65
Id.
 43

Exchange operations. The VC Exchange shall then submit to the Supervision and Examination

Sector (SES) a proof of registration with AMLCS, within five (5) business days from

registration thereat. Failure to register shall result in the automatic cancellation of the VC

Exchange registration.66

All proprietors, partners, directors, officers, and other personnel directly involved in

VC Exchange Services shall attend a BSP or AMLC accredited seminar before starting their

operations. Said training will cover the requirements of the AMLA, as amended, particularly

on customer due diligence, reporting of covered and suspicious transactions, and record-

keeping. Refresher training shall likewise be conducted at least every 2 years. 67

B. Operation of VC Exchanges

During the operation of the VC Exchange, the BSP imposes a rule for “Large Value

Pay-Outs” Large value pay-outs which consists of more than ₱500,000 (or its foreign currency

equivalent) in any single transaction with customers or counterparties, shall only be made

through check payment or direct credit to deposit accounts.68

A VC Exchange must establish adequate risk management and security control

mechanisms. VC Exchanges providing wallet services for holding, storing, and transferring

VCs must have an effective cybersecurity program. Even VC Exchange with simple operations

must have up-to-date anti-malware solutions, periodic back-ups, and constant awareness of

emerging risks and other cyberattacks. All VC exchanges shall maintain an internal control

system commensurate to the nature, size and complexity of their respective businesses.

66
Supra at 63.
67
Id.
68
Id.
 44

Furthermore, they shall adhere to the guidelines issued by the BSP on the minimum control

standards that VC Exchanges are expected to observe on their operations.69

It is also important that VC exchange comply with the reportorial requirement of the

BSP. Under the said requirement, the VC exchange has the obligation to inform the SES of the

commencement of operations of the VC Exchange within five (5) business days from the start

of operations of each of its offices. It shall also notify within five (5) business days from

contract signing of its newly accredited VC Exchange agents as well as any addition and/or

termination of their tie-up partner/s.

VC Exchanges are also not allowed to change their registered/business name without

submitting to the SES the Certificate of Registration from the Department of Trade and

Industry (DTI), Securities and Exchange Commission (SEC) or Cooperative Development

Authority (CDA), as the case may be, indicating the new business/registered name and the

Original copy of BSP COR issued under the old name. There is also a need to obtain prior

approval from the BSP for any change in ownership of a sole proprietorship or partnership, or

control of a corporation in the VC Exchange. Control shall refer to any transaction involving

voting shares of stock of a VC Exchange that will result in ownership or control of at least 20%

of voting shares of stock of the VC Exchange by any person, whether natural or juridical, or

which will enable such person to elect, or be elected as, a director of such VC Exchange. The

VC Exchange shall submit the names of its proposed new owner/s or controlling shareholder

for evaluation. Failure to seek prior approval may result in cancellation of registration. 70

69
Supra at 63.
70
Id.
 45

Aside from the above instances when VC Exchanges need to notify and report to the

BSP, they shall also maintain records and submit an Annual Audited Financial Statements, not

later than the 30th of June following the reference calendar year; Quarterly Report on Total

Volume and Value of VCs transacted, within 10 business days from end of reference quarter;

and Quarterly list of operating offices and websites, within 10 business days from end of

reference quarter.

The last two requirements must be duly certified by the proprietor, managing partner,

president, or any officer of equivalent rank.71

Operating without prior BSP registration shall warrant: (i) disqualification from

registration, and (ii) fine of not less than P50,000 nor more than P200,000, or by imprisonment

of not less than two years nor more than 10 years, or both, at the discretion of the court.

Violation of any provisions of the AMLA, as amended, and its RIRR, shall warrant: (i)

cancellation of registration, (ii) applicable penalties prescribed under AMLA, (iii)

disqualification from holding any position in any BSP-supervised or –regulated institution, or

(iv) written reprimand. Erroneous, delayed, or unsubmitted reports, and violation of any

provisions or requirements of the Circular, shall warrant: (i) cancellation of registration, and

(ii) monetary penalties.72

71
Supra at 63.
72
Id.
 46

4.3. How Foreign Law and Jurisprudence Treat the Nature of Bitcoin and the

Operations of Virtual Currency Exchanges

4.3.1. How Foreign Law and Jurisprudence Treat the Nature of Bitcoin

Because of the recent cases that emerged involving transactions VC, the US Court was

forced to define Bitcoin. A functional view was adapted by the Courts such that, they are

defined in a case – to – case basis but relating them to the Securities Act and Federal money

Laundering Statutes. A number of key cases spearheaded the shaping of the U.S. government’s

stance on bitcoins.

4.3.1.1. Bitcoins as an Investment

In the case is SEC vs. Shavers. Shavers, the defendant in this case was the founder of

Bitcoin Savings and Trust (“BTCST”). It was established that from February 2011 to August

2012, he was able to obtain investment in BTCST through his internet name “pirateat40”. He

promised the investors a return of their investment at the rate of 1% per day in the form of

bitcoins. Eventually he would use the bitcoins of the new investors of BTCST in order to pay

outstanding investment. In this case, the Court treated the bitcoins that was invested in

Shavers’ Ponzi scheme as investment money. It ratiocinated that since the bitcoins were used

to purchase goods or services, pay for individual living expenses, and be exchanged for fiat
73
currencies, bitcoins constituted as an investment money.

73
Securities and Exchange Commission v. Trendon T. Shavers and Bitcoin Savings and Trust, Civil Action No.
Civil Action No. 4:13-CV-416, Litigation Release No. 23090 / September 22, 2014,
https://www.sec.gov/litigation/litreleases/2014/lr23090.htm
 47

4.3.1.2. Bitcoins as Money or Funds

In another case, bitcoins are treated as money or funds. This is the case of United States

vs. Faiella where defendants Robert Faiella and Charlie Shrem were accused of operating a

money transmitting business without authority to do so. They are also implicated in conspiring

to commit money laundering in connection with the Silk Road. Contrary to the contention of

the defendants, the Court explained that bitcoins qualifies as money thereby making the

defendants’ business a money transmitting business which without license is illegal. The

pertinent decision of Judge Rakoff states that Bitcoin clearly qualifies as “money” or “funds”

using plain meaning definitions found in the dictionary. This is so since it can be easily

purchased in exchange for ordinary currency, acts as a denominator of value, and is used to

conduct financial transactions. The court found this definition consistent with the legislative

history of 1960, which was passed to prevent money laundering in connection with drug

dealing. The court also finds that Congress chose to use the term “funds” to keep up with the

evolving methods of money launderers. The defendant’s activities as “transmitting money”

and thus qualifying them as “money transmitters” and subject to FinCEN’s virtual currency

guidance. FinCEN or the Financial Crimes Enforcement Network a bureau of the United States

Department of the Treasury which does not only collects but analyzes information about

financial transactions in order to resist domestic and international money laundering, terrorist

financing, and other financial crimes. 74

74
United States v. Faiella, 39 F. Supp. 3d 544, 545–47 (S.D.N.Y. 2014).
 48

4.3.1.3. Bitcoins as a Commodity

In a recent decision in the case of Commodity Futures Trading Commission Against

Patrick K. Mcdonnell, and Cabbagetech, Corp., bitcoins was classed as a commodity in the

U.S. along with gold and oil, according to the Commodity Futures Trading Commission

(CFTC). This decision released in March 2018 puts at issue the question on whether virtual

currency may be regulated by the CFTC as a commodity. The New York Court answered in

the affirmative. 75

The facts of the case is as follows. Patrick McDonnell is the owner of CabbageTech,

Corp., doing business as Coin Drop Markets (“defendants”), offered fraudulent trading and

investment services related to virtual currency. Customers both from the United States and

abroad paid defendants for “membership” in virtual currency trading groups purported to

provide profits of up to “300%” per week. Defendants advertised their services through “at

least two websites, www.coindropmarkets.com and www.coindrops.club,” as well as on the

social media platform Twitter. After receiving membership payment or virtual currency

investments, defendants deleted their “social media accounts” and “websites and ceased

communicating with their customers around July, 2017.” The promised return in investment

never materialized and the defendants refused to return their membership fee. 76

The court finds the plaintiff has made a preliminary prima facie showing that the

defendants committed fraud by misappropriation of investors’ funds and misrepresentation

through false trading advice and promised future profits. Thus, a preliminary injunction is

75
Case 1:18-cv-00361-JBW-RLM, Commodity Futures Trading Commission Against Patrick K. Mcdonnell, and
Cabbagetech, Corp. D/B/A Coin Drop Markets
76
Supra at 75
 49

granted in favor of the CFTC. Without an injunction, the court finds that there is a reasonable

likelihood that the defendants will continue to violate the CEA. 77

In the discussion in the case, Virtual Currencies are defined as digital assets used as a

medium of exchange which are stored electronically in “digital wallets”. VCs are exchanged

over the internet through a direct peer-to-peer system and are often described as

“cryptocurrencies”. Such is the case because they use “cryptographic protocols to secure

transactions . . . recorded on publicly available decentralized ledgers,” called “blockchains.” 78

VCs were said to have some characteristics of government paper currency,

commodities, and securities, specifically that of gold. However, VCs serve the purpose of gold

more efficiently because it is digital rather than a heavy, unwieldy object. It does not have any

mass and can be sent easily from place to place. Commodities are generally defined as “goods

sold in the market with a quality and value uniform throughout the world.” This categorization

would be appropriate because it realistically reflects the economic behavior of Bitcoin users

and squares with traditional economic conceptions of exchange. 79

“A commodity is any item that “accommodates” our physical wants and needs. And one of

these physical wants is the need for a store of value. Throughout history humans have used

different commodities as a store of value – even cocoa beans – but, more persistently, gold. In

contrast, a security is any instrument that is “secured” against something else. As a currency is

usually secured by a commodity or a government’s ability to tax and defend, it is considered to

be a security. By these definitions, bitcoin with a lower case “b,” is a commodity, and not a

currency, while Bitcoin with a capital “B” is the technology, or network, that bitcoin moves

across. The analogy would be Shale technology versus shale oil.” 80

77
Supra at 75.
78
Id.
79
Id.
80
Id.
 50

CEA defines “commodities” as “wheat, cotton, rice, corn, oats, barley, rye, flaxseed,

grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops,

fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats

and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock

products, and frozen concentrated orange juice, and all other goods and articles . . . and all

services, rights, and interests . . . in which contracts for future delivery are presently or in the

future dealt in.” The definition of ‘commodity’ in the CEA is broad which covers physical

commodity, such as an agricultural product and extends to currency or interest rate. After an

administrative proceeding in 2015, the CFTC issued an order finding, for the first time, that

virtual currencies can be classified as commodities.81

4.3.2. How Foreign Law Treat the Operations of Virtual Currency Exchanges

The treatment of the U.S. to the operations involving bitcoins is not far from that of the

Philippines. The U.S. government has also undertaken several measures to regulate bitcoin

operations. In as early as 2013, the Financial Crimes Enforcement Network (FinCEN), issued

guidance on the applicability of regulations to virtual currencies. Both the federal and state are

actively monitoring the operations involving bitcoins. The interpretative guidance document

is entitled “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or

Using Virtual Currencies.” Similar to BSP’s Circular 944, the guidance document aims to

delineate which entity would be considered as Money Services Business (MSB). Upon being

determined as MSB, such entity will be subject to Fin CEN’s regulations which consist of

registration, reporting, and record-keeping requirements. However, unlike Circular 944, there

81
Supra at 75.
 51

is no specific mention to bitcoin but the timing of the issuance suggests that the motivation is

the increase in bitcoin transactions.82

The guidance document identifies the role of “users”, “administrators”, and

“exchangers”. A user is one who obtains VC in order to purchase goods or service whether

real or virtual but is not considered to be an MSB. Administrators are persons engaged in

issuing or putting into circulation VCs and has the authority to withdraw the said VCs from

such circulation. They accepts and transmits a convertible VC. Exchangers are those who

exchange or converts VC into real currency, funds, or other VCs. They buy and sell convertible

VCs. Only administrators and exchangers falls under the umbrella of MSB and are considered

as money transmitter and under the FinCEN regulation. 83

Under the guidance document a user purchasing goods or services using bitcoins will

not be considered as MSB unless such individual sells bitcoins. In such case, he or she will be

considered as money transmitter and will be subjected to FinCEN’s regulation. Also, any

business that facilitates the conversion of bitcoins into USD will be considered an exchanger

and will also be subject to FinCEN’s regulations for MSBs. Ultimately, with the exception of

merchants, all other businesses transacting in Bitcoin will have to meet registration, reporting,

and record-keeping requirements in accordance with the implementing regulations of the Bank

Secrecy Act. 84

82
Kien-Meng Ly, Matthew. 2014.”Coining Bitcoin’s Legal Bits: Examining the Regulatory Framework for Bitcoin
and Virtual Currencies. Harvard Journal of Law and Technology.
83
Supra at 82.
84
Id.
 52

4.4. Legal and Economic Theories and Principles that Justify the Use of Bitcoins

4.4.1. Legal Theories and Principles that Justify the Use of Bitcoins

A. Natural Law

Laws are created to regulate the relationship and activities of men and also to prevent

the wrongs and evil which the human mind may have anticipated. The creation of bitcoins and

their favorable acceptance and adoption by the people can never have been anticipated by the

state. Otherwise the country would have already been bombarded with a number of statutes

and regulations involving their operation. Just as the other activities of men in the virtual world,

bitcoin transactions was initially ignored and tolerated. The use of bitcoins was justified by the

existence of man’s freedom to pursue his or her private affairs. As long as the rights of others

are not encroached or trespassed upon, these private affairs will be tolerated. Significant is the

belief that everyone has a point of view and should be respected, as embodied in the Doctrine

of Tolerance. The said doctrine holds that all philosophies, religion, opinions, and activities

are equally valid and one will not be judged as being morally superior to others.85

A basic theory in law which comprise man’s idea of freedom is the Natural law. Natural

law is that law which is carved in the hearts of men prescribed by their rational sense and exists

in their very nature. It speaks our human dignity and it encompasses the whole idea of the

freedom of man. The right to freedom exists in unison with another. It grants man the right to

pursue and attain everlasting happiness, to live and be free. “Liberty, according to the

scholastics, means the absence of internal necessity toward one course of action; that the power

85
Brogan, Thomas J. 1951. “The Natural Law and the Right to Liberty”. Natural Law Institute Proceedings Vol.
4. Page 24.
 53

and exercise of choice is left to the free will to act in one way or to act in another, when all the

elements for proper determination are present.”86 Just as any other right and privileges granted

to men, liberty must not be pushed further to mean the absence of obligation to others. Right

and obligation are obviously complements.

B. Caveat Emptor

With the assimilation of bitcoins in every part of the globe, the users have to rely on

themselves where the law and statutes fall short. Mr. Mhel Plabasan, one of the writers of

Circular 944, cautioned the public in adopting bitcoins stating that the users must employ the

doctrine of “Caveat Emptor”.

Caveat Emptor is a Latin term which can be translated as “buyers beware”. This

principle gives the responsibility of any risk in the goods on the shoulder of buyers especially

if they do not inspect the quality of the goods. Under this doctrine, the buyers should examine

the goods thoroughly for his expected purpose. Is in the process of doing so, he or she makes

a mistake or chooses defective goods, or goods not suitable for his or her purpose, he or she

cannot accuse the seller or cannot shift his or her own fault on the shoulder of the seller. It is

the buyer’s duty to select the goods of this requirement. After conclusion of sale the purchaser

cannot recover the price or damages from the seller. 87

With respect to bitcoins, the buyers or users need not inspect the bitcoins since their

character and nature would be the same in all aspects. What the users must be mindful of are

the persons or entity’s that they deal with in their transactions involving bitcoins. The state in

86
Supra at 85.
87
Malek, Abdul. 2014. Doctrine of “Caveat Emptor” (Buyer be aware) in Common Law and the Doctrine of
“Khiyar al aib” (Option of defect) in Islamic Law: A Comparative Study. IIUC Studies Vol 10 & 11.
 54

protecting the users authorized persons or entity’s with whom the users may safely make their

transactions of bitcoins.

4.4.2. Economic Principle that Justify the Use of Bitcoins

A. Laissez Faire

Similar to the Doctrine of Tolerance and the concept of man’s freedom and liberty is

the idea of non-interference of man’s activities by the government embodied in the social and

economic theory “Laissez Faire”. Laissez faire is a French term which is an abbreviation of

the phrase “laissez-faire passer le monde de lui meme” which literally means, “don’t interfere,

the world will take care of itself”. Despite being a French concept, it is the Scottish Philosopher

Adam Smith who popularized the concept in his book “The Wealth of Nations”. He argued in

his book that businesses to be effective must not be restrained by the government in any form.

Thus, the said concept is used today by the business people who do not want the government

to interfere with their actions. It became the philosophy of people who are against the

government’s interference and believed that too many rules will stifle a healthy competition

and consequently preventing progress. 88

In a world of laissez Faire, it has become a right to have access to a system that will

enable the common man to store and transfer money with ease. Plabasan, admitted that a

significant number of the population are still considered as unbanked. Because of this, the

operations of bitcoins in the country is justified to cater for this unbanked segment of the

society under the concept of laissez faire.

88
Mccormick, Ken. 1999. The Tao of Laissez-Faire. Eastern Economic Journal.
 55

The fact that just about anyone with a computer and an internet connection can set up

his or her own (unlimited) account(s) in just a few minutes and use the same as a medium of

storage and transfer of value makes VCs like bitcoin, appear to be a highly appealing solution

for the unbanked population in the country. Plabasan further stated that unlike banks, they do

not require physical facilitators or offices. Transactions made using VCs are stored on a public

ledger referred to as a “block chain” and can be easily verified by anyone at will.

4.5. The Legal and Ethical Implication of Bitcoin Exchanges to the Laws and Policies on

Money Laundering and Terrorism Laws

4.5.1. The Anti – Money Laundering Laws

The BSP issued a number of steps to bring the Philippines at par with the international

standards in order to extend its continued commitment and support to the global fight against

money laundering. The money laundering law of the country underwent three amendments.

In September 2001, the initial Anti-Money Laundering law was passed as Republic Act

No. 9160 or the Anti-Money Laundering Act (AMLA) of 2001. It provides that money

laundering is a crime where the proceeds of an unlawful activity are transacted, making them

appear to have originated from legitimate sources. It is committed by any person knowing that

any monetary instrument or property represents, involves, or relates to the proceeds of any

unlawful activity, transacts or attempts to transact said monetary instrument or property. It is

also committed by any person who knowing that any monetary instrument or property involves

the proceeds of any unlawful activity, performs or fails to perform any act as a result of which

he facilitates the offense of money laundering. Finally, money laundering is committed by any
 56

person who fails to disclose any monetary instrument or property knowing that such is required

under the anti-money laundering law to be disclosed and filed with the Anti-Money Laundering

Council (AMLC). The law defines money laundering as a criminal offense and prescribes

penalties for crimes committed. 89

The law also established the Anti-Money Laundering Council as the central monitoring

and implementing body. In general, the law imposes requirements on customer identification,

record keeping, reporting of covered and suspicious transactions, relaxes strict bank deposit

secrecy laws, and provides for freezing, seizure, forfeiture, recovery of dirty money, property

as well as for international cooperation. The law covers banks, non-banks, quasi-banks, trust
90
entities, and other institutions under the supervision and regulation of the BSP.

To further strengthen the country’s AML regime, the law was amended under RA

10167. Significantly, it amended sections 10 and 11 of the original Anti-Money Laundering

law or the R.A. 9160. Section 10 allows freezing of monetary instrument or property. If

probable cause was found to exist that any monetary instrument or property is in any way

related to an unlawful activity as defined, the Court of Appeals may issue a freeze order, which

shall be effective immediately. The court should act on the petition to freeze within twenty-

four (24) hours from filing of the petition. If the application is filed a day before a nonworking

day, the computation of the twenty-four (24)-hour period shall exclude the nonworking days.

The freeze order grated shall be for a period of twenty (20) days unless extended by the court.
91
Hand in hand with Section 10 is Section 11 which grants authority to the AMLC inquire into

89
Republic Act No. 9160, The Anti-Money Laundering Act (AMLA) of 2001
90
Id.
91
Republic Act 10167, An Act To Further Strengthen The Anti-Money Laundering Law, Amending For The
Purpose Sections 10 And 11 Of Republic Act No. 9160, Otherwise Known As The Anti-Money Laundering Act Of
2001, As Amended, And For Other Purposes.
 57

bank deposits. It provides that upon order of any competent court based on an ex parte

application, the AMLC may inquire into or examine any particular deposit or investment,

including related accounts, with any banking institution or non-bank financial institution, when

it has been established that there is probable cause that the deposits or investments, including

related accounts involved, are related to an unlawful activity or money laundering offense. The

Court of Appeals shall act on the application to inquire into or examine any deposit or

investment with any banking institution or non-bank financial institution within twenty-four

(24) hours from filing of the application. 92

These two amended provisions recognized the urgency of the issuance of the freeze

order and the grant of authority to AMLC to conduct bank inquiry within 24 hours from the

filing of the petition. The amendment resulted to favorable action of the FATF. It decided to

upgrade the country's “dark gray” list to “gray”, which is just one notch away from being taken

out in the FATF list of nations considered non-compliant to global AML standards.

The third AMLA amendment under R.A. 10365 was passed into law on February 15,

2013 and expanded the definition of the crime of money laundering increasing the number of

acts which comprise money laundering offense. In the third Amendment, money laundering is

committed by any person who, knowing that any monetary instrument or property represents,

involves, or relates to the proceeds of any unlawful activity transacts said monetary instrument

or property; converts, transfers, disposes of, moves, acquires, possesses or uses said monetary

instrument or property; conceals or disguises the true nature, source, location, disposition,

movement or ownership of or rights with respect to said monetary instrument or property;

attempts or conspires to commit the first three money laundering offenses; aids, abets, assists

92
Supra at 91.
 58

in or counsels the commission of the first three money laundering offenses; and performs or

fails to perform any act as a result of which he facilitates the commission of the first three

money laundering offenses. In addition money laundering is also committed by any covered

person who, knowing that a covered or suspicious transaction is required to be reported to the

Anti-Money Laundering Council (AMLC), fails to do so. 93

The AMLC can now go after persons who engage in the conversion, transfer,

movement, disposal of, possession, use, and concealment or disguise, of the monetary proceeds

of an unlawful activity that was previously limited to the transaction of laundered funds and

property. Jewelry dealers of precious metals and stones whose transactions are in excess of

P1,000,000 and company service providers as defined and listed under RA 10365, are now

included as “Covered Persons”. Circular 950 defined “covered persons” as referring to banks,

non-banks, trust entities, non-stock savings and loan associations, pawnshops, foreign

exchange dealers, money changers, remittance and transfer companies, electronic money

issuers and other financial institutions which under special laws are subject to Bangko Sentral

supervision and/or regulation, including their subsidiaries and affiliates, which are also covered

persons, wherever they may be located. Subsidiary is an entity where more than fifty percent

(50%) of the outstanding voting stock is owned by a covered person while an affiliate is an

entity where at least twenty percent (20%) to not more than fifty percent (50%) of the voting

stock is owned by a covered person.94

The BSP is still taking a number of initiatives to further strengthen the country’s AML

Regime such as the creation of the Anti-Money Laundering Specialist Group (AMLSG) within

93
Republic Act 10365, An Act Further Strengthening The Anti-Money Laundering Law, Amending For The
Purpose Republic Act No. 9160, Otherwise Known As The "Anti-Money Laundering Act Of 2001″, As Amended
94
Id.
 59

the Supervision and Examination Sector (SES), issuance of a consolidated AML known as the

Updated AML Rules and Regulations (UARR). UARR was issued to consolidate all existing

BSP circulars, circular letters and other issuances related to AML and complements the

implementation of the existing AML legal framework. Aside from the usual provisions on

customer identification/“Know-Your-Customer” KYC and record keeping requirements, the

UARR emphasizes a sound risk management system to ensure that risks associated with money

laundering and terrorist financing are identified, assessed, monitored, mitigated and controlled

by covered institutions. “A sound risk management system includes adequate and active Board

and Senior Management oversight, acceptable policies and procedures embodied in a Money

Laundering and Terrorist Financing Prevention Program (MLPP), appropriate monitoring and

Management Information System and comprehensive internal controls and audit.” 95

4.5.2. Anti – Terrorism Laws: Human Security Act of 2007 and Terrorism Financing

Prevention and Suppression Act of 2012

In line with the state’s policy “to protect life, liberty, and property from acts of

terrorism, to condemn terrorism as inimical and dangerous to the national security of the

country and to the welfare of the people, and to make terrorism a crime against the Filipino

people, against humanity, and against the law of nations”, R.A. 9372 entitled “An Act to Secure

the State and Protect our People from Terrorism” otherwise known as the “Human Security

Act of 2007” was passed on March 6, 2007. The law defined terrorism as any act of a person

who commits those punishable acts under the Revised Penal Code such as Piracy in General

95
Supra at 93.
 60

and Mutiny in the High Seas or in the Philippine Waters (Article 122); Rebellion or

Insurrection (Article 134); Coup d' Etat (Article 134-a), including acts committed by private

persons; Murder (Article 248); Kidnapping and Serious Illegal Detention (Article 267); Crimes

Involving Destruction (Article 324), or under Presidential Decree No. 1613 (The Law on

Arson); Violation of Toxic Substances and Hazardous and Nuclear Waste Control Act of 1990

(Republic Act No. 6969); Atomic Energy Regulatory and Liability Act of 1968 (Republic Act

No. 5207); Anti-Hijacking Law (Republic Act No. 6235); Anti-Piracy and Anti-Highway

Robbery Law of 1974 (Presidential Decree No. 532); and, Decree Codifying the Laws on

Illegal and Unlawful Possession, Manufacture, Dealing in, Acquisition or Disposition of

Firearms, Ammunitions or Explosives (Presidential Decree No. 1866, as amended). Such acts

must sow and create a condition of widespread and extraordinary fear and panic among the

populace, or done in order to coerce the government to give in to an unlawful demand.

Violators will be meted with the penalty of forty (40) years of imprisonment, without the

benefit of parole as provided for under Act No. 4103, otherwise known as the Indeterminate

Sentence Law, as amended. 96

The passing of the Human Security Act of 2007 was significant in making the

transactions made by the banking institution visible for it allowed examination and

sequestration of deposits based on certain conditions. It gives authority to the Court of Appeals

to examine deposits if there is probable cause for terrorism. Section 27 of R.A.9372 authorizes

the justices of the Court of Appeals designated as a special court to handle anti-terrorism cases

to: (a) examine, or cause the examination of, the deposits, placements, trust accounts, assets

and records in a bank or financial institution; and (b) gather or cause the gathering of any

96
Republic Act 9372, The Human Security Act of 2007
 61

relevant information about such deposits, placements, trust accounts, assets, and records from

a bank or financial institution. This authority may be exercised after the Court of Appeals

conducted a hearing and is satisfied that there exist a probable cause that: (1) a person charged

with or suspected of the crime of terrorism or, conspiracy to commit terrorism, (2) of a

judicially declared and outlawed terrorist organization, association, or group of persons; and

(3) of a member of such judicially declared and outlawed organization, association, or group

of persons. The bank or financial institution concerned, shall not refuse to allow such

examination or to provide the desired information, when so, ordered by and served with the

written order of the Court of Appeals. 97

Republic Act No. 10168 otherwise known as “The Terrorism Financing Prevention and

Suppression Act of 2012”, is a consolidation of Senate Bill No. 3127 and House Bill No. 5015

which was finally passed by the Senate and the House of Representatives on June 6, 2012.

Significant in the said law is the expansion of the definition of terrorism which was provided

under Section 3 and 4 of R.A. 9372. With the passing of R.A. 10168 Terrorist Act refers any

act in violation of the Human Security Act of 2007; any other act intended to cause death or

serious bodily injury to a civilian, or to any other person not taking an active part in the

hostilities in a situation of armed conflict, when the purpose of such act, by its nature or context,

is to intimidate a population, or to compel a government or an international organization to do

or to abstain from doing any act; or any act which constitutes an offense that is within the scope

of any of the treaties of which the Republic of the Philippines is a State party. 98

97
Supra at 96
98
Id.
 62

The main thrust of the law is the provision defining the crime of Financing of Terrorism

and imposing the penalties thereof. Financing of Terrorism as defined in Section 4 refers to

any person who, directly or indirectly possesses, provides, collects or uses property or funds

or makes available property or funds by any means, with the unlawful and willful intention

that they should be used or with the knowledge that they are to be used, in full or in part, (a) to

carry out or facilitate the commission of any terrorist act; (b) by a terrorist organization,

association or group; or (c) by an individual terrorist, shall be guilty of the crime of financing

of terrorism. Under Section 8 of R.A. 10168, any person who deals directly or indirectly with

any property or fund that he knows or has reasonable ground to believe is owned or controlled

by a designated person, organization, association or group of persons or makes available any

property or funds, or financial services or other related services to a designated and/or

identified person, organization, association, or group of persons, shall also be guilty of the said

crime. It also includes any person who organizes or directs others to commit financing of

terrorism 99

4.5.3. Legal Implication of Bitcoin Exchanges to the Laws and Policies on Money

Laundering and Terrorism Laws

A. Bitcoin Exchanges Pose a Threat to Money Laundering and Terrorism Laws.

In the interview made by the researcher with Atty. Mel Georgie B. Racela, head of the

Anti-Money Laundering Specialist Group (AMLSG), virtual currency transactions become a

concern of the legislators and law enforcement agencies only when the VC intersects with the

99
Supra at 96.
 63

real world or what was referred to earlier as bi-directional flow. In bi-directional flow VC,

commonly bitcoins are exchanged to local currency or local currency is exchanged for bitcoins.

He further explained that it is only in the bi-directional flow that the government may interfere

since it now involves the local currency. Virtual Currency transactions online is beyond the

scope of their jurisdiction. This justifies the scope of their circular to transactions involving

the exchange of VC to the local currency or local currency to VC.

The decentralized network utilized by bitcoins means that users are “pseudonymous”.

As explained by Mr. Luis Buenaventura, author of the book "Reinventing Remittances with

Bitcoin", all the bitcoin transactions may be viewed online but the information as to who made

the transaction or from which part of the globe did it came from is not visible. Thus, while

every single Bitcoin transaction is traceable on a public ledger, it is not tied to anyone’s

identity. This makes the Bitcoin system seriously attractive for criminal activity specifically in

money laundering. High caution is undertaken by the government to ensure that VC exchange

centers are not used as a means or conduit to money laundering or to finance terrorist group.

B. Bitcoin Exchanges Do Not Conflict the Laws and Policies on Money

Laundering and Terrorism Laws.

The BSP issued the Circular 944, which was earlier discussed in the paper, to regulate

bitcoin exchanges in order to prevent the VCs from being an instrument to launder money and

finance terrorism. With the use of VCs, terrorist may purchase firearms and other things

necessary to successfully achieve their end using VCs. Supporters of these terrorists may send

them funds to finance their terrorism activities. People who engage in illegal activities may be

able to operate with the use of VCs. A question may arise on whether the Anti-Money
 64

Laundering and Anti-Terrorism law would be able to prevent the possible scenarios from

happening considering that we are speaking of VCs and not monetary instruments, funds, or

property which are made subject of the said two laws.

The researcher initially viewed that bitcoin exchanges are beyond the scope of the Anti-

Money Laundering and Anti-Terrorism law since they exist online with the identities of the

users being anonymous. It will just be a hopeless chase. However, an important matter was

pointed out by Atty. Racela: recipients of VCs will not hold on to their VCs forever, there will

always be a point when they have to convert or exchange their VCs into their local currency in

order to make use of its full benefits. This is when the chase starts. Only when the VCs are

converted or exchanged with monetary instruments, funds, or property, or vice versa, will the

Anti-Money Laundering and Anti-Terrorism law come to play. Atty. Racela clarified that the

state will have no way of controlling or regulating VCs when they are in the virtual realm. Not

only is it impossible but also beyond their jurisdiction.

4.5.4. Ethical Implication of Bitcoin Exchanges to the Laws and Policies on Money

Laundering and Terrorism Laws

The ethical issue which is related to bitcoin transaction is the great appeal they provide

to prospective money launderers, terrorists, and terrorists financers. Allowing bitcoin

exchanges to operate in the country is like sending and open invitation to these prospective

money launderers, terrorists, and terrorists financers to conduct their illegal affairs within our

territory. In effect, the regulators facilitated the propagation of crimes.

 65

Atty. Richard David Funk, former Head of AMLC’s Compliance and Investigation

Group was quick to defend the BSP in its act of issuing Circular 944 which allowed the

operation of bitcoin exchanges. He stated that everything that can be used for the good of

financial technology can also be used for bad. Even fiat currency which is actually meant for

good can also be utilize to finance illegal activities. He further added that the only way to can

prevent these evils it is to study the circumstances and come up with a regulation and laws in

order to control it and minimize the occurrence. Anyway, he says, laws are created precisely

and hopefully to prevent and deter the commission of crimes, but there is no full proof way of

stopping them.

Thus, bitcoin exchanges do not pose any ethical concern. At the end of the day what is

important is that bitcoin exchanges are also balanced with the ability of the country to act or

enforce their policies and impose upon the appropriate persons the necessary sanctions.

4.6. How Bitcoin Transactions are Sustained with the Anti-Money Laundering law and

Anti-Terrorism Law

4.6.1. The Key Players in the VC transactions

To ensure that Anti-Money laundering and Anti-Terrorism laws are not violated or

undermined, the BSP as the central authority in matters relating to currencies and their

transactions, issued circulars to regulate the transactions involving VCs. They are Circulars

944, 950, and 942. In demonstrating and presenting how bitcoin transactions are sustained

without undermining the laws of the Philippines in money laundering and terrorism, the players

in the said transactions shall be discussed including their respective role and functions. This
 66

portion will also tackle how each players perform and comply in accordance with their role

and functions.

The key players in the VC transactions are the following:

1. The BSP

2. The Authorized Virtual Currency Exchange Centers, which currently are:

a. Satoshi Citadel Industries (SCI) / Rebittance Anti-Money Laundering and

Countering Financing of Terrorism (AML-CFT) Framework
b. Coins.ph AML-CFT Framework

4.6.1.1. The BSP

The BSP as the central monetary authority, shall function and operate as an independent

and accountable body to discharge its mandated responsibilities concerning money, banking

and credit. It will be an independent monetary authority which will supervise over all the

operation of banks and provide policy directions in the areas of money, banking, and credit. It

is a government – owned and controlled corporation that is invested by law with corporate

powers. Its primary objective is to maintain price stability conducive to a balanced and

sustainable growth of the economy. It shall also promote and maintain monetary stability and

the convertibility of the peso. 100

In line with its regulatory powers over all operations of finance companies, non-bank

financial institutions, and matters relating to currency, the BSP issued BSP Circular No. 944

which provides for the Guidelines for Virtual Currency Exchanges. The Circular is

incorporated as Section 4512N of the Manual of Regulations for Non-Bank Financial

100
BSP Circular No. 944 Series of 2017
 67

Institutions (MORNBFI). This will govern the operations and reporting obligations of VC

exchanges in the Philippines.101

4.6.1.2. VC Exchanges

The Circular defines a VC Exchange as “any entity that offers services or engages in

activities that provide facility for the conversion or exchange of fiat currency to VC or vice

versa.” It also defines VC Exchange Service as the “conversion or exchange of fiat currency

or other value into VC, or the conversion or exchange of VC into fiat currency or other value.”

Fiat currency as earlier mentioned refers to “government-issued currency that is designated as

legal tender in its country of issuance through government decree, regulation, or law.” 102

A. SCI / Rebittance AML-CFT Framework

The framework of Rebittance was presented by Atty. Rafael Padilla, the Head of Legal

and Compliance Department of Rebittance in the BSP meeting on February 5, 2018 organized

by the Joint Terrorist Financing Investigation Group which was entitled, “Preventing Money-

Laundering, Combatting Terrorist Financing, and Managing Crypto-Related Risks”.

SCI was established in May 2014 and one of the pioneer blockchain technology

companies in the Asia-Pacific Region located at Legaspi Village, Makati City. It was built by

a team of homegrown entrepreneurs, its rapid execution and iteration has led to the

development of ecosystem of products and services ranging from remittances,

cryptocurrency exchange, payment processing, and mobile money. Rebittance Inc. is a

101
Supra at 100.
102
Subsection 4512N. Manual of Regulations for Non-Bank Financial Institutions.
 68

subsidiary of SCI and registered with the BSP as a remittance and transfer company operating

as a Virtual Currency Exchange. Rebittance Inc. is also registered with the Anti-Money

Laundering Council (AMLC).

SCI / Rebittance ensures that business is conducted in conformity with high ethical

standards, that laws and regulations are complied with, and that service is declined where

there are strong reasons to suspect that transactions are associated with money laundering

and terrorist financing activities. They comply with the KYC or “Know Your Customer”

requirement imposed by the BSP on all remittance services including the banking industry.

They comply with the said requirement by obtaining competent evidence of the customer’s

identity. They also establish procedures to verify the identity of new customers, including their

beneficial owners, for business accounts.

SCI cooperates fully with law enforcement agencies, which exceeds beyond

transactions reporting. Their Risk-Based Approach (RBA) includes assessing money

laundering and terrorism financing risks and apply RBA to ensure that appropriate preventive

and mitigation measures are implemented. They employ Product Risk Management (PRM) by

taking appropriate measures to manage and mitigate risk before launching new products or

business, practices or use new or developing technologies. Similarly, they also review existing

products to assess if AML risks have been enhanced based on new facts and circumstances.

The Financial Action Task Force (FATF) issued guidance on RBA for Virtual

Currencies in June 2015. The company makes the FATF Guidance an integral part of SCI’s

AML-CFT Framework. As an example they make sure that the required originator and

beneficiary information specified by Recommendation 16 of the FATF Regulation are included

 69

when wire transfers are made. Consequently, appropriate measures are taken in case the

required information is lacking.

In identifying and assessing indicators of Money Laundering / Terrorism Financing

(ML/TF) the company considers a range of factors which may include: (a) The nature, scale,

diversity and complexity of their business and their target markets; (b) The proportion of

customers already identified as high risk; (c) High-risk jurisdictions, including those listed by

FATF; (d) Volume and size of its transactions, considering the usual activity and the profile of

its customers.

The company makes sure to comply with the reportorial requirement of the BSP as

earlier mentioned by Plabasan by preparing quarterly reports on the total volume and value of

virtual currencies transacted. This quarterly report will then need be submitted to the BSP

within ten days from the end of reference quarter. Large value pay-outs of more than five

hundred thousand pesos (P500,000) or its foreign currency equivalent in any single transaction

with a customer/beneficiary or counterpart cannot be done in cash. Said large value pay-out

shall only be made through check payment and direct credit to deposit accounts.

B. Coins.ph AML-CFT Framework

Coins.ph was founded in 2014 by Silicon Valley entrepreneurs Ron Hose and Runar

Petursson. It is the leading mobile blockchain-enabled platform in South East Asia that allows

anyone even those without bank accounts, to easily access financial services directly from their

phone. Using Coins.ph, customers have access to a mobile wallet and services such as

remittances, air-time, bill payments, and online shopping at over 100,000 merchants who

accept digital currency.

 70

In presenting the AML-CFT Framework of the company, Ron Hose, the CEO of the

company emphasized the three (3) stages in money laundering involving several transactions

which could alert an intermediary such as their company to a possible money laundering

activity. These are the following:

1. Placement – the physical act of disposing of the cash proceeds drawn from illegal activities

2. Layering – the act of separating illicit proceeds from their source by creating complex tiers

of financial transactions in order to disguise the audit trail and to provide anonymity

3. Integration – the act of providing an appearance of legitimacy to criminally- derived wealth.

If the layering process is successful, the integration step places the laundered proceeds back

into the economy in a manner that their re-entry into the financial system has the appearance

of being normal business funds

The framework of Coins.ph is focused in establishing a compliance office, enforcing

effective Know-Your-Customer (KYC) protocol, Reporting to AMLC, Ongoing Employee

Training, Ongoing monitoring and Compliance Testing, Record Keeping and Data retention in

accordance with AML laws and regulations, and Internal Audit Function

The duty of appointed compliance officer, team of compliance analyst and internal

auditor, according to Hose, is to make sure that there is an ongoing transaction monitoring

compliance, regulatory updates, and contingency plan in the event of any major changes. In

terms of Customer Due Diligence (CDD) in relation to KYC, the approach of Coins.ph is

different from the other remittance center. Since the company does not have a physical location

in the Philippines, the collection and verification of KYC is different. They have to utilize

technology to be able to onboard customers and authorize them. Because the KYC

requirements of the BSP are very extensive, they have to find a way to balance user experience
 71

and compliance. Thus, their KYC information is collected electronically and only verified by

their team here in the Philippines.

Hose also stated that the application of the customers depends on a list of factors as

well. In order to start with the application, the applicant needs to sign up and provide some

basic information such as full name, email address and cellphone number. This is in accordance

with circular 950 of the BSP. Then the person will be asked to take his or her photo.

The service that the company provides includes a basic service and which will only

allow a person to do cash in for up to ₱ 2,000 per day. At this point you can only do cash in

but not cash out so you are not allowed to do a remittance. So you can only pay your bill, or

buy a load. To avail of a higher service which covers a higher amount of cash in as well as

cash out, the customer submits a valid ID. At this point the customer’s limit will be increased

to up to ₱ 50,000 a day but limited to ₱ 100,000 monthly.

Constant monitoring of the activity of the customer is done. So if there has been a

deviation with the normal pattern in the customer’s activity, then the company tags it as

suspicious. They then revalidate the report and reassess the customer’s risk category.

When it comes to training, all the company’s personnel are mandated to undergo

training while they were “on boarding”. They are then required to take training on relevant

policies and procedures which comprises their basic training. The training does not stop there

since before they start their actual positions they still have to undergo an in depth training as

the rule requires. Still, they have annual trainings and refresher courses depending on whether

they are assigned in the first line or second line of defense.

Within the legal constraints relative to client confidentiality, Coins.ph, still according

to the company’s CEO cooperates with law enforcement agencies. This includes taking
 72

appropriate measures within the law if there are reasonable grounds for suspecting money

laundering. Any disclosure made in conjunction with the Act shall be made to the Executive

Director of the Anti-Money Laundering Council of the Bangko Sentral ng Pilipinas.

4.6.2. Regulations to Ensure that Bitcoin Transactions are Sustained with the Anti-

Money Laundering law and Anti-Terrorism Law

A number of countries ordered the ban or shut down of a lot of VC exchange in their

jurisdiction. However, the Monetary Board of the BSP agreed in 2014 not to restrict bitcoins

since according to Plabasan, the BSP actually considers VC transaction as a means to aid them

in catering unbanked individuals and may function as a cost efficient means in remittance

service. While there are risks, there are also benefits associated with the use of the VC so the

BSP’s strategy is just to issue public advisory. The BSP also continuously monitors the

developments in the VC transactions and employs a proportionate application of regulation.

This is the primary reason why Circular 944, Circular 950 and Circular 942 were issued.

4.6.2.1. Circular 942 (signed on January 20, 2017)

Circular 942 governs the operations and reporting obligations of Non-Bank Financial

Institutions. It covers entities engaged in remittance, money changing, and/or foreign exchange

dealing pursuant with Anti-Money Laundering Act and The New Central bank Act. These

entities are referred to as Remittance and Transfer Companies (RTCs), Money Changers

(MCs), and Foreign Exchange Dealer (FXDs). 103

103
Circular 942 Series of 2017
 73

RTCs are entities that provide Money or Value Transfer Service (MVTS). MVTS are

financial services that involve the acceptance of cash, cheques, other monetary instruments or

other stores of value and the payment of a corresponding sum in cash or other form to a

beneficiary by means of a communication, message, transfer, or through a clearing network.

The clearing network may be a Remittance Agent, Remittance Platform Provider (RPP), or E-

Money Issuer (EMI). Money changer (MC) and Foreign Exchange Dealer (FxD) refer to any

entity who engages in money changing/foreign exchange dealing business which includes

Authorized Agent Banks' subsidiary or affiliate forex corporations. 104

Before RTCs, MCs, or FXDs can operate, the circular requires them to register with

the Bangko Sentral in accordance with the procedure set forth in the same statute. On the other

hand, all existing RTCs, MCs, FXDs shall apply or re-apply for registration. 105

The reportorial requirement is a control established by the BSP which may be found in

all three circulars presented in this paper. For Circular 942, the BSP requires RTCs, MCs,

FXDs to maintain records and submit the list of operating, accredited and closed offices;

audited financial statements (AFS) which shall be submitted not later than June 30 of following

calendar year; quarterly reports on the total value of money changing foreign exchange

transactions; and quarterly reports on the total value of foreign remittance transactions. These

reports or documents must be submitted to the appropriate department of the Supervision and

Examination Sector (SES). If the foregoing reporting requirements are not complied with or

consists of erroneous or delayed reports, the RTC, MC, or FXD concerned, will be subjected

to the appropriate penalties upon observance of due process. 106

104
Supra at 103
105
Id.
106
Id.
 74

4.6.2.2. Circular 944 (signed on February 6, 2017)

Plabasan, stated that in 2014, the conversion of virtual currency already amounted to

two million dollars and has significantly increased to about seven million dollars in 2016. In

2017, the conversion reached closed to eight million dollars. To date, a total of 1,568 virtual

currencies are in circulation. Because of the recent developments and the increasing conversion

of fiat to bitcoins and vice versa, the Monetary Board decided to approve the BSP circular 944.

What does Circular 944 contains? Basically, it is a targeted approach to VC exchanges.

It covers only those entities that facilitate the conversion of fiat to VC or vice versa. The BSP

admittedly recognize that it is impossible to regulate online VC transactions and issuance

because the issuer may probably be located elsewhere and thus beyond their jurisdiction. Also,

most of the risks such as those involving money laundering and financing terrorism become

apparent only when VC can be converted to fiat currency. Atty. Richard Funk stated that the

main thrust of the circular is to mitigate the risk associated with virtual currency transaction.

The circular was enacted to prevent the use of virtual currencies for illegal purpose.

The circular is patterned on the Financial Action Task Force Risk-based Approach,

says Plabasan, which has been the approach of other regulators or other monetary authorities

in other countries. In this type of approach a person or an entity performing or facilitating the

conversion of fiat currency to virtual currency and vice versa needs to register with the BSP

similar to the process with the Western Union or Western Union franchise. He stated that they

need to register with the BSP and comply with the same set of regulations or the same set of

Anti-Money Laundering regulation but with additional requirement. Furthermore, if they

perform pay out amounting to 500,000 and above they have to do it via check or direct deposit
 75

to an account to insure that it will be monitored by a financial institution. Other requirements

would be internal controls, technology risk management, and control protection. Upon

registration, they will need to sign an undertaking that they will comply with the rules of the

BSP. There is also the reportorial requirement which includes submission of a financial

statement and activity reports. There will also be monetary or non-monetary sanctions which

will be imposed for violators.

4.6.2.3. Circular 950 (signed on March 15, 2017)

The Monetary Board amended Part Eight or the Anti-Money Laundering Regulations

of the Manual of Regulations for Banks (MORB) and Manual of Regulations for Non-Bank

Financial Institutions (MORN BFI) to effectively implement the provisions of Republic Act

(R.A.) No. 9160, otherwise known as the "Anti-Money Laundering Act of 2001" (AMLA), as

amended by R.A. Nos. 9194, 10167 and 10365, as provided under Rule 18 of the Revised

Implementing Rules and Regulations (RIRR) of the AMLA, as amended, as well as R.A. No.

10168 or “The Terrorism Financing Prevention and Suppression Act of 2012”, as provided

under Rule 27 of its Implementing Rules and Regulations (lRR). The said amendment is the

circular 950. As stated in its declaration of policy, it aims to prevent the “covered persons” to

be used as a money laundering site and conduit for the proceeds of an unlawful activity. The

circular defined “covered persons” as referring to banks, non-banks, trust entities, non-stock

savings and loan associations, pawnshops, foreign exchange dealers, money changers,

remittance and transfer companies, electronic money issuers and other financial institutions

which under special laws are subject to Bangko Sentral supervision and/or regulation,

including their subsidiaries and affiliates, which are also covered persons, wherever they may
 76

be located. Subsidiary is an entity where more than fifty percent (50%) of the outstanding

voting stock is owned by a covered person while an affiliate is an entity where at least twenty

percent (20%) to not more than fifty percent (50%) of the voting stock is owned by a covered

person. 107 Thus, VC Exchange being a remittance and EMI is considered “covered persons”

under Circular 950.

Being “covered persons”, the said Circular require them to identify, understand and

assess their Money Laundering/ Terrorism Financing (ML/TF) risks, arising from customers,

countries or geographic areas of operations and customers, products, services, transactions or

delivery channels. They must also conduct Customer Due Diligence (CDD) which is a risk-

based approach to be undertaken depending on the type of customer, business relationship or

nature of the product, transaction or activity. CDD includes identifying the customer and

verifying the true identity of the customer; identifying the beneficial owner and taking

reasonable measures to verify the identity of the beneficial owner; understanding and obtaining

information on the purpose and intended nature of the business relationship when necessary;

and conducting ongoing due diligence on the business relationship and scrutiny of transactions

undertaken throughout the course of the relationship to ensure that the transactions being

conducted are consistent with the covered person's knowledge of the customer, their business

and risk profile.108

When the customers, as assessed by the covered persons, turned out to be “high risk”

based on the nature of their product, source of funds, public profile or high position, being in

the watch list, or other suspicious ground, the covered persons must conduct not only CDD but

107
Circular 950 Series of 2017
108
Supra at 107
 77

Enhanced Due Diligence (EDD). The validation required by EDD varies on whether the

covered persons consist of an individual or corporation.

Validation Requirement for Individual Validation Requirement for Corporation

1. Birth date 1. Source of funds or source of wealth from

2. Address through evaluation of utility bllls, reliable documents such as audited financial

bank or credit card statement, sending thank statements, lTR, bank references, etc.;

you letters, or other documents showing 2. Status of the entity;

address or through on-site visitation; 3. Address through on-site visitation of the

3. Contacting the customer by phone or company, sending thank you letters, or other

email; documents showing address; or

4. Determining the authenticity of the 4. Contacting the entity by phone or email.

identification documents through validation

of its issuance by requesting a certification

from the issuing authority or by any other

effective and reliable means; or

5. Determining the veracity of the declared

source of funds.

Circular 950 also requires the covered persons to validate the identity of the party they

will be dealing with as well as the documents submitted by them. The circular even authorizes

the covered persons without prior Monetary Board approval to outsource to a counterparty,

which may or may not be a covered person the gathering of the minimum information and/or
 78

documents and conduct a face-to-face contact. However, they may also rely on the

identification process or gathering of minimum information and face-to-face contact

undertaken by a third party subject to the rules provided under the circular. 109

With all the safeguards in place, the state specifically the BSP, is gaining information

on the identity of the party who intends to transact bitcoins lessening the anonymity of their

identity. These safeguards established in the different circulars issued by the BSP allows the

institution to control, manage, and sustain bitcoin transaction with the Anti-Money Laundering

law and Anti-Terrorism Law.

4.6.3. Complementary Scheme of Bitcoin Transactions with the Anti-Money

Laundering law and Anti-Terrorism Law

The researcher viewed the relationship of the personnel aspect of the bitcoin transaction

and the regulatory framework imposed by the BSP under the three circulars as complementing

in the manner shown by the diagram at the next page. The personnel aspect consists of the

BSP, VC Exchanges, and the Customers. The BSP is the personnel aspect which is authorize

to manage and control bitcoin transactions and establishes the regulatory framework upon

which the VC Exchanges may operate. The framework upon which the Circulars, consisting

of Circular 944, Circular 942, and Circular 950, were established is made compliant and

complements with the existing anti-money laundering and anti-terrorism laws in the country.

The entire system has the goal of preventing the crimes of money laundering and terrorism,

while protecting the customers in their bitcoin transactions.

109
Supra 107.
79
 80

CHAPTER V

SUMMARY OF FINDINGS, CONCLUSION, AND RECOMMENDATIONS

5.1. SUMMARY

5.1.1. Bitcoins defined in the Philippine laws and the treatment to Bitcoin

Transaction

The definition of bitcoins being one of the virtual currencies is drawn mainly on

Circular 944 which defines and treat VC as any type of digital unit that is used as medium of

exchange or a form of digitally stored value created by agreement within the community of

VC users. If in the real world what we have fiat currencies, in the virtual world, we have the

Virtual Currencies or VC for brevity.

5.1.2. Treatment of Foreign Law and Jurisprudence

Bitcoin and other Virtual Currencies are treated as a commodity under the United

State’s Commodity Exchange Act regulated by the Commodity Futures Trading Commission

(CFTC). To date only South Korea, China, and Indonesia shut down VC exchanges in their

jurisdictions.

5.1.3. Legal and Economic Justification in the Use of Bitcoin

The continued existence of bitcoin transactions is justified by the Doctrine of Tolerance

which validates the freedom of man’s pursuit for their private affairs. This doctrine is rooted

on natural law which comprises man’s idea of freedom. The economic justification, on the
 81

other hand, is grounded on the principle of laissez faire which allows non-interference of the

government on the citizen’s social and economic activities.

5.1.4. Implications of Bitcoin Transactions to Anti – Money Laundering Law and Anti-

Terrorism Law

Bitcoin transactions are not confined in the virtual world but now intersects with the

real world. Because of this, high caution is undertaken by the government to ensure that VC

exchange centers are not used as a conduit to money laundering or to finance terrorist group

and that laws related to them are strictly adhered to.

5.1.5. How Bitcoin Transactions are sustained with the Anti-Money Laundering law and

Anti-Terrorism Law

In order for the bitcoin transactions to be sustained without undermining the laws

money laundering and terrorism, the BSP, as the central authority in matters relating to

currencies and their transactions, issued circulars to regulate the transactions involving VCs.

It also approved two VC Exchange Centers to monitor VC exchange transaction providing for

an adequate protection to the financial system and consumers.

5.2. CONCLUSION

Bitcoins including the other Virtual Currencies are types of digital unit or a form of

digitally stored value which functions similar to that of fiat currency. They are not legal tender

but are innovation in the means of exchange agreed upon by the community. The said

community is continuously increasing as shown by the increase of the virtual currency

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exchanges recorded by the BSP from two million dollars in 2014 to eight million dollars in

2017. They are here to stay.

Bitcoins are made legal in the Philippines. With the present status of bitcoins in the

country, the necessary steps undertaken by the BSP from issuing advisories to circulars are but

proper and wise. The said actions encourage financial innovation but at the same time ensure

that the Philippines will not be used for money laundering or terrorist financing activities and

that the financial system and consumers will be sufficiently protected.

5.3. RECOMMENDATION

The following recommendations are respectfully proffered by the researcher upon the

findings gathered in the study:

1. Create Awareness. People who are new to VC may be easily lured in engaging in

transactions with persons or entities who will only make false representation and

promise in exchange for money or VCs. They become susceptible to fraud and scam.

It is important that they are aware that regulations involving VC transactions are in

place for their protection. They should be well informed of the authorized VC exchange

to ensure the validity and authenticity of their transactions.

2. Expand Coverage of Sanction. To date, the sanctions provided in the law and

regulations issued by the BSP are imposed only to VC exchange centers. Rigid

requirements on their registration and rules on their operation are imposed by the BSP

on VC exchange centers and violation imposed may range from cancellation of

registration to monetary penalties. Corresponding sanction must also be imposed on

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persons or entities who engage in VC transactions with non-authorized VC exchange.

This will inculcate in the minds of the people the attitude of abiding in the rules of the

state and eventually prevent dealings with fraudulent entities.

3. Vigorous Monitoring of Online Activities. Rules and regulations no matter how sound

will fail without efficient policy on enforcement. The BSP must not stop in issuing

circulars imposing requirements on VC exchange but must establish a policy which

must involve online platforms. The policy must incorporate monitoring and reportorial

requirement to online platforms such as FB and other website administrators.

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BIBLIOGRAPHY

A. PHILIPPINE LAWS and RULES and REGULATIONS

Bangko Sentral ng Pilipinas Circular No. 944 Series of 2017, “Guidelines for Virtual Currency

(VC) Exchanges”

Bangko Sentral ng Pilipinas Circular No. 942 series of 2017, “Amendment to Section 4511N

of the Manual of Regulations for Non-Bank”

Bangko Sentral ng Pilipinas Circular No. 950 series of 2017, “Amendments to Part Eight or

the Anti-Money Laundering Regulations of the Manual of Regulations for Banks and

Manual of Regulations for Non-Bank Financial Institutions”

Manual of Regulations for Non-Bank Financial Institutions.

Republic Act 7653, The New Central Bank Act

Republic Act No. 9160, The Anti-Money Laundering Act (AMLA) of 2001

Republic Act 10167, An Act To Further Strengthen The Anti-Money Laundering Law,

Amending For The Purpose Sections 10 And 11 Of Republic Act No. 9160, Otherwise

Known As The Anti-Money Laundering Act Of 2001, As Amended, And For Other

Purposes

Republic Act 9372, The Human Security Act of 2007

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B. US LAWS and JURISPRUDENCE

Securities and Exchange Commission v. Trendon T. Shavers and Bitcoin Savings and Trust,

Civil Action No. 4:13-CV-416 (September 22, 2014).

Commodity Futures Trading Commission Against Patrick K. Mcdonnell, and Cabbagetech,

Corp. D/B/A Coin Drop Markets, Case 1:18-cv-00361-JBW-RLM.

United States v. Faiella, 39 F. Supp. 3d 544, 545–47 (2014).

C. BOOKS, JOURNALS, and ONLINE SOURCES

Agcaoili, L. (2017, August 19). BSP Approves Registration of 2 Bitcoin Exchange Operators . Retrieved

from Philstar Global : http://www.philstar.com/business/2017/08/19/1730418/bsp-

approves-registration-2-bitcoin-exchange-operators

Antonopolous, A. (2014). "Mastering Bitcoin". CA: O’Reilly Media.

Borroni, A. (2016). Bitcoins: Regulatory Patterns. Banking & Finance Law Review. Retrieved from

https://search.proquest.com/docview/1843836885?accountid=28547

Brogan, T. J. (1951). “The Natural Law and the Right to Liberty”. Natural Law Institute Proceedings

Vol. 4.

Chatham. (2014). Making Sense of Bitcoin. Newstex. Retrieved from

https://search.proquest.com/docview/1561487655?accountid=28547

Franco, P. (2014). Understanding Bitcoin: Cryptography, Engineering and Economics. Wiley.

Halaburda, H. (2016). “Digital currencies: Beyond bitcoin" . Communications & Strategies.

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Irwin, A. &. (2016). The Use of Crypto-Currencies in Funding Violent Jihad". Journal of Money

Laundering Control.

Kelly, B. (2014). The Bitcoin Big Bang: How Alternative Currencies Are about to Change the World.

John Wiley & Sons, Incorporated.

Kien-Meng Ly, M. (2014). Coining Bitcoin’s “Legal Bits”: Examining the regulatory Framework for

Bitcoin and Virtual Currencies. Harvard Journal of Law and Technology.

Lanham. (2016). House Energy and Commerce Subcommittee on Commerce, Manufacturing, and

Trade Hearing. Retrieved from

https://search.proquest.com/docview/1774151292?accountid=28547

Malek, A. (2014). "Doctrine of “Caveat Emptor” (Buyer be aware) in Common Law and the Doctrine

of “Khiyar al aib” (Option of defect) in Islamic Law: A Comparative Study. IIUC Studies Vol 10

& 11.

Mari, A. (2017). "Cryptocurrencies: A Niche Pursuit?". Computer Weekly.

Mccormick, K. (1999). "The Tao of Laissez-Faire" . Eastern Economic Journal.

Newswire, I. (2017, July 31). The Risks and Benefits of Investing in Cryptocurrency. Retrieved from

https://search.proquest.com/docview/1924628012?accountid=28547

Philippines: Philippines now a major player on virtual currency usage - BSP Exec. (2016, June 8).

Retrieved from Asia News Monitor:

https://search.proquest.com/docview/1794173052?accountid=28547

Releases, M. (2014, March 6). “Warning Advisory on Virtual Currencies”, . Retrieved from Bangko

Sentral ng Pilipinas Official Website:

http://www.bsp.gov.ph/publications/media.asp?id=3377

Rella, L. (2015). Transnational Political Regulation of Bitcoin . Lund University.

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Richter, C. K. (2015). "Virtual Currencies like Bitcoin as A Paradigm Shift in the Field of Transactions".

The International Business & Economics Research Journal.

Savona, E. (2005). "Responding to Money Laundering" . Routledge.

Schlichter, D. S. (2014). “Paper Money Collapse:The Folly of Elastic Money”. John Wiley & Sons, Inc.

Tsukerman, M. (2015). "The Block Is Hot: A Survey Of The State Of Bitcoin Regulation And Suggestions

For The Future". Berkeley Technology Law Journal.

D. INTERVIEWS

Atty. Richard David Funk, I. (2018, February 13). Independent legal practitioner and

Professional AML Trainer

Buenaventura, M. L. (2018, February 6). Chief Technology Officer of Bloom Solutions,

Blockchain Entrepreneur, and author of the book "Reinventing Remittances with

Bitcoin"

Hose, M. R. (2018, February 5). CEO at coins.ph, one of the two Virtual Currency exchange

center authorized by the BSP together with SCI Ventures

Hughes, M. N. (2018, February 18). Chief Technology Offier of Appsolutely, the leading

blockchain loyalty system and creator of LoyalCoin and a designer various

cryptocurrency-based applications

Padilla, A. R. (2018, February 5). Head of Legal and Compliance of SCI Ventures Inc., one

of the two Virtual Currency exchange center authorized by the BSP

Plabasan, M. M. (2018, February 5). IT Supervisor of the Bangko Sentral ng Pilipinas and

also one of the people who penned BSP Circular 944

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Racela, A. M. (2018, February 5). Head of the Anti-Money Laundering Specialist Group

(AMLSG), Deputy Director for Special Projects and Reports of the Office of

Supervisory Policy Development (OSPD) under the BSP, and among those who

penned Circular 944