BSP in a bind over bitcoins

MANILA, Philippines—Regulators are in a quandary on how to approach “bitcoins,” a digital currency that is gaining popularity among investors and notoriety among policymakers around the world.

According to the Bangko Sentral ng Pilipinas (BSP), the nascent phenomenon poses financial risks to consumers who are lured by the prospect of profit amid rising valuations.

But for a country like the Philippines, bitcoins may prove to be a boon, given its potential as a new, secure and low-cost channel for remittances.

“The BSP is studying the appropriate regulatory approach to this innovation. We are trying to better understand the intricacies of its use and implications on consumer protection,” BSP Governor Amando M. Tetangco Jr. said. “This innovation could … offer a low-cost remittance solution, but we would need to have some level of confidence that the weaknesses could be addressed.”

The main danger, Tetangco said, was the lack of a global consensus among policymakers on how to handle bitcoin transactions, particularly when anti-money laundering efforts and consumer protection issues are concerned.

Germany, for instance, has recognized the virtual currency as a “unit of account,” while former Federal Reserve chair Ben Bernanke once told US lawmakers that the idea of bitcoins could hold “long-term promise.”

Bitcoin was created by software developer Satoshi Nakamoto in 2009. He created the virtual currency through a computer resource-intensive process called “mining.”

Unlike traditional currencies, bitcoins are not issued by central banks. Its trading is unregulated in most jurisdictions. But consumers are drawn to it because of the efficiency by which it can be transferred between users.

In a recent public advisory, the BSP warned of the risks posed by the trading of bitcoins in the country, made possible through the establishment of Bitcoin.ph exchange.

The advisory also follows the recent collapse of Mt. Gox, a Tokyo-based bitcoin exchange that, at one point, was handling 70 percent of all the virtual currency’s transactions around the world.

Mt. Gox filed for bankruptcy last February following the loss, partially due to theft, of 850,000 bitcoins of its clients. At the time of Mt. Gox’s closure, the bitcoins it lost were valued at $450 million.

The BSP said because the trading of bitcoins was still unregulated, consumers could lose money if exchange platforms shut down, much like Mt. Gox did. Consumers may also lose money if their electronic bitcoin wallets are compromised.

The public was also warned against spikes in the value of bitcoins.

“If you buy a virtual currency today, it is quite possible for its value to drop sharply and permanently the next day,” the BSP said.

BSP Assistant Governor Johnny Noe E. Ravalo told the Inquirer that bitcoins had two of the four characteristics of money—its durability or ability to store value, and transportability, referring to its ability to be used for transactions.

“The main issue for any commodity that’s used as a medium of exchange is valuation. How do we ensure that prices are not just being bumped up?” Ravalo said.