Fintech and regulation
The collapse of FTX, a Bahamas-based company which was once the third largest cryptocurrency exchange in the world, has been widely reported in the news.
And since we live in a connected world, even if this happened thousands of miles away, we can assume that there are Filipino investors who will be affected by the collapse, or what comes after.
After FTX, BlockFi, a web platform and mobile app where you can buy, sell, and trade cryptocurrencies or crypto, also filed for bankruptcy.
Before FTX, in mid 2022, there was the Three Arrows Capital which was said to be the first major crypto firm to go bankrupt. At one point, Three Arrows was managing $10 billion in assets.
At that time, analysts predicted that there would be a chain reaction causing pain and contagion in the crypto world and identified several entities such as Genesis, Voyager, BlockFi, Blockchain, BitMex, Deribit and yes, FTX, that may be affected by the collapse.
A lot of the companies mentioned have either filed for bankruptcy, suffered substantial losses, or face one form of crisis or another.
These events, which are happening abroad, are relevant to us here in the Philippines, as more and more Filipinos own crypto and hold accounts and wallets in these exchanges.
It has been reported by the Bangko Sentral ng Pilipinas (BSP) that the volume of transactions in the Philippines involving virtual assets grew 362 percent year on year to nearly 20 million in June 2021 and was worth about P105.93 billion.
According to Finder, an Australian based financial technology website, 10.9 million Filipinos own some form of cryptocurrency, 36 percent of which are held in Bitcoin. According to its Crypto Adoption November 2022 report, which surveyed 389,345 people in 26 selected countries with 17,680 of respondents from the Philippines, the Philippines also ranks 12th out of 26 countries for crypto adoption.
There are now also lending applications run by financing and lending companies which provide small value loans to clients. These are widely available on the internet and on mobile apps.
One survey conducted by a lending application company reported that the Philippines has seen an increased demand for online loans of 75 percent and mobile wallets of 49 percent. This company claimed that as of early 2022, it had already served over 2.7 million Filipinos. Some estimates indicate that as high as 80 percent of the Filipino adult population have availed of the low value loans offered by these lending apps, which have become quite popular due to easy accessibility and minimal requirements needed.
Unfortunately, together with the huge number of loan accounts, came abuses by some lenders and their debt collectors.
These exchanges and applications are both based abroad and locally. There are legal entities who are licensed in the Philippines, and it would be safer for Filipinos to use these licensed platforms, as Philippine regulators have been quite strict in overseeing and disciplining erring operators.
These entities whether engaged in the business of allowing users to buy and sell cryptocurrencies or providing financial access to loans via mobile or internet applications, are broadly referred to as financial technology companies or fintech companies.
Fintech companies are businesses that use technology to make financial processes and transactions more efficient or to enhance, modify, and automate these activities for businesses and consumers. Examples are mobile banking, payment applications and services, portfolio managers and advisers, online lenders, and online trading platforms which are not limited to the traditional buy and sell of stocks but include purchase of bonds, commodities and cryptocurrencies such as Bitcoin, Ethereum, and Dodgecoin.
Because of the rapid pace of development and the danger it brings to the Philippine financial system, there is a need for our regulatory agencies to be alert, which they have been.
At the forefront of having to balance the use and development of new technology versus protection of the public the financial system are the Securities and Exchange Commission (SEC) and the BSP.
The SEC has through its Memorandum Circular No. 10 issued last November 2, 2021, imposed a moratorium on the registration of new online lending platforms (OLP) run by financing and lending companies.
An OLP is a mobile lending application, website, and other fintech-enabled program or system, where the services and products of Financing and Lending Companies are made available.
As of November 29, 2021, there were 124 financing and lending companies allowed to operate OLPs in the Philippines. Despite the clamor from businesses wanting to register and operate such platforms, the SEC has not lifted the moratorium.
In the meantime, the SEC recently announced that it is preparing the rules governing digital asset offerings and digital asset exchanges which aim to provide the public with more options, as well as protect them from the misuse of such emerging assets.
The BSP has also been busy regulating fintech companies.
Last December 2021, through Memorandum Circular 2021-064, the BSP imposed a two-year moratorium on application of nonbank electronic money issuers or EMIs, which are electronically-stored cash examples of which are cash cards, e-wallets accessible via mobile phones or other access device. Notably, the Anti-Money Laundering Council reported that in 2020, suspicious transaction reports from EMI’s doubled to more than 140,000 compared to the previous year.
As of end of October 2021, there were 35 non-bank EMI’s and 29 banks with EMI licenses.
Aside from imposing a moratorium on new EMI licenses, the BSP also imposed a three-year moratorium on digital exchanges or value added service providers (VASPs) in its Resolution No. 1141, dated Aug 4, 2022.
VASPs are entities that offer services or engages in activities that provide facility for the transfer or exchange of virtual asset. A virtual asset is any type of digital- unit that can be digitally traded or transferred and can be used for payment or investment purposes. Cryptocurrencies, digital tokens and NFTs are virtual assets.
During the moratorium, the BSP has created a regulatory sandbox framework where those intending to operate and seek licenses as EMIs and VASPs may test their application and business process in a controlled environment until they are ready for exit and eventual market participation. The standards for evaluation and regulation by the BSP in this program are quite stringent.
Last but not the least, there is the digital bank which is the newest type of bank in the Philippines. As of date, the BSP has limited to six the number of digital banks it has licensed to operate and these are GOtyme of Robinsons Bank Corp., Maya Bank of PayMaya, Overseas Filipino Bank (OFBank), Tonik Bank of Singapore, UNObank of Singapore, and UnionDigital of the Union Bank of the Philippines.
It is quite obvious that our regulatory agencies have recognized the dangers to the public and the Philippine financial system brought about by the rapid change in technology and innovation in the financial system. The moratoriums put in place allow the regulating agencies to balance two competing interests, which on the one hand is to allow the Philippines to keep pace with global developments in technology and finance and, on the other, to protect this financial system.
The moratoriums put in place allow our regulatory agencies to take a pause, in order to observe and learn, that they may put in place the proper rules and regulations to protect the public and our financial system.
(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding partner of Tiongco Siao Bello & Associates Law Offices, a professor at the MLQU School of Law, and an arbitrator of the Construction Industry Arbitration Commission of the Philippines. He may be contacted at [email protected]. The views expressed in this article belong to the author alone.)
