Fintech and regulation | Asking Business

by James · December 5, 2022

The collapse of FTX, a Bahamas-based company that 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 it is Filipino investors who will be affected by the collapse, or what comes after.

After FTX, BlockFi, an online platform and mobile app where you can buy, sell and trade cryptocurrencies or crypto, also filed for bankruptcy.

Before FTX, in mid-2022, it was Three Arrows Capital that was said to be the first major crypto firm to go bankrupt. At one point, Three Arrows managed $10 billion in assets.

At the 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, which could be affected by the collapse.

Many of the aforementioned companies have either filed for bankruptcy, suffered significant losses, or are facing some form of crisis.

These events, happening abroad, are relevant to us here in the Philippines, as more and more Filipinos own crypto and keep 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 around 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 the Crypto Adoption November 2022 report, which surveyed 389,345 people in 26 selected countries with 17,680 of the respondents from the Philippines, the Philippines also ranks 12th out of 26 countries for crypto adoption.

There are now also loan applications run by financing and lending companies that provide small value loans to customers. These are widely available on the internet and on mobile apps.

A survey conducted by a loan application company reported that the Philippines has seen an increase in demand for online loans at 75 percent and mobile wallets at 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 taken advantage of the low-cost loans offered by these lending apps, which have become quite popular due to their easy availability and minimal requirements.

Unfortunately, along with the huge number of loan accounts came abuse from some lenders and their collection agencies.

These exchanges and applications are both based abroad and locally. There are legal entities that 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 monitoring and disciplining errant 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 streamline financial processes and transactions or to improve, modify and automate these activities for businesses and consumers. Examples are mobile banking services, payment applications and services, portfolio managers and advisors, online lenders and online trading platforms that are not limited to the traditional buying and selling of stocks, but include the purchase of bonds, commodities and cryptocurrencies such as Bitcoin, Ethereum and Dodgecoin.

Because of the rapid pace of development and the danger it poses to the Philippine financial system, there is a need for our regulatory agencies to be vigilant, which they have been.

At the forefront of having to balance the use and development of new technology versus the protection of the public, the financial system is the Securities and Exchange Commission (SEC) and the BSP.

The SEC, through its Memorandum Circular No. 10 issued on 2 November 2021, introduced a moratorium on the registration of new online lending platforms (OLP) operated by financing and lending companies.

An OLP is a mobile loan 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 demand from companies that want to register and operate such platforms, the SEC has not lifted the moratorium.

Meanwhile, the SEC recently announced that it is drafting the rules for digital asset offerings and digital asset exchanges, which aim to give the public more options, as well as protect them from abuse of such new assets.

The BSP has also been busy regulating fintech companies.

In December 2021, through Memorandum Circular 2021-064, the BSP imposed a two-year moratorium on the use by non-bank issuers of electronic money or EMIs, which are electronically stored cash examples of which are prepaid 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 EMIs doubled to more than 140,000 compared to the previous year.

At the end of October 2021, there were 35 non-bank EMIs and 29 banks with EMI licences.

Apart 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 August 4, 2022.

VASPs are entities that provide services or engage in activities that enable the transfer or exchange of virtual assets. A virtual asset is any type of digital entity that can be traded or transferred digitally 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 can 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 of BSP in this program are quite strict.

Last but not least, it is the digital bank that 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 from 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 caused by the rapid change in technology and innovation in the financial system. The moratoriums in place allow the regulatory 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 hand to protect this financial system.

The moratoriums in place allow our regulatory agencies to pause, to observe and learn, so they can put the right rules and regulations in place to protect the public and our financial system.

(The author, Atty. John Philip C. Siao, is a practicing attorney and founder of Tiongco Siao Bello & Associates Law Offices, a professor at MLQU School of Law, and an arbitrator at the Construction Industry Arbitration Commission of the Philippines. He can be contacted at [email protected] The views expressed in this article belong solely to the author.)