VASP-Licensed Bexpress Publishes Position on Digital Assets Act of 2022

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Editor’s Note: Bexpress, operating as Bexpress/Bexpro is a licensed virtual assets service provider (VASP) in the Philippines. BitPinas is encouraging other stakeholders to publish their position papers and initiate discussions on the policy issues concerning the Digital Assets Act:

To know more about the Digital Assets Act, check out the following articles:

14 September 2022

Republic of the Philippines

SENATE
Committee on Banks, Financial Institutions and Currencies

Pasay City

Dear Senator Villar,

Thank you for your invitation to submit our Position Paper on Senate Bill No. 184. Said Bill proposes to recognize digital assets, requiring the registration of so-called “digital asset enterprises,” their operators, among other purposes. We appreciate the opportunity that the Committee has given to enable us to comment on what we believe is a significant bill that addresses the policy implications of emerging technologies such as cryptocurrencies and blockchain.

Bexpress Inc. (“Bexpress) is a technology startup founded in 2016, a BSP-supervised financial institution registered with the Bangko Sentral ng Pilipinas as a Virtual Currency Exchange since 2019 and as a Virtual Asset Service Provider since 2021. Bexpress is a financial technology company that seeks to contribute to the growth of the blockchain ecosystem in the Philippines. Bexpress develops products across several financial services including money service business, virtual asset service business and payment processing.

We reviewed Senate Bill No. 184. Overall, we welcome the progressive policy that is being championed by Senate Bill No. 184. The proposed bill acknowledges and recognizes a groundbreaking technology that is unfolding before us, but it is equally important that bad actors should be discouraged from using the technology to perpetrate crimes, fraud and other nefarious activities. It is commendable to adopt a policy that would minimize, if not eliminate, various legal risks associated with digital assets. In the long run, such policy could also have an nurturing effect of encouraging adoption of the technology for legitimate activities.

Please let us know if you require further information regarding the comments and recommendations we put forward in this submission.

Sincerely yours,

For Bexpress Inc.

KYUNG SOO KANG

Bexpress Publishes Position on Digital Assets Act of 2022

Dear Senator Villar,

Having reviewed Senate Bill No. 184, Bexpress hereby submit the following positions and comments:

AN ACT RECOGNIZING DIGITAL ASSETS, REQUIRING THE REGISTRATION OF DIGITAL ASSET ENTERPRISES, THEIR OPERATORS, AND FOR OTHER PURPOSES

Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled:

SEC. 1. Short Title

— This Act shall be known as the “Digital Assets Act of 2022.”

Comments:

We note that the proposed bill seeks to offer statutory clarity on the subject of virtual assets and electronic money. However, we wish to highlight that there are important, substantive and technical differences between virtual assets and electronic money. In view of these distinctions, we believe it would not be a good policy to lump together virtual asset and electronic money under the conceptual umbrella of digital assets.

Digital assets, such as privately-issued cryptocurrencies and nonfungible tokens (NFTs), are properties in digital form where ownership is recorded on a shared public ledger that is updated concurrently by a decentralized network of users globally.[1] The United States Congressional Research Service simply defines digital assets as “assets issued and transferred using distributed ledger or blockchain technology” and gives “crypto asset, cryptocurrency, or digital token” as examples.[2] We expect the concept of digital asset to evolve and expand in the long term but the underlying theme is that such digital representations of value are recorded in a decentralized or distributed ledger such as blockchain.

Electronic money is similar to digital assets only in form, but they are substantially different in the sense that e-money is necessarily a representation of a legal tender whereas digital assets are not necessarily legal tender; e-money is essentially intended to function as currency and as a medium of exchange whereas digital asset have varied functions and uses cases; e-money must necessarily constitute a claim on its central issuer, whereas digital assets does not necessarily have an issuer (as in the case of bitcoin) and does not represent a claim against a counterparty or anybody. As a requirement for its issuance, funds must be received in an amount not less than the monetary value of the e-money, whereas digital assets have varying rules on issuance and does not necessarily require funds to be transferred to an issuer before the digital asset can be issued.

To optimize clarity and to conform with the “one title one subject” requirement of Article VI, Sec. 26(1) of the Constitution, we propose two options for the consideration of the Congress:

(a) amend both the long title and the short tile by specifying the term “electronic money;”[3] or

(b) delete all references and sections relating to electronic money in this proposed bill, and consolidate them in a separate bill that will set out the statutory policy on the regulation of electronic money issuance and related services.

Between the two options, we recommend the second option as the better policy approach. First of all, we are of the view that BSP’s authority to regulate electronic money is already covered by Section 50 of the New Central Bank Act.[4] According to said section, the Monetary Board is authorized by to issue such regulations as it may deem advisable in order to regulate the circulation of currency substitutes. A currency substitute is an instrument that represents a specific currency by which the holder can eventually receive money in the currency bearing on their face.[5] An electronic money should be regarded as a currency substitute considering that e-money is (1) a monetary value; (2) as represented by a claim on its issuer; (3) that is electronically stored in an instrument or device; (4) issued against receipt of funds of an amount not lesser in value than the monetary value issued; (5) accepted as a means of payment by persons or entities other than the issuer; and (6) withdrawable in cash or cash equivalent.[6]

As early as 2009, the BSP has issued BSP Circular No. 649[7] or the Guidelines Governing Issuance of Electronic Money. Some of the objectives of the regulation are to foster the development of efficient and convenient retail payment and fund transfer mechanism in the Philippines, encourage the availability and acceptance of e-money as a retail payment medium, and ensure necessary safeguards and controls to mitigate the risks associated with e-money business.

A proposed bill on electronic money would be a good opportunity to improve and distill BSP’s 13-year administrative guidance into basic statutory rules or principles by amending relevant provisions of the New Central Bank Act. Incidentally, such proposed bill can incidentally address the legal issue on whether the BSP is authorized (or as a policy question, should the BSP be authorized?) to issue central bank digital currency (CBDC).

Central bank digital currency

One possible approach that the BSP may consider to be responsive to the rapidly developing digital economy is the issuance of a CBDC—a widely accessible digital form of fiat money that is legal tender. To enjoy the technological advantages of privately-issued cryptocurrencies, a central bank can consider the deployment of a centrally controlled CBDC to effectively compete with blockchain-based alternatives. The BSP would enjoy cost efficiency and scale while maintaining control over the supply of money, as well as the ability to enact rules and regulations to root out crime and other undesirable activities. CBDC is a new form of money, issued digitally by the central bank and intended to serve as legal tender. CBDC is not intended to have a physical form like cash. But as cash, it would be widely accessible to Philippine residents—and potentially to individuals and organizations abroad. [8]

In a report published by the BSP, the BSP tackled the legal aspects of issuing CBDC and examined the feasibility of issuing CBDC under the existing legal framework, i.e., the BSP Charter. According to the report, the BSP, under the existing legal framework, may further boost advancement of cash-lite economy through digital payments to create a more broad-based and critical mass of digital payments users in the Philippines. Most importantly, the expanded authority provided by the National Payment Systems Act[9] (NPSA) for the BSP to own and operate a payment system may be used as the legal framework to introduce the use of CBDC in wholesale form. A wholesale CBDC is a variant with restricted access that would be available only among financial intermediaries for settlement purposes.[10]

An interesting insight is that according to the BSP, the issuance of retail CBDC is not legally feasible under existing statutory framework. The main rationale is based on a strict interpretation of the definition of “currency” and “legal tender” under the BSP Charter. According to the report, the term “currency” which may be issued and circulated by the BSP refers only to physical banknotes and coins. Section 52 provides that only notes and coins issued by the BSP may be considered as legal tender for all debts in the Philippines. Sections 53, 54 and 56 specify the characteristics of the currency, requirements on the printing of notes and minting of coins, and replacement of currency unfit for circulation, which are all referring to physical banknotes and coins. Thus, CBDC do not fall within the purview of “currency” and “legal tender” as these terms are described under Republic Act No. 7653, as amended.[11]

Therefore, to authorize the issuance by the BSP of CBDC and in order for said form of currency to have the same standing as the BSP-issued banknotes and coins, there is a need to pass either (i) a separate law to grant explicit authority for the BSP to issue CBDC and issue, through the Monetary Board, rules and regulations governing its issuance and use, or (ii) amend existing laws, such as the New Central Bank Act or the NPSA, to provide explicit authority in favor of the BSP to issue a legal tender CBDC.

SEC. 2 Declaration of Policy

— It is hereby declared the policy of the State to recognize without regulating digital assets as a valid means of transaction and investment with the objective of harnessing digital assets for growth, development, financial inclusion, and poverty alleviation while maintaining the stability of the country’s economy, and protecting investors and the public concerned.

Comments:

We commend the declared policy of the proposed bill in providing legal certainty on the legitimacy, validity and legality of cryptocurrency-related transactions, recognizing the economic benefits of digital assets and its various use cases, as well as the emergence of digital assets as a new asset class for investment, but acknowledging the primacy of investor protection especially considering the unique characteristics of digital assets.

The legal certainty that will be brought by the enactment of the Digital Assets Act is important to alleviate any fear, uncertainty and doubt (“FUD”) on the future of digital assets. FUD can negatively influence the adoption of digital assets as well as their use cases and applications. Any perceived legal uncertainty can stymie innovation and discourage economic opportunities—which would be unfortunate especially if we take into account the potential role of cryptocurrencies and blockchain in the advent of the fourth industrial revolution.

Some of the important use cases for cryptocurrencies have been seen in countries that lack stable payment systems and are ravaged by hyperinflation, as well as in countries controlled by totalitarian regimes. In these places, cryptocurrencies emerged as an alternative financial system that enables payments, remittance and cross-border international value transfer without fear of censorship.[12] However, while cryptocurrencies promise a resilient, open and inexpensive alternative payment system, there are use cases of the technology that runs into conflict with existing legal and regulatory frameworks partly due to its decentralized, cross-border and pseudonymous nature. In fact, many blockchain protocols that govern cryptocurrencies were not necessarily programmed to align with relevant laws and regulations.[13]

Indeed, bad actors have discovered early that cryptocurrencies can be abused to facilitate crime and evade conventional laws and regulations. By using “mixers” and “tumblers,” they have also learned how to frustrate or at least delay law enforcement’s ability to trace and apprehend illicit actors by obfuscating the origin, beneficiary, amount and other data associated with their cryptocurrency transactions.[14] Advanced cryptographic techniques such as ring signatures and zero-knowledge proofs could further weaken the government’s capability to leverage transactions monitoring and blockchain analytics tools to detect crime and other nefarious activities.[15] While most cryptocurrencies are only pseudonymous, i.e., an account is recognized by a string of letters and numbers known as wallet address but its owner can still be ascertained through clever detective work, truly anonymous “digital cash” could eventually be created and its wide adoption could pose tougher challenges for governments that seek to control the flow of value across the globe.[16]

There are of course legitimate policy considerations in regulating cryptocurrency-based activities, especially in financial services, and discourage technologists and entrepreneurs from developing anonymous and uncontrollable cryptocurrencies designed to operate entirely outside the purview of the law. Crafting new regulations requires thoughtful consideration as heavy-handed policies could give rise to increased government surveillance, reduced financial privacy, and unintended consequences.[17] For example, an officious, bureaucratic and rigid licensing regime for virtual asset service providers (VASP), some of which are unacquainted with the rigors of financial service compliance, could encourage actors to go underground rather than embrace the clout of regulation.

We note however the phrase “without regulating” in the above draft Section 2. A careful reading of the proposed bill suggests that many of the provisions are regulatory in character, and the long title contemplates a registration requirement for digital asset enterprises. The phrase “without regulating” is ambiguous because it is unclear whether it implies the adoption of a light touch approach or it merely assures that virtual assets and virtual asset service providers should not be burdened by overregulation. We recommend either the refinement of Section 2 to better articulate the policy on regulation or the deletion of the phrase “without regulating” if only to make the current version of the policy section clearer.

SEC. 3. Definition of Terms

— The following terms shall mean:

(a) BSP means the “Bangko Sentral ng Pilipinas”

(b) Digital asset means e-money and virtual assets

Comments:

In view of our recommendation in Section 2 on the better policy approach, we recommend to remove the reference to “e-money” in the definition of virtual asset.

We further recommend the following definition for digital asset:

“(b) ‘Digital asset’ means any natively electronic asset that confers economic, proprietary or access rights or powers that is recorded using cryptographically secured distributed ledger technology, blockchain or any similar functional equivalent. Digital asset includes cryptocurrencies, cryptoassets, stablecoins (excluding electronic money), virtual assets, digital tokens, nonfungible tokens (NFTs), digital asset securities, and non-security digital assets.”

In commercial practice and in crypto communities, the term “cryptocurrency” is understood to be synonymous with terms such as “cryptoasset”, “digital asset”, “digital token”, “virtual asset,” and “virtual currency.” Their technical distinctions, if any, are practically irrelevant. With the exception of “virtual asset,”[18] we submit that these terms should be intended to be interchangeable with each other, even for legal purposes.

We propose a revision of this definition to also include nonfungible tokens (NFTs). This is practically important in view of the popularity and wide use of this particular type of digital asset in the Philippines.

The proposed revised definition also includes stablecoins in view of their rapid global adoption. One of the peculiar characteristics of conventional cryptocurrencies is the high volatility of their value in the token market. Stablecoins are designed to take advantage of cryptocurrency’s instant settlement feature and at the same time introduce stability to the value of the digital asset. A stablecoin is a special type of digital asset specifically engineered to ensure that it maintains its peg to a fixed target price. Stability of value may be achieved through various technology approaches, economic incentives or collateral arrangements.[19] Some stablecoins may be backed by legal tender (i.e., “fiat-backed”), commodity, or another cryptoasset. Fiat-backed stablecoins are usually redeemable for the underlying fiat currency, where one unit of the stablecoin can be exchanged for one unit of the underlying fiat currency. Other types of stablecoins may be more complex, decentralized, backed by a basket of assets, or managed by algorithm (i.e., algorithmic stablecoins).[20] A reliable stablecoin (i.e., consistently stable) could enable a variety of use cases in financial services.

Stablecoins have gained significant traction as medium of payment outside the conventional banking system, remittance, as a hedge against weak fiat currencies in economies marred by hyperinflation, and as a form of leverage in trading cryptoassets. However, it should be clarified that the term “stablecoin” does not suggest that the token’s value will always be stable, nor should it be construed as an endorsement or legal guarantee of the value or stability of these types of cryptoassets.[21]

Stablecoins, especially decentralized primitives like DAI, play a critical role in the decentralized finance (DeFi) ecosystem. Because they are designed to stabilize the value of a digital asset, many DeFi projects encourage the use of stablecoins in their platform due to their viability as a medium of exchange and unit of account within the DeFi ecosystem, as compared to other volatile cryptocurrency alternatives.[22] However, stablecoins present another round of challenges to regulators who are already grappling with general issues concerning cryptocurrencies[23] and the category-defying changes that cryptocurrency poses. An important policy question is whether the Congress should consider enacting a statute to regulate stablecoin issuers. This is a matter that is currently being considered in other jurisdictions like the United States and the European Union.

Lastly, the proposed revised definition specifically mentions “digital asset securities” (i.e., security tokens) and “non-security digital assets” to recognize that some digital assets, but not all, behave like securities or investment contracts. Therefore, only digital assets that partake the nature of a security should be regulated under the securities regulatory framework, while non-security digital assets should be treated by other applicable laws depending on their nature, function or underlying economic transaction.

Determining whether a digital asset is a security involves an assessment of economic realities and specific facts or circumstances, guided by the statutory definition of securities under Sec. 3.1 of the Securities Regulation Code, as well as jurisprudential tests like the Howey Test.[24] Most certainly, simply calling a digital asset a “utility” token or structuring the token to provide some utility does not prevent the token from being viewed as a financial instrument or a security. Tokens and offerings that incorporate investment features and marketing efforts that emphasize the potential for profits based on the entrepreneurial or managerial efforts of others contain the hallmarks of a security under existing securities law. The proposed bill should maintain coherence with existing laws, acknowledge the fact that not all digital assets partake the nature of a security, and this question must be assessed based on economic realities and specific facts or circumstances.

(c) “E-money” means a digital representations of fiat currency whose issue is backed by an equivalent fiat currency. It is an electronic store of monetary value on a technical device that may be widely used for making payments to entities other than the e-money issuer. The device acts as a prepaid bearer instrument which does not necessarily involve bank accounts in transactions.

(d) “E-money Issuer” refers to any entity which provides money transfer or remittance services using e-money.

Comments:

In view of our recommendation in Section 2 on the better policy approach, we recommend the deletion of items (c) and (d) as it would not be relevant to define “e-money” and “e-money issuer” considering the revised definition of “digital asset” that would exclude electronic money within the scope of the defined term.

(e) “SEC” means the Securities and Exchange Commission.

(f) “Virtual asset” means virtual currency and virtual token.

Comments:

We recommend that the above definition of virtual asset be revised and BSP’s definition of the term in BSP Circular No. 1108[25] be adopted instead with some refinements:

“Virtual asset” means any type of digital asset that can be digitally traded, or transferred, and can be used for payment or investment purposes. It can be defined as a ‘property,’ ‘proceeds,’ ‘funds,’ ‘funds or other assets, and other ‘corresponding value.’ It is used as a medium of exchange or a form of digitally stored value created by agreement within the community of virtual asset users. Virtual asset shall be broadly construed to include digital units of exchange that either (i) have a centralized repository or administrator; (ii) are decentralized and have no centralized repository or administrator; or (iii) may be created or obtained by computing or manufacturing effort. For purposes of this Act, digital assets that are used for (i) payment of goods and services solely provided by its issuer or a limited set of merchants specified by its issuer (e.g., gift checks); (ii) payment of virtual goods and services within an online game (e.g., gaming tokens); (iv) nonfungible tokens that are not used for payment or investment purposes or (iii) central bank digital currencies or those issued or guaranteed by any sovereign jurisdiction shall not be considered as virtual asset.

Within the scope of BSP’s regulatory framework—specifically the Guidelines for Virtual Asset Servicer Providers, the concept of “virtual asset” or “VA” is defined as “any type of digital unit that can be digitally traded, or transferred, and can be used for payment or investment purposes.” BSP also regards VA as “property”, “proceeds”, “funds or other assets” and other “corresponding value”, which can be used as a medium of exchange or a form of digitally stored value—whether issued by a central administrator or by a decentralized network.[26]

BSP Circular No. 1108 excludes from the material scope of its regulation digital units that are used for “payment of goods and services solely provided by its issuer or a limited set of merchants specified by its issuer (e.g. gift checks).” It further excludes digital units for the payment of virtual goods and services within an online game (e.g. gaming tokens). This is consistent with the FATF’s Guidance that also excludes closed-loop items that are non-transferable, non-exchangeable, or non-fungible within the meaning of VA. Such closed-loop items might include airline miles, credit card awards, or similar loyalty program rewards or points, as long as their owner cannot sell them in a secondary market.[27] Non-fungible tokens are also generally excluded from the FATF definition of virtual asset, unless they are used for payment or investment purposes.[28]

The term “virtual asset” should also not be construed to include digital representations of fiat currencies that are issued or guaranteed by any jurisdiction (e.g. central bank digital currency or CBDC). However, in the above proposed definition, we refined BSP’s definition (adopted from the FATF definition) to delete the clause pertaining to lack of legal tender status as an essential characteristic of virtual assets. This qualification could produce confusion in view of the fact that bitcoin, the first and most valued cryptocurrency, is already considered legal tender in other jurisdictions such as El Salvador and Central African Republic. If not modified, the definition could potentially give rise to the issue on whether bitcoin is considered virtual asset under the proposed Digital Assets Act, defeating the purpose of the proposed bill to offer statutory clarity on the legal status of cryptocurrencies.

(g) “Virtual asset business” means any of the following businesses: (i) virtual asset exchange, (ii) virtual asset broker, (iii) virtual asset dealer, (iv) other businesses related to virtual assets;

Comments:

We recommend that the above definition be revised and the term “Virtual Asset Service Provider” (VASP) be adopted along with the five classifications or categories of VASP as formulated by the Financial Action Task Force as early as 2018:

(g) “virtual asset service provider” means any natural or juridical person who as a business actively facilitates one or more of the following activities or operations for or on behalf of another natural or juridical person:

(i) exchange between virtual assets and fiat currencies;

(ii) exchange between one or more forms of virtual assets;

(iii) transfer of virtual assets, which refers to actively facilitating a transaction on behalf of another person to move a virtual asset from one virtual asset wallet or account to another;

(iv) Safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and

(v) Participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.

The term virtual asset service provider excludes: (i) hardware manufacturers of virtual asset wallets; (ii) manufacturers of automated teller machines for virtual assets; (iii) unhosted or non-custodial wallets where the user controls the private keys; (iv) software developers or any person who merely develops or sells a software, application or platform for virtual assets; (v) any person or entity that solely validates virtual asset transactions such as miners and validator nodes; (v) other ancillary participants such as internet service providers and cloud service providers.

In accordance with the FATF Guidance for virtual assets (VA) and VASPs, there are two key elements to qualify as a VASP: (1) there is a provider that actively facilitates VA-related activities; and (2) the provider acts as a business on behalf of the customers.[29] The business element requires that the service must be for a commercial purpose and done on a regular or habitual basis, and excludes those who carry out a virtual asset-related function on rare occasions or a “very infrequent basis” for non-commercial reasons.[30]

In assessing whether an entity should be considered as a VASP, the activities and functions performed should be considered—regardless of the technology used. An entity can be a VASP, whether they use a decentralized or centralized platform, smart contract, or some other mechanism. For example, when a decentralized application (dApp) actively facilitates or conducts the exchange or transfer of value (whether in VA or traditional fiat currency), the dApp, its owner/operator(s), or both could potentially fall under the definition of a VASP. Even the individuals who developed a decentralized VA payment system may be treated as a VASP when they engage as a business in actively facilitating or conducting the payments.[31] Whether a platform is centralized or decentralized may be a key aspect in assessing the money laundering and terrorist financing risk; but this question is not necessarily a controlling factor in the VASP analysis, and in theory it is possible for a so-called “decentralized” application or platform to be treated as a VASP.

Neither the FATF Guidance nor the BSP Guidance for VASPs seek to regulate the technology that underlies virtual assets. The VASP regime intends to regulate the persons or actors that operate such technology or software applications to actively facilitate financial activity or conduct as a business certain VA activities on behalf of another person.[32] Therefore, as a safe harbor for software developers, any person who develops or sells either a software application of a new VA platform should not be considered VASP when solely developing or selling the application or platform because writing code or software development does not necessarily actively facilitate virtual asset transactions nor imply that they are engaged in business.

To expand the VASP regime to cover software developers could offend the constitutional guarantee of free speech. In Bernstein v. US Department of Justice,[33] the United States Federal Court of Appeals ruled that software code is a type of speech that is protected by the First Amendment, and the government’s regulation preventing the code’s publication was unconstitutional. While not a binding precedent, Bernstein is regarded as a landmark case in the United States and therefore persuasive. The decision supports the view that any law or regulation that will require the licensing of virtual asset software development would be repugnant to the constitutional protection for free speech, of expression, or the press.[34] The particular medium through which ideas are expressed is generally immaterial to the protection, and even if it is a gibberish or visual chaos.[35] To deny statements made in coding languages the same protections granted to statements made in English would make no more sense than to deny novels protection when they are written in French, symphonies because they are written in musical notation, or scientific papers because they tend to be filled with arcane graphs and formulae.[36] Computer code is literally a written series of symbols themselves, i.e., letters and numbers or, once compiled, 0s and 1s. While it is true that people will use computer source code to perform actions, the act of writing and sharing the code is an entirely separate act from the act of executing the code.[37]

Moreover, those who provide ancillary or incidental services or products to a blockchain or virtual asset networks, such as internet service providers, cloud service providers, hardware wallet manufacturers, manufacturers of crypto automated teller machines (ATM) and non-custodial or unhosted wallets,[38] should also not be regarded as VASP, as long as they do not actively facilitate as a business any VASP activities for their customers.[39] Finally, it is important to clarify that any person or entity that solely validates virtual asset transactions, such as cryptocurrency miners and operators of validator nodes in proof-of-stake networks, should not be regarded as providing a virtual asset service.¯

With respect to VASPs engaged in the transfer of virtual assets, the term “transfer” refers to the conduct[40] of a transaction on behalf of another person that moves a virtual asset from one virtual asset address or account to another.[41] Therefore, this type of VASP contemplates those who operate as intermediary to actively facilitate the transfer of VA. Virtual asset transfer as a VASP activity should not be interpreted to cover literally all activities that involved transfer of virtual assets especially where no intermediary is involved and the transfer is executed directly through the blockchain or via code or smart contract. [42]Thus, an unhosted or non-custodial wallet that allows its user to transfer virtual assets to another wallet address by using the user’s private key should not be regarded as engaged in virtual asset transfer.

(h) “virtual asset exchange” means a center or a network established for the purposes of trading or exchanging of virtual assets, which operates by matching orders or arranging for the counterparty or providing the system or facilitating a person who wishes to trade or exchange virtual assets to be able to enter into an agreement or match the order, in the normal course of business.

Comments:

Considering the vagueness of the term “virtual asset exchange”, we recommend to replace the term with “virtual asset trading platform.”

The term virtual asset “EXCHANGE” can be understood in two different senses: (a) the conversion of virtual asset; or (b) a marketplace where virtual assets are traded. The first sense is akin to money changing and therefore can be regarded under certain circumstances as money service business, which is a financial service regulated by the BSP as provided in its charter.[43] The second sense is akin to a trading venue or facility where the sale or purchase of securities are transacted.

With respect to exchange as a money service business (MSB), there is legal uncertainty on whether the exchange of virtual asset to fiat currency (or vice versa) and the exchange of virtual asset to another virtual asset fall within the regulatory ambit of the BSP. With respect to exchange as a marketplace, it is also uncertain whether the exchange registration requirements under the Securities Regulation Code apply to virtual asset trading platforms,[44] regardless of whether the listed assets are digital asset securities or non-security digital assets. The enactment of the Digital Assets Act would therefore be a good opportunity to confirm, clarify and define the regulatory perimeters of agencies such as the BSP and SEC when it comes to virtual asset exchange activities.

We submit that the virtual asset “exchange” that should be regulated by the BSP must be limited only to intermediaries that actively facilitate the conversion of virtual assets to fiat currency (or vice versa). Indeed, BSP Circular No. 1108 requires certain VASPs to register with the BSP and secure a Certificate of Authority to operate as MSB.[45] We recommend that the proposed bill introduce a statutory definition that will explicitly include the conversion of virtual asset to fiat currency (or vice versa) among the money service business regulated by the BSP. This is important considering that BSP’s traditional definition of MSB does not seem to accurately cover virtual asset exchange. In various circulars issued by the BSP, including BSP Circular No. 1108, money service business is defined as “the acceptance of cash, checks, other monetary instrument 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 to which the service provider belongs.”[46]

On whether the Digital Assets Act should confirm BSP ‘s authority to regulate “crypto-to-crypto” exchange activities within the scope of money service business, we submit that this policy question should be carefully studied to avoid overregulation. The monetary policy implications seem remote and theoretical when the exchange transaction does not include Philippine peso or any fiat currency and is limited only to a purely crypto-to-crypto exchange transaction. At any rate, we believe that the BSP is in the best position to address this policy question.

The Monetary Board has the power to authorize entities to engage in MSB.[47] The BSP’s supervisory authority over MSB has been reaffirmed in Section 3 of the New Central Bank Act, as amended by R.A. No. 11211 in 2019. Section 3 provides that as may be determined by the Monetary Board, the BSP exercises regulatory and examination powers over MSB.[48]

BSP regards certain VASPs as money service business under the theory that once fiat currency is exchanged or converted into a virtual asset, it becomes easily transferrable, facilitating expedient movement or transfer of funds and payment service.[49] However, it should be emphasized that this does not mean that BSP should oversee and regulate all kinds of digital asset enterprises or all categories of VASPs. That the BSP is the regulator of all types of VASPs and all crypto-related ventures is a common misconception in commercial and industry practice, which the proposed Digital Assets Act can finally clarify.

In fairness to the BSP, the Guidelines for VASPs specifically excludes VASP who are involved in the participation and provision of financial services related to an issuer’s offer or sale of a virtual asset. In our view, such activity could fall within the regulatory perimeter of the Securities and Exchange Commission (SEC) if the virtual asset partakes the nature of a security, as this would be analoguous to investment banking that is governed by the Investment Houses Law.[50] BSP’s VASP regulation also does not apply to entities solely acting on their own behalf, or those who do not act, as a business, on behalf of customers to facilitate virtual asset-related activities.[51]

BSP’s regulatory authority when it comes to VASPs should not be interpreted to include marketplace or trading facilities that bring together purchasers and sellers or for performing functions commonly facilitated by securities exchange, i.e., the trading of virtual assets that are in the nature of security, crypto derivatives and other synthetic virtual assets that behave like securities; this specific type of VASP and their activity may be covered by the existing provisions of the Securities Regulation Code[52] administered by the SEC.

With respect to virtual asset exchange as a marketplace, we are of the opinion that the SEC currently has no jurisdiction to regulate the buying and selling of nonsecurity digital assets such as bitcoin (BTC) or ether (ETH) on spot market, even when the transaction is executed through a trading venue or platform. The SEC’s regulatory oversight comes into the picture when a crypto exchange facilitates the trading of a security token by listing them in the platform. The SEC’s jurisdiction is also triggered if a VASP, through its website, mobile application or other means, facilitates the distribution of a security token within the Philippine market as when a custodial wallet service provider allows the storage and transfer of a security token.

Whether the SEC should be granted additional authority to regulate non-security digital assets (i.e., commodity tokens or digital commodities) is an important policy question. But even if Congress decides to designate the SEC as regulator of virtual asset trading platforms, we believe it would be crucial to clarify that this would not automatically mean that virtual assets or digital assets will now be legally treated as securities. The existing statutory definition of a security under the Securities Regulation Code, complemented by jurisprudential guidelines such as the Howey Test, should still be employed in assessing the characteristics of a digital asset, and it is only when a digital asset behaves like a security that it should be regulated as a security.

Under the current state of the law, the SEC performs various administrative and regulatory functions apart from securities and exchange regulation. The SEC currently functions as the Philippines’ corporate registry. The SEC also regulates lending companies and financing companies, even though these companies may only have remote or incidental relation to securities transactions. In itself, we do not see it as a policy issue to increase the SEC’s supervisory function to cover virtual asset trading platforms and other categories of VASPs for as long as this approach would not be construed to mean that digital assets constitute securities and that virtual asset trading platforms should be regulated as securities exchange under the Securities Regulation Code. Whether a particular virtual asset trading platform should register as a securities exchange or as an alternative trading system (ATS) depends on whether the platform actively allows the listing of security tokens or digital asset securities for trading.

(i) “virtual asset broker” means a person who provides services or holds itself to the public as available to provide services as a broker or an agent for any person with respect to the trading or exchange of virtual assets in the normal course of business, in consideration of a fee or other remuneration.

Comments:

We propose to specifically exclude from the definition of a broker any person or entity that solely validates virtual asset transactions. This proposed exclusion, inspired by a similar provision in U.S. Senate Bill 4760,[53] is designed to ensure that cryptocurrency miners and operators of validator nodes will not be regarded as brokering the transaction. We therefore suggest to amend the definition of virtual asset broker to read as follows:

“(i) ‘virtual asset broker’ means a person who provides services or holds itself to the public as available to provide services as a broker or an agent for any person with respect to the trading or exchange of virtual assets in the normal course of business, in consideration of a fee or other remuneration, excluding any person or entity that solely validates virtual asset transactions.”

(j) “Virtual asset dealer” means a person who provides services or holds itself out to the public as available to provide services with respect to the trading or exchange of virtual assets for its own account in the normal course of business outside the virtual asset exchange.

Comments:

In the same vein, we propose to specifically exclude from the definition of a dealer any person or entity that solely validates virtual asset transactions. This proposed exclusion, is also designed to ensure that cryptocurrency miners and operators of validator nodes will not be regarded as dealing with virtual asset transactions. We therefore suggest to amend the definition of virtual asset dealer to read as follows:

“(j) ‘Virtual asset dealer’ means a person who provides services or holds itself out to the public as available to provide services with respect to the trading or exchange of virtual assets for its own account in the normal course of business outside the virtual asset exchange, including market makers, but excluding any person or entity that solely validates virtual asset transactions.”

It will be observed that we also included market makers within the scope virtual asset dealer and this is important considering how ubiquitous market makers are in the cryptocurrency market. Market making is defined by the Implementing Rules of the Securities Regulation Code (SRC Rules) as transactions by a broker dealer “to ensure two way quotes, provide liquidity, and maintain a fair and orderly trading market therein.”[54] We must emphasize that the above rules only apply to market making transactions in securities markets, and not necessarily in crypto markets, but the updated definition of virtual asset dealer ensures that market makers for virtual assets are also regulated to some extent.

“virtual currency” means an electronic data unit created on an electronic system or network for the purpose of being used as a medium of exchange for the acquisition of goods, services or any other rights, or the exchange between virtual assets, and shall include any other electronic data units.

Comments:

Considering our proposal to amend the definition of the term “virtual asset,” there is no legal or practical benefit in further defining the term “virtual currency.” In practice, the two terms are interchangeable and synonymous to each other. Therefore, we propose to delete this definition.

(l) “virtual token” means an electronic data unit created on an electronic system or network for the purpose of: (i) specifying the right of a person to participate in an investment in any project or business; (ii) specifying the right of a person to acquire specific goods, specific service, or any specific other right under an agreement between the issuer and the holder, and shall include any other electronic data units of right.

Comments:

In relation to our proposal to amend the definition of the term “virtual asset,” there is no legal or practical benefit in further defining the term “virtual token” as the concept should be understood to be encompassed by the term “virtual asset,” which is a specie of digital asset. We therefore propose the deletion of this definition.

(m) “virtual token portal service provider” means a provider of an electronic system for an offering of newly issued virtual tokens who is responsible for screening the characteristics of virtual tokens to be offered, qualifications of the issuer and the completeness and accuracy of registration statement and draft prospectus for the offering of virtual tokens or any other information to be disclosed through such provider.

Comments:

Considering our proposal to adopt the FATF definition of the term “virtual asset service provider,” the concept of virtual token portal service provider can now be deleted because it is already encompassed by the fifth category of VASP, namely the provision of financial services related to an issuer’s offer and/or sale of a virtual asset. Many are also unfamiliar with the term “virtual token portal service provider” which is seldom used in commercial and industry practice, hence deleting this definition could enhance clarity of the proposed regulation.

SEC. 4. BSP as Lead Agency for E-Money

– The BSP shall be in charge of the exercise of powers under this Act over the operation of E-money and shall have the power to issue notifications and perform duties in accordance with this Act;

Comments:

In view of our recommended “better policy” approach to separate the provisions on electronic money from the proposed Digital Assets Act, we therefore recommend the deletion of this section.

SEC. 5. SEC as Lead Agency for Virtual Assets. — The SEC shall be in charge of the exercise of powers under this Act over the offering and issuance of virtual assets, and the operation of virtual asset businesses. The SEC shall have the power to issue notifications and perform duties in accordance with this Act.

Comments:

We propose to revise this section to delineate the regulatory perimeters of the SEC and the BSP with respect to VASPs. As mentioned in our comments above, some VASPs that essentially perform money service business should be regulated by the BSP, consistent with the provisions of the BSP Charter. On the other hand, some VASPs that provide services relating to securities transactions (e.g., virtual asset trading platforms for digital asset securities) should fall within the regulatory ambit of the SEC, consistent with the Securities Regulation Code. However, there are categories of VASPs that do not exactly fit within the regulatory scope of neither the BSP nor the SEC, requiring statutory clarification from Congress.

We therefore recommend the following changes to the draft Section 5:

SEC. 5. Regulation of Virtual Asset Service Providers

— The SEC shall be in charge of regulating virtual asset trading platforms, virtual asset brokers, virtual asset dealers, and those who provide financial services relating to an issuer’s offer and/or sale of a virtual asset, without prejudice to the SEC’s supervisory role on digital asset securities in accordance with Republic Act. No. 8799 or the Securities Regulation Code, as amended: provided that, the SEC’s supervisory authority over the abovementioned virtual asset service providers shall not be construed as conclusive assessment that virtual assets and other digital assets are securities in the absence of specific facts and circumstances that would indicate otherwise.

The BSP shall exercise supervisory function over virtual asset exchange activities that constitute money service business. For purposes of clarity, the following virtual asset service are hereby declared to constitute money service business: (i) exchange between virtual assets and fiat currencies; (ii) exchange between one or more forms of virtual assets; (iii) transfer of virtual assets, which refers to actively facilitating a transaction on behalf of another person to move a virtual asset from one virtual asset wallet or account to another; and (iv) safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets.

With respect to items (ii) exchange between one or more forms of virtual assets and (iv) safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets, it may be controversial whether these activities partake the nature of money service business. We defer to the Congress’s sound discretion in determining the appropriate policy for these activities and whether they should be considered money service business.

SEC 6. Scope

— Securities pursuant to the law governing securities and exchange shall not be regarded as virtual currency or virtual token under this Act. Virtual asset business operators and virtual token portal service providers under this Act shall be regarded as financial institutions under RA No. 9160 also known as the Anti-Money Laundering Act.

Comments:

We respectfully request for guidance and information on the rationale of the first part of this section. In the absence of information, we assume that the intention of the first sentence is to differentiate security tokens (i.e., digital asset securities) from virtual currency (i.e., payment tokens) and virtual tokens (i.e., commodity or utility tokens). If our assumption is correct, we would recommend what we believe would be a better wording for this clause. We believe it is important to recognize that not all digital assets should be considered as security. This is especially necessary in the event the Congress decides to designate the SEC as regulator of certain virtual asset services, which designation could give rise to a misconception that virtual assets are securities, no ifs and buts.

Further, we recommend that the second sentence of Section 6 be amended by adopting the technical term “virtual asset service providers.” In the latest guidance, the FATF recommended the inclusion of VASPs as a covered person for purposes of anti-money laundering regulation. Further, we recommend the adoption of the term “covered person” instead of “financial institution” to be consistent with the statutory definitions of the Anti-Money Laundering Act (AMLA). Finally, it would be convenient to amend the definition of covered persons under the AMLA by including VASP within the close list. Therefore, we recommend the following amended version of Section 6:

SEC 6. Scope. — Notwithstanding the SEC’s supervisory role with respect to certain virtual asset service providers as provided in the preceding section, a digital asset shall not be presumed to be a security, unless economic realities and specific facts or circumstances indicate otherwise.

Virtual asset service providers shall be regarded as a covered person under Republic Act No. 9160, otherwise known as the Anti-Money Laundering Act, as amended. For this purpose, Section 3 of the same Act is hereby amended to read as follows:

“SEC. 3. Definitions. — For purposes of this Act, the following terms are hereby defined as follows:

“(a) ‘Covered persons,’ natural or juridical refer to:

“(1) x x x;

“(11) virtual asset service providers.”

SEC. 7. Transfer of Virtual Assets

— In case where delivery, transfer, holding or return of cryptocurrencies or virtual tokens is required, virtual currencies or virtual tokens of the same category and type and of equal amount shall be fungible.

Comments:

We respectfully request for guidance and information on the rationale of this section. Until then, we will reserve our comments on this proposed rule.

SEC. 8. Operation of E-money Issuers

— For the purpose of supervision and monitoring of E-money Issuers, the BSP shall have the duty and power to establish the policies relating to the promotion and development as well as supervision and monitoring of E-money and E-money issuers as prescribed under this Act. Such power and duty shall include:

(a) the issuance of rules, regulations, notifications, orders or directives on the operation of E-money Issuers;

(b) the determination of fees for an application for a license or permit, granting of a license or permit, application for a permission, granting of a permission, filing of registration statements for offering of virtual tokens, filing of annual registration statements, other applications or undertaking of businesses under a license, license or permission;

(c) the prescription of criteria as a guideline for the consideration to address any potential issues which may arise from the enforcement of this Act;

(d) any other activities to be implemented according to the objectives of this Act.

Comments:

In the light of our recommended “better policy” approach, we recommend the deletion of this section and that the same be consolidated as part of a separate bill that will govern the regulation of electronic money issuance.

At any rate, we believe that the BSP’s regulatory ambit when it comes to currency substitutes under Section 50 of the New Central Bank Act is broad enough to authorize BSP to regulate electronic money and electronic money issuers. The powers and duties listed are administrative in character and may be omitted without limiting the authority of the BSP to regulate electronic money as currency substitute. We note however that some clauses in item (b) seem misplaced considering that electronic money issuers do not facilitate virtual asset transactions. Even if adopted, item (b) should be corrected in this wise:

(b) the determination of fees for an application for a license or permit, granting of a license or permit, application for a permission, granting of a permission, filing of registration statements for offering of virtual tokens, filing of annual registration statements, other applications or undertaking of businesses under a license, license or permission;

SEC. 9. Offering and Issuance of Virtual Assets

— For the purpose of supervision and monitoring of the issuance and offering of virtual tokens and the undertaking of virtual asset businesses, the SEC shall have the duty and power to establish the policies relating to the promotion and development as well as supervision and monitoring of virtual assets and virtual asset business operators as prescribed under this Act. Such power and duty shall include:

(a) the issuance of rules, regulations, notifications, orders or directives on issuance and offering of virtual tokens and virtual asset businesses;

(b) the determination of fees for an application for a license or permit, granting of a license or permit, application for a permission, granting of a permission, filing of registration statements for offering of virtual tokens, filing of annual registration statements, other applications or undertaking of businesses under a license, license or permission;

(c) the prescription of criteria as a guideline for the consideration to address any potential issues which may arise from the enforcement of this Act;

(d) any other activities to be implemented according to the objectives of this Act.

Comments:

In view of our recommended changes in Section 5 and Section 6, we propose for the deletion of this proposed section.

With respect to the issuance of virtual assets, it is our position that the SEC should only regulate (a) the issuance of digital asset securities in line with the registration requirement of the Securities Regulation Code; and (2) virtual asset service providers that offer financial services relating to an issuer’s offer and/or sale of a virtual asset (whether the virtual asset is a security or otherwise). Considering the various means by which virtual assets are issued, some of which do not have a central issuer and the assets are issued according to the network’s consensus algorithm (e.g., bitcoin and ether), it will not be a good policy to legally require the carte blanche regulation of the issuance of virtual assets.

SEC. 10. Disclosure of Information

— To protect the public interest or investors, the SEC shall have the duty to disclose the information relating to any violation and penalty imposed on such person who commits an offence under this Act, including any other information obtained in the performance of duties under this Act.

Comments:

We support the approval of this proposed rule. Our only recommendation is to expand the requirement to cover the BSP in relation to certain virtual asset service providers that it regulates. We therefore suggest the following minor change to Section 10:

SEC. 10. Disclosure of Information. — To protect investors, financial consumers and public interest in general, the SEC and the BSP shall have the duty to disclose any information relating to any violation and penalty imposed on such person who commits an offence under this Act, including any other information obtained in the performance of their supervisory duties under this Act.

SEC. 11. License to Operate E-money Issuers

—only the BSP shall issue a license to operate E-money Issuers. Any natural or juridical person may obtain a license to operate E-money Issuers by filing an Application for Registration and Notarized Deeds of Undertaking to the BSP. The BSP shall Issue the corresponding license upon fulfillment of the registration requirements. The E-money issuer shall commence operations within three (3) months from the date of issuance of the license. The E-money Issuer should register with the Anti-Money Laundering Council Secretariat (AMLCS) within thirty (30) calendar days from the actual commencement of business operations.

Comments:

In the light of our recommended “better policy” approach, we recommend the deletion of this section and that the same be consolidated as part of a separate bill that will govern the regulation of electronic money issuance.

SEC. 12. License to Offer Virtual Tokens

— Only the SEC shall issue a license to offer newly issued virtual tokens to the public. Any natural or juridical person may obtain a license to offer virtual tokens by filing a registration statement and a draft prospectus to the SEC. The offeror of virtual tokens shall prepare and submit the following information to the SEC:

(a) reports concerning the results of business operation and the financial conditions;

(b) any information which may affect the rights and interests of virtual token holders or the decision-making on investment or the change in the price or value of virtual token.

The SEC shall have the power to specify in a notification the categories of virtual tokens or the characteristics of the offering of virtual tokens which shall be exempt from the requirement to submit a filing of the registration statement for an offering of virtual tokens and the draft prospectus under this Section.

Comments:

With respect to the issuance of virtual assets, it is our position that the SEC should only regulate (a) the issuance of digital asset securities in line with the registration requirement of the Securities Regulation Code; and (2) virtual asset service providers that offer financial services relating to an issuer’s offer and/or sale of a virtual asset (whether the virtual asset is a security or otherwise).

Considering the various means by which virtual assets are issued, some of which do not have a central issuer and the assets are issued according to the network’s consensus algorithm (e.g., bitcoin and ether), it will not be a good policy to legally require the carte blanche regulation of the issuance of virtual assets.

We therefore recommend to restrict the scope of this proposed to cover only the offering of digital asset securities. This section should be intended to provide special registration requirements for digital asset securities, while the Securities Regulation should only apply in suppletory character. Taking this policy approach will address the problem of “square peg in a round hole,” where the applicability of existing registration rules to security tokens is merely theoretical but practically impossible in view of the unique attributes of virtual assets and the dynamics of their issuance. We therefore suggest Section 12 to read as follows:

SEC. 12. License to Offer Digital Asset Securities or Security Tokens. — Only the SEC shall issue a license to offer newly issued digital asset securities or security tokens to the public. Any natural or juridical person may obtain a license to offer digital asset securities by filing a registration statement and a draft prospectus to the SEC. The offeror of digital asset security shall prepare and submit the following information to the SEC:

(a) reports concerning the results of business operation and the financial conditions;

(b) any information which may affect the rights and interests of security token holders or the decision-making on investment or the change in the price or value of the digital asset security.

The SEC shall have the power to specify in a notification the categories of digital asset securities or the characteristics of the offering of digital asset securities which shall be exempt from the requirement to submit a filing of the registration statement for an offering of security tokens and the draft prospectus under this Section.

SEC. 13. License to Operate Virtual Asset Business

— Only the SEC shall issue a license to operate a virtual business. The application for the license and the issuance of the license shall be in accordance with the rules, procedures and conditions as specified by the SEC and is subject to payment of the application and license fees.

In operating virtual asset business, a business operator shall comply with the rules, procedures and conditions as specified by the SEC, taking into account the following matters:

(a) sufficient financial resources for the conduct of and risks associated with its operations;

(b) safety of its clients’ assets;

(c) security measures against electronic crime, which are capable of protecting the computer system and computer data as well as the management of risks associated with crime or other causes;

(d) appropriate accounting systems for the business and auditing by the auditor approved by the SEC;

(e) know-your-client measures, client due diligence process and measures against financial assistance to terrorists or money laundering.

Where it is necessary to maintain the economic and financial stability of the country, or to protect the public interest, the SEC shall have the power to specify conditions with which the licensed business operator shall be required to comply in operating the virtual asset business.

Any virtual asset business operator who has operated a virtual asset business prior to the date on which this Act come into force and whose business requires a license under this Act shall submit an application for the license as prescribed in this Act within ninety days from the date on which this Act comes into force if it intends to continue to operate the business. Upon submission of the application for the license, such operator may continue to operate such business until the application is rejected.

Comments:

In view of our recommended changes in Section 5 and Section 6, we propose for the deletion of this proposed section.

SEC. 14. Cessation of Virtual Asset Business

— Any virtual asset business operator who wishes to cease operating a virtual asset business for which it has been granted a license shall apply for an approval to cease its business operations from the SEC. In granting the approval, the SEC may specify any conditions.

If any virtual asset business operator has ceased its business operations, it shall complete the purchase, sale or exchange of virtual assets, settlement and delivery of any outstanding transaction.

If it appears that a virtual asset business operator does not operate the virtual asset business for which it has been granted a license within the period specified by the SEC or suspends its operations for a period of time which is longer than those specified by the SEC, the SEC, shall have the power to revoke the license of such operator.

Comments:

In view of our recommended changes in Section 5 and Section 6, we propose the deletion of this proposed section. Moreover, we believe that this Section is mainly administrative and it would be a better policy to defer this matter to the sound discretion of the BSP and the SEC.

If the Congress would deem it wise to adopt this Section, we would recommend the refinement of the sentence: “In granting the approval, the SEC may specify any conditions.” To state that the SEC may specify “any conditions” without providing any criteria or guideline would fail the sufficient standard test and constitute undue delegation of legislative power. A sufficient standard would ensure that the SEC’s authority is properly mapped out, guiding them on how the delegated authority should be effected, and avoid a roving commission and the unnecessary transfer of legislative power to the SEC whose function should be limited only to filling in the gaps in the execution of the law. Thus, in the case of Ynot v. Intermediate Appellate Court,[55] the Supreme Court declared Executive Order No. 626 unconstitutional because it allowed confiscated carabeef and carabaos to be distributed to institutions and deserving farmers as the Chairman of the National Meat Inspection Commission “may see fit.” According to the Court:

“One searches in vain for the usual standard and the reasonable guidelines, or better still, the limitations that the said officers must observe when they make their distribution. There is none. Their options are apparently boundless. Who shall be the fortunate beneficiaries of their generosity and by what criteria shall they be chosen? Only the officers named can supply the answer, they and they alone may choose the grantee as they see fit, and in their own exclusive discretion. Definitely, there is here a ‘roving commission,’ a wide and sweeping authority that is not ‘canalized within banks that keep it from overflowing,’ in short, a clearly profligate and therefore invalid delegation of legislative powers.”[56]

SEC. 15. Regulation of Virtual Asset Business

— If it appears that the financial condition or operations of a virtual asset business operator is in such condition which may cause damage to the public, or a virtual asset business operator violates or fails to comply with the prescribed rules, procedures and conditions, the SEC may order the virtual asset business operator to rectify it within the specified period of time. If the virtual asset business operator fails to comply, the SEC may order the virtual asset business operator to temporarily suspend its operations either in whole or in part within the specified period of time for the rectification. In this regard, the SEC may also specify any condition to be complied with by the virtual asset business operator for the purpose of rectifying the financial conditions or operations of such virtual asset business operator. If the virtual asset business operator fails to comply, or in the case of repeated non-compliance, the SEC may consider revoking its license. In this regard the SEC, may order the virtual asset business operator whose license is revoked to take any action to protect the interest of its clients.

Comments:

In view of our recommended changes in Section 5 and Section 6, we propose for the deletion of this proposed section. Moreover, we believe that this Section is mainly administrative and it would be a better policy to defer this matter to the sound discretion of the BSP and the SEC.

SEC. 16. Revocation of License to Operate Virtual Asset Business

— Where there is evidence that the financial condition or operations of any virtual asset business operator is in such condition which may cause serious damage to the public and such business operator is unable to rectify its financial condition or operations, the SEC shall have the power to revoke its license. In this regard, the SEC may order the virtual asset business operator whose license is revoked to take any action to protect the interest of its clients.

Comments:

In view of our recommended changes in Section 5 and Section 6, we propose for the deletion of this proposed section. Moreover, we believe that this Section is mainly administrative and it would be a better policy to defer this matter to the sound discretion of the BSP and the SEC.

We believe there is no need to expressly state the SEC’s authority to revoke the registration or license granted to a VASP. The authority to revoke is necessarily implied from the authority to grant a license.[57]

SEC. 17. Protection of Virtual Asset Clients

— No virtual token business operator in the category of virtual asset broker, including its staff members or employees who are aware or in possession of information related to any order for purchase or sale of any virtual assets or derivatives related to such virtual assets of any client of such business operator, shall take any of the following actions, either for the their own benefit or for the benefit of any other persons, in any manner that is likely to cause a disadvantage to the client:

(a) placing, modifying, or cancelling an order for purchase or sale of virtual assets or derivatives related to such virtual assets by taking advantage of doing so before the order of such client is completely executed;

(b) disclosing information related to the order of such client to any other person where they know or ought to know that such other person would rely on such information in placing, modifying or cancelling any order for purchase or sale of virtual assets or derivatives related to such virtual assets before the order of such client is completely executed.

Comments:

We support this provision for ensuring that front-running and insider trading are prohibited even though the underlying virtual asset may not necessarily be a security. Front-running is the “practice of trading on leaked information before the event on which the information is based has been realized, thus making the trade on which the information was based more expensive or less lucrative.”[58] This rule is also consistent with the policy of Section 34 of the Securities Regulation Code, “to prevent ‘front-running’, a market malpractice whereby brokers, also acting as dealers, prioritize their own dealer accounts by executing their own orders on a particular issue ahead of their clients.”[59]

We also propose that the anti-fraud provision in Section 26 of the Securities Regulation Code be incorporated in this Section. Hence, in addition to suggested refinements, we recommend the following changes to Section 16:

SEC. 17. Protection of Virtual Asset Clients. — No virtual asset service provider, virtual asset broker, or virtual asset dealer, including its staff members or employees who are aware or in possession of information related to any order for purchase or sale of any virtual assets or their derivatives shall take any of the following actions, either for the their own benefit or for the benefit of any other person, in any manner that is likely to cause a disadvantage to the client:

(a) place, modify, or cancel an order for purchase or sale of virtual assets or their derivatives by taking advantage of doing so before the order of such client is completely executed;

(b) disclose information related to the order of such client to any other person where they know or ought to know that such other person would rely on such information in placing, modifying or cancelling any order for purchase or sale of virtual assets or their derivatives related before the order of such client is completely executed;

(c) employ any device, scheme, or artifice to defraud virtual asset clients;

(d) obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or

(e) engage in any act, transactions, practice or course of business which operates or would operate as a fraud or deceit upon any person.

SEC. 18. Penalty Clause

— Any virtual token offeror who fails to comply with Section 11 and/or 12, or contravenes or fails to comply with the rules, procedures and conditions issued in accordance with Section 11 and/or 12, shall be liable to imprisonment for a term not exceeding two years or a fine not exceeding five hundred thousand pesos (PhP 500,000.00) and a further dally fine not exceeding three thousand (PhP 3,000.00) for every day during which the contravention continues.

Any person who makes a false statement or conceals any fact which should have been disclosed in the registration statement for an offering of virtual tokens and draft prospectus pursuant to Section 11 and/or 12, shall be liable to imprisonment for a term not exceeding five years and a fine not less than five hundred thousand pesos (PhP 500,000.00).

Any virtual token offeror who contravenes or falls to comply with Section 13 and Section 15 shall be liable to a fine not exceeding three hundred thousand pesos (PhP 300,000.00) and a further daily fine not exceeding ten thousand pesos (PhP10,000) for every day during which the contravention continues.

Comments:

In relation to the various recommendations we submitted in this Position Paper, we recommend that this penal clause be revamped to exclude electronic money issuers as well as the issuers of nonsecurity digital assets (considering our recommendation that the registration requirement be applied only to the issuance of digital asset securities or security tokens). References to “virtual token” in this section should be revised and replaced by the term “digital asset securities.”

Lastly, we recommend that the activities enumerated in Section 17, such as front-running, insider trading, fraud and market manipulation, should be criminalized and that penalties be imposed to discourage the commission of these fraudulent acts.

SEC. 19. Implementing Rules and Regulations

— Within sixty (60) days from the effectivity of this Act, the SEC and the BSP shall promulgate the necessary rules and regulations to effectively implement the provisions of this Act.

SEC. 20. Repealing Clause

— All provisions of existing laws, orders and regulations contrary to or inconsistent with this Act are hereby repealed or modified accordingly.

SEC. 21. Separability Clause

— If for any reason any part or provision of this Act shall be deemed unconstitutional or invalid, the other sections or provisions hereof shall not be affected and shall remain in force and effect.

Sec. 22. Effectivity

— This Act shall take effect fifteen (15) days after its publication in the Official Gazette or in a newspaper of general circulation.

We shall make this Position Paper brief, but please rest assured that we will happily make ourselves available as resource persons to discuss further in detail our recommendations and share additional insights on the proposed bill.

Once again, thank you very much for this opportunity.

With you in service,

For Bexpress Inc.

KYUNG SOO KANG

Chief Executive Officer

14 September 2022

  1. Rafael Padilla, Fintech: Law and First Principles, p. 51 (2020).

  2. Congressional Research Service, Digital Assets and SEC Regulation, p. 1 (2021). In commercial practice and in crypto communities, the term “cryptocurrency” is understood to be synonymous with terms such as “cryptoasset”, “digital asset”, “digital token”, “virtual asset”, and “virtual currency.” Their technical distinctions, if any, are practically irrelevant. With the exception of virtual asset, these terms should therefore be intended to be interchangeable with each other, even for legal purposes.

  3. For this alternative recommendation, the long title should be amended to read: “AN ACT RECOGNIZING DIGITAL ASSETS AND ELETRONIC MONEY, REQUIRING THE REGISTRATION OF DIGITAL ASSET ENTERPRISES AND ELECTRONIC MONEY ISSUERS, AND FOR OTHER PURPOSES.” On the other hand, the short title should be amended to read: “Digital Assets and Electronic Money Act of 2022.”

  4. R.A. No. 7653 (1993), as amended.

  5. Bastida v. Commissioner of Customs, G.R. No. L-24011 (1970).

  6. See BSP Circular 649, Guidelines Governing Issuance of Electronic Money (2009).

  7. See BSP Circular 649 http://www.bsp.gov.ph/downloads/Regulations/attachments/2009/c649.pdf

  8. Rafael Padilla, Fintech: Law and First Principles, p. 112 (2020).

  9. R.A. No. 11127 (2018).

  10. Central Bank Digital Currency for the BSP: Fundamentals and Strategies, p. 43-52 (2021).

  11. Id.

  12. Rafael Padilla, Fintech: Law and First Principles, p. 53 (2020).

  13. Id., 55.

  14. Primavera De Filippi & Aaron Wright, Blockchain & The Law: The Rule of Code, Harvard University Press, p. 66 (2018).

  15. Id, p. 67.

  16. Id.

  17. Id, p. 61.

  18. The term “virtual asset” has a technical meaning originally developed by the Financial Action Task Force and now widely adopted by many bank regulators and financial intelligence units. See our comments on the definition of virtual asset.

  19. Rafael Padilla, Legal and Regulatory Aspects of Stablecoins, p. 1 (2020).

  20. OCC Interpretive Letter #1172, October 2020, p. 3. (https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2020/int1172.pdf)

  21. Financial Stability Board (FSB), Regulatory Issues of Stablecoins, p. 1-2, https://www.fsb.org/wp-content/uploads/P181019.pdf (2019).

  22. Rafael Padilla, Defi, Law and Regulation, p. 2 (2020).

  23. David Furlonger & Christopher Uzureau, The Real Business of Blockchain, Harvard Business Review Press p. 136 (2019).

  24. The U.S. Supreme Court held in Securities and Exchange Commission v. W.J. Howey Co. that – for an investment contract to exist, the following elements must concur: (1) there must be an investment of money; (2) in a common enterprise; (3) with expectation of profits on the part of the investor; and (4) arising primarily from the efforts of others. In Philippine jurisprudence, this U.S. doctrine is also referred to as the Howey Test. According to Philippine Supreme Court in Power Homes Unlimited Corp. v. SEC, G.R. No. 164182 (2008), the Howey Test ““embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.” In another case, Virata vs. Ng Wee, G.R. Nos. 220926 (2017), the Philippine Supreme Court stated that the Howey case served as “the foundation for the domestic definition” of investment contract as a security. The Philippine Securities and Exchange Commission had applied the Howey Test in several occasions in relation to its enforcement actions against unregistered token offerings such as the Krops initial coin offering (ICO) and various cryptocurrency-related investment schemes such as Cryptopeso and Forsage.

  25. Guidelines for Virtual Asset Servicer Providers (2021).

  26. See Definition of Terms, Guidelines for Virtual Asset Service Providers, p. 2 (2021).

  27. FATF Guidance For Virtual Assets and Virtual Asset Service Providers, p. 17 (2019).

  28. FATF Updated Guidance For Virtual Assets and Virtual Asset Service Providers, p. 24 (2021).

  29. To easily recall the elements, we coin the following terms: (1) active facilitator element and (2) business element.

  30. FATF Updated Guidance For Virtual Assets and Virtual Asset Service Providers, p. 24 (2021).

  31. FATF Guidance For Virtual Assets and Virtual Asset Service Providers, p. 17 (2019).

  32. Rafael Padilla, Insights on BSP Guidelines for Virtual Asset Service Providers, p. 5 (2021).

  33. 922 F. Supp. 1426 (1996).

  34. Peter Van Valkenburgh, Electronic Cash, Decentralized Exchange, and the Constitution, https://coincenter.org/entry/e-cash-dex-constitution (2019)

  35. Id., p. 33.

  36. Id., p. 35.

  37. Id., p. 36.

  38. Unhosted or non-custodial wallets should be clearly differentiated from custodial wallet service providers who take control of the virtual assets of its users and would therefore fall under the fourth category of VASP: “safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets.” Unhosted or non-custodial wallets allow its users to retain control of virtual assets because the private key required to transfer the virtual asset is retained by its users. Unhosted or non-custodial wallets therefore only offer their users a software as an interface to conveniently interact with the relevant distributed ledger or virtual asset network, but they are not necessarily involved in active facilitation of a virtual asset service.

  39. FATF Guidance For Virtual Assets and Virtual Asset Service Providers, p. 17 (2019).

  40. “Conduct” refers to active facilitation of a virtual asset service. See FATF Updated Guidance For Virtual Assets and Virtual Asset Service Providers, p. 25 (2021).

  41. FATF Guidance For Virtual Assets and Virtual Asset Service Providers, p. 57 (2019).

  42. Sec. 3, New Central Bank Act, as amended by R.A. No. 11211 (2019).

  43. The term “cryptoasset trading platform” is also used by securities regulators. See for instance the International Organization of Securities Commission’s (IOSCO) Consultation Report on Issues, Risks and Regulatory Considerations Relating to Crypto-Asset Trading Platforms (2019).

  44. See BSP Circular No. 942 for the amended rules on Money Service Business Operations (2017). See also BSP Circular No. 1039 , which streamlines the requirements for application for registration as MSB (2019). The application process was simplified to conform with the mandates of the Ease of Doing Business and Efficient Government Service Delivery Act (R.A. No. 11032, 2018).

  45. BSP Guidelines for Virtual Asset Service Providers, p. 3 (2021).

  46. Sec. 3, New Central Bank Act, as amended by R.A. No. 11211 (2019).

  47. Section 3. Responsibility and Primary Objective. — The Bangko Sentral shall provide policy directions in the areas of money, banking, and credit. It shall have supervision over the operations of banks and exercise such regulatory and examination powers as provided in this Act and other pertinent laws over the quasi-banking operations of non-bank financial institutions. As may be determined by the Monetary Board, it shall likewise exercise regulatory and examination powers over money service businesses, credit granting businesses, and payment system operators. The Monetary Board is hereby empowered to authorize entities or persons to engage in money service businesses.

  48. See Policy Statement, BSP Guidelines for Virtual Asset Service Providers, p. 1 (2020).

  49. P.D. No. 129, as amended.

  50. BSP Guidelines for Virtual Asset Service Providers, p. 2 (2021).

  51. R.A. No. 8799 (2000).

  52. Senate Bill to amend the Commodity Exchange Act to provide the Commodity Futures Trading Commission jurisdiction to oversee the spot digital commodity market, and for other purposes (03 August 2022).

  53. SRC Rules, 28.1.2.2.

  54. G.R. No. 74457 (1987).

  55. Id.

  56. Gordon v. Veridiano, G.R. No. L-55230 (1988).

  57. Allison Hintz, Lost in the Dark: An Analysis of the SEC’s Regulatory Response to Dark Pools, 13 DePaul Bus. & Com. L.J. 329 (2015).

  58. Lucila Decasa, Securities Regulation Code Annotated, p. 139 (2013). Rafael Padilla, Fintech: Law and First Principles, p. 299 (2020).

This article is published on BitPinas: VASP-Licensed Bexpress Publishes Position on Digital Assets Act of 2022

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