THE PHILIPPINES CRYPTOCURRENCY OVERVIEW

Introduction

Cryptocurrencies, or virtual currencies, are digital means of exchange that uses cryptography for security.
The word ‘crypto’ comes from the ancient greek word, ‘kryptós’, which means hidden or private. A digital
currency that is created and used by private individuals or groups has multiple benefits. Cryptocurrencies
challenge the orthodoxy of how a currency works in ways that excite some and worry others. So, what
exactly is cryptocurrency and why is it different? Unlike other currencies, all cryptocurrencies are entirely
digital. No cryptocurrency prints money or mints coins. Everything is done online. Conventional forms of
currency are generated by the government and then circulated in the economy, via banks.
Cryptocurrencies do not rely on either of these institutions. Instead, cryptocurrency is decentralized. In
other words, it is created, exchanged, and regulated by its users. Cryptocurrencies are digitally mined.
Mining precious metals has been used as a means of giving value to money. The question of how
cryptocurrencies have value is complex and reveals that any currency derives its worth from faith in its
purchasing power. All currencies require a system that guards against misuse and fraud.

ABOUT THE PHILIPPINES ON CRYPTOCURRENCY

With the current pace of global industrial development, cryptocurrency is becoming a global phenomenon
as several countries now recognize its importance. Cryptocurrency is a digital currency in which encryption
techniques are used to regulate the generation of units of currency and verify the transfer of funds. It is a
variety of virtual currency that uses cryptography for security and is neither issued nor guaranteed by a
Central Bank nor backed by any commodity. The most common type of cryptocurrency is the Bitcoin.

On March 6, 2014, alarmed by the Bitcoin exchanges in the Philippines, the Bangko Sentral ng Pilipinas
(BSP) issued a Warning Advisory for the public that exchanges of virtual currency, such as the Bitcoin, are
not regulated by the BSP or any other regulatory authority, and thus, there are no regulations that would
specifically protect consumers and businesses for financial losses from transacting with the use of virtual
currencies.

On February 6, 2017, realizing that virtual currency (VC) system can revolutionize the delivery of financial
services, the BSP issued Circular 944, or the Guidelines for Virtual Currency Exchanges, requiring VC
exchanges to obtain certificate of registration to operate as remittance and transfer company. As such, all
VC Exchanges shall adhere to the guidelines issued by the BSP. However, the BSP emphasized that this
issuance is not to endorse VCs as currencies but merely to regulate the use of VCs in financial or business
transactions. Thus, the BSP reminds the public to be cautious in entering into VC transactions as it is a risky
investment.

In a 2017 Securities and Exchange Commission Advisory on Initial Coin Offerings and the 2018 SEC Advisory
warning the public on Bitcoin-related Ponzi Schemes, the SEC warned the public that investment schemes
with the use of cryptocurrencies or digital currencies are considered securities transactions subject to its
regulatory authority. Thus, such entities engaged in VC transactions should secure prior registration and/or
license to solicit investment or sell securities as required under the Securities Regulation Code. Further,
the SRC requires that cryptocurrencies or digital currencies, which are treated as securities, should be
registered with the SEC prior to its offer to the public.

In a resolution issued by the SEC on March 2, 2018, in the case of In re: Black Cell Technology Inc., Black
Sands Capital Inc., BlackCell Technology Limited and Krops v. Enforcement and Investor Protection
Department, SEC CDO Case 01-18-046, using the Howey Test and Section 3.1 of the SRC, the SEC ruled that
Kropcoins, a cryptocurrency, are considered unregistered securities that are being offered and/or sold
within the Philippines; and though the offer was initiated by a Hong Kong company, it is accessible via the
Internet to buyers in the Philippines. Based on the foregoing, the Philippines treats cryptocurrencies as
securities, which may be subjected to taxes under the National Internal Revenue Code (NIRC), as amended
by the Tax Reform for Acceleration and Inclusion law.

The Bureau of Internal Revenue (BIR), on the other hand, has not yet issued its guidelines on the tax
treatments of cryptocurrency transactions, despite the emerging interest on the VC exchanges in the
Philippine market. Nonetheless, since the SEC treated it as securities, the BIR may also tax them as
securities. Further, the NIRC, as amended, provides that any income of an individual or corporation, in
whatever form, sourced from the Philippines, is taxable in general. Thus, depending on the transaction
involved using cryptocurrencies, income, percentage and other business taxes provided under the NIRC
may be imposed by the BIR.

The use of cryptocurrencies is, indeed, helpful to the fast-growing global industry since cashless
transactions bring convenience to business dealings and promote faster operations, especially on
international engagements. However, it comes with a great risk of financial losses due to the volatility of
cryptocurrency market. Further, due to its cryptographic feature, cryptocurrencies can be easily used in
money laundering or in funding terrorist activities. Thus, vigilance on both users and the government
authorities is the key to the effective use of cryptocurrency.

At present, the Philippine government is yet to stabilize its laws and regulations on VC exchanges. Despite
the fact that the BSP and the SEC recognized VC exchanges, it is still unregulated as most cryptocurrencies
are unregistered; and thus, it would be a challenge on the part of the BIR to track and impose the necessary
taxes on cryptocurrency transactions. One can even mine a crypto coin worth millions of dollars and sell it
to a foreign buyer without the knowledge of the tax authorities. At this current state, our government has
very limited means in monitoring the cryptocurrency market and cannot fully protect the financial interest
of its citizen users. Therefore, one who enters the cryptocurrency market should always be on guard
because “Cashless is good, but you may lose your goods.” (Atty. Septfonette Fe D. Balusdan)

FREQUENTLY ASKED QUESTIONS (FAQS) ON VIRTUAL CURRENCIES BY BANGKO SENTRAL NG PILIPINAS

WHAT IS A VIRTUAL CURRENCY?

• A virtual currency (VC) is a type of digital “currency” created by a community of online users, is
stored in electronic wallets (e-wallets), and generally transacted online.
• It is not issued or guaranteed by central banks or government authorities.
• VCs may be transferred within the community of users. It may be used to buy virtual items (e.g.
games, apps) or real goods from online shops/merchants willing to receive the VC as payment. In
this sense, VCs are used as a medium of exchange.
 • VCs may also be exchanged to/from actual cash (fiat money) through people/companies that are
part of the community of users.

HOW DOES VC DIFFER FROM CRYPTOCURRENCY?

VC is a general term that covers different types depending on business model

1. centralized (e.g. one entity/individual issues the VC);

2. decentralized (e.g. no central repository or administrator but several entities/individuals
maintain the VC);
3. convertible (e.g. the VCs can be exchanged to fiat currency and vice versa); or
4. cryptocurrencies.

Cryptocurrency is a type of VC that uses cryptography – a method of storing and transmitting data in
unreadable form so that only the intended receivers can read and process it. This allows cryptocurrency
transactions to be carried out in a decentralized manner by a group of users. The first and most popular
cryptocurrency to date is “Bitcoin”, introduced in 2009.

HOW DOES BITCOIN WORK?

Below is a simplified narration of how Bitcoin works:

1. A user sets up a Bitcoin wallet onto a personal computer or mobile device. The wallet’s software
interfaces with wallets of other Bitcoin users.
2. The user loads funds into the Bitcoin wallet. This can be done by:
a. - Purchasing from a Bitcoin exchange, trading platform or directly from another person
using Bitcoin;
b. - Transferring Bitcoin to/from other Bitcoin users as payment for goods and services; and
c. - Awarding of Bitcoin for performing validation of Bitcoin transactions. An example is
“mining” wherein a person who successfully validates a Bitcoin transaction is rewarded
with corresponding Bitcoins.
3. Once Bitcoins are in the wallet, the user can initiate a Bitcoin transaction.
4. Upon initiation of the transaction, Bitcoin miners confirm and validate the transaction. The
validation process involves solving certain math problems using “private key”, “public key” and
transaction message to address double-spending and ensure authenticity of the Bitcoin holder. A
“public key” is a sequence of letters/numbers that everyone in the Bitcoin community can see. A
“private key” is another set of letters/numbers that is kept secret between/among the
transactors.
5. Once validated, the transaction is effected and posted in the public ledger called the
“blockchain”, also known as “digital ledger technology”.
HOW DOES VC DIFFER FROM FIAT CURRENCY AND E-MONEY?

VC is distinct from fiat currency or real currency – the coins and paper money minted and printed by the
central bank of a country; designated and circulated as legal tender in the country; and used and
accepted as a medium of exchange in the country. Fiat currency is fully backed by the government of a
country, and is acceptable as payment for public and private debts.

VC is also distinct from e-money, which is a digital representation of fiat currency. E-money is convertible
to fiat currency in licensed emoney issuers or e-money agents. It is used to electronically transfer
monetary value that is equivalent to, or similarly denominated as fiat currency. Like fiat currency, e-
money is legal tender.

WHAT ARE THE POTENTIAL BENEFITS OF VCS?

From a consumer standpoint, VCs may provide benefits in the following areas:

• Remittances and wire transfers

o The Philippines is one of the countries receiving high levels of remittances from overseas.
Many Filipinos either receive remittances from abroad, or send remittances to relatives
and loved ones within the Philippines. Increasing number of Filipinos shop online, pay for
goods/services online, or transfer funds via digital means. Such remittances and transfers
– when facilitated using cryptocurrencies or VCs through licensed VC Exchanges – are
relatively more convenient, faster and cheaper compared to traditional remittance and
payment schemes. In this case, the average Filipino stands to benefit. The entry of VC
Exchanges also enhances competition in the remittance and payments market, which can
result in lower transaction costs and improved services.
• Electronic payments
o As a digital value or asset, VCs are easier to use as payment for goods and services that
are offered online. This can support the growing e-commerce industry in the Philippines.
It can also support the use of social media, mobile technologies and other innovative
platforms as delivery channels for financial services.
• Financial inclusion
o VCs also have potential to expand financial inclusion. VCs may be used to facilitate and
expand financial services for low-income Filipinos and those living in far-flung areas where
traditional financial service providers like banks are unable to reach. This may be possible
and profitable, given the cost-efficiency of VC transactions as well as Filipinos’ tendency
to adopt digital platforms and mobile technology.

WHAT ARE THE RISKS INVOLVED IN USING VCS?

While VCs and the digital ledger technology that powers VCs have potential to facilitate delivery of
legitimate financial services such as remittances and payments, there are inherent risks:
 • Prices change quickly
o The value of VCs is solely driven by supply and demand (i.e. its value increases as more
people want to get the VC, and decreases when there are unpleasant incidents or negative
news involving VCs). Because of speculations in the VC market, prices are unstable and
change quickly over time. Users trading, investing and/or accepting VCs bear the risk of
loss. There is no legal protection available for VC users in such cases.
• Potential for unlawful use
o VC transactions have high degree of anonymity. The creators, senders and receivers can
easily and effectively transact without knowing each other's real identities. The pseudo-
anonymous and online nature of VCs make them attractive to fraudsters, scammers and
people intending to do unlawful activities (e.g., money laundering/ terrorist financing).
Legitimate VC users may be affected in case law enforcers clamp down on certain VC
Exchanges.
• Prone to theft or loss
o Just like any type of asset that is available online, VCs may be subject to hacking or theft,
virus infection, and other cyber threats. Users may inadvertently lose their private keys
that are used to secure the VC wallet. VC holders must adopt sound security practices and
other safety measures to protect their VC accounts.
• VC transactions are immediate and irreversible
o In case of fraudulent, unauthorized or erroneous transactions, VC holders may find it
difficult to reverse said transactions. VC holders will be unable to file complaints or seek
recourse since there is no central authority or issuer that backs or guarantees VCs.
• VC holdings are not insured
o In the Philippines, VCs are not considered as deposits. In case VC Exchanges fold up or
stop operating, VC holders cannot claim deposit insurance from the Philippine Deposit
Insurance Corporation (PDIC).

WHAT IS THE BSP REGULATORY APPROACH TO VCS?

Consistent with the Bangko Sentral ng Pilipinas (BSP) approach to innovation, the BSP has adopted a
balanced approach to VCs by allowing the market to develop and subsequently issuing responsive
regulations, as follows:

• Warning Advisory on Virtual Currencies dated 06 March 2014

o When VCs were starting to grow in the Philippine market, the BSP issued an advisory in
2014. It informed the public of the features, benefits and attendant risks when dealing
with VCs.
• BSP Circular No. 944 dated 06 February 2017
o Following the rise in the use of VCs for payments and remittances in the Philippines, the
BSP established a formal regulatory framework for VC Exchanges – Circular No. 944 dated
6 February 2017. VC Exchanges are companies or businesses engaged in changing VCs into
fiat currency (and vice versa). The act of converting VCs into Philippine money can
facilitate payments and remittances. Circular 944 requires VC Exchanges to register with
the BSP as remittance and transfer companies. They are also required to put in place
 adequate safeguards to address the risks associated with VCs. These include control
measures to counter money laundering/ terrorist financing (ML/TF), technology risk
management systems, and consumer protection mechanisms.
• Advisory on the Use of Virtual Currencies dated 29 December 2017
o The BSP recently issued another public advisory in response to certain unscrupulous
fraudsters/groups that try to entice consumers to “invest” in Bitcoins or VCs packaged as
an Initial Coin Offering (ICO). The advisory warns consumers to be cautious in dealing with
VCs, only maintain VCs sufficient to meet their transactional requirements, and adopt
sound security measures to protect their VC accounts. The advisory also reiterates that
BSP does not endorse VCs as a currency or an investment instrument due to its highly-
speculative and risky nature. The BSP highly encourages existing and prospective VC users
to deal only with BSP registered VC Exchanges. The BSP also cautions the public to be
vigilant about VC related transactions and investments in view of potential risks.

IS IT GOOD TO INVEST IN VCS?

Because of price volatility, VC holders may incur significant losses when trading or investing in VCs. While
VCs were not initially designed to be used as an investment product, some traders/people speculate on
VCs which adds to the price volatility. As in any other type of investment, prospective VC investors should
know and fully understand VCs and cryptocurrencies before speculating or investing in such a product. The
public is advised not to blindly follow the crowd, adopt herd mentality, or engage in speculative
transactions. The public should exercise extreme caution at all times when dealing with VC products and
transactions in general.

CRYPTOCURRENCY TRADING IN THE PHILIPPINES

Trading of cryptocurrencies in the Philippines can be done through the Philippine Digital Asset Exchange
(PDAX). The Philippines’ homegrown cryptocurrency exchange.

Philippine Digital Asset Exchange, more commonly known as PDAX, is a cryptocurrency trading platform
that was founded in 2017 in the Philippines. It is approved by the Bangko Sentral ng Pilipinas (BSP) to
operate as a virtual currency exchange.

The PDAX exchange is designed specifically for the Philippine market and lets you buy and sell
cryptocurrencies such as bitcoin and other digital assets at the most competitive global market prices using
the Philippine Peso (PHP) directly.

Driven by its goal to provide an easy-touse and secure investment platform that is accessible by every
Filipino regardless of their social, economic, or financial background, the PDAX company continues to push
boundaries to promote the adoption of cryptocurrencies and other digital assets in the country.

The following cryptocurrencies are listed on the PDAX exchange:

• Bitcoin (BTC)
• Ether (ETH)
 • Ripple (XRP)
• Bitcoin Cash (BCH)
• Litecoin (LTC)
• Tether (USDT)

The trading pairs supported by PDAX are the following:

• BTC / PHP
• BCH / PHP
• ETH / PHP
• XRP / PHP
• LTC / PHP
• USDT / PHP
• ETH / BTC
• XRP / BTC

The minimum order size that a trader can place on PDAX are the following based on the cryptocurrency
categorized as follows:

1. Minimum Trade Value - The minimum trade value on PDAX is PHP 52 per trade.
2. Minimum Trade Quantity - The minimum trade quantity on PDAX varies per digital asset:
a. BTCPHP: 0.0001 BTC
b. ETHPHP: 0.004 ETH
c. XRPPHP: 4 XRP
d. BCHPHP: 0.005 BCH
e. LTCPHP: 0.02 LTC
f. USDTPHP: 1 USDT

When placing preferred order type (market, limit, or fill and kill order (FAK), it should meet both the
minimum trade value and the minimum trade quantity otherwise, it will not be placed.

WHAT DO YOU NEED TO BEGIN TRADING CRYPTOCURRENCIES?

Before you can start trading, you will first need to make sure you have the following:

• A cryptocurrency wallet (you can choose from paper, mobile, software, or hardware wallets)
• Access to an exchange that allows you to buy, sell, or trade crypto such as PDAX

WHAT ARE PAIRINGS?

When delving into the world of cryptocurrency trading, you will typically start by buying your first crypto
with fiat currency. Fiat refers to a national currency such as the Philippine Peso (PHP). So, an example
might be that you wish to trade your PHP with Bitcoin (BTC). This is something that is popular.
However, once you have tested the waters, you might want to begin trading between two
cryptocurrencies, such as Bitcoin and Ripple. In this case, they would be abbreviated as BTC (for Bitcoin)
and XRP (for Ripple) in PDAX. For a newcomer, this can be slightly overwhelming as exchanges tend to list
pairings in their abbreviated forms as illustrated above.

HOW DOES TRADING WITH AN EXCHANGE (PDAX) WORK?

• Users (or investors) either transfer their existing crypto to their account on an exchange or use the
exchange to buy crypto with fiat currency such as PHP
• The exchange (PDAX) holds on to the cryptocurrency
• The user watches the prices of other cryptocurrencies available
• Users place their buy or sell orders once they have chosen the desired trade
• The exchange finds a seller or buyer to match your trade
• The exchange then completes your transaction.

Here's the hard truth - trading is not for everyone and the learning curve is quite steep. Losing a certain
portion of your pot is inevitable. There are often times when despite the invested effort, fruition won’t be
realized nor guaranteed.