Speaking before the Shareholders Association of the Philippines on March 12, Bangko Sentral ng Pilipinas Governor Nestor Espenilla debunked certain myths and lies about privately issued cryptocurrencies. He said he was reflecting the Bangko Sentral’s viewpoint.
Myth 1: Privately issued cryptocurrencies are legal tender and shall soon replace fiat currency.
Truth: Cryptocurrencies, not backed by any central authority, are not legal tender. Moreover, until they fully demonstrate stability, wide acceptability and other economic attributes, they will not replace fiat currency any time soon.
Myth 2: Cryptocurrencies are bad and are only used for illicit activities.
Truth: Cryptocurrencies, like fiat currencies, are neither good nor bad. They are neutral. But, no doubt, BSP is mindful of their wide use in illicit activities because of the anonymity of its transactors and is taking action in this regard.
Myth 3: The BSP endorses the use of and/or investment in privately issued cryptocurrencies.
Truth: The BSP allows the market to develop but it has also issued responsive regulations to uphold consumer protection and to maintain financial stability. The BSP does not endorse or promote privately issued cryptocurrencies.
In his speech, however, Espenilla said the BSP cryptocurrencies are a medium of exchange. The Bangko Sentral ng Pilipinas recognizes this.
Per BSP, crypto or virtual currency is any “form of digitally stored value created by an agreement within the community of virtual currency users.” As far back as 2014, the BSP has advised the public of the features, benefits and attendant risks in dealing with cryptocurrency.
As regulator, BSP adopts what he calls a “balanced, open and flexible” approach to cryptocurrencies. My translation: BSP is negative on cryptocurrencies. To be clear, stresses Espenilla, “we do not endorse privately issued cryptocurrencies as a medium of exchange. Moreover, given their highly speculative and volatile nature, we do not endorse them as investment vehicles either.”
BSP is watchful about risks cryptocurrencies pose to the public, for two reasons: One, to increase consumer protection, and two, “in keeping with our advocacy against money laundering, terrorist financing and other crimes.”
“Given cryptocurrency’s reliance on the full anonymity of those who transact in them, there is a propensity for this mode of payment to be used for illegal purposes,” says Espenilla.
A third risk is on the financial system. “These risks are not imagined. They arise as cryptocurrency necessarily interplays with the non-digital world—the regular economy—when they are exchanged into pesos or other traditional currency,” the BSP chief points out.
Still, for the sake of promoting “financial innovation” and “financial inclusion,” BSP tolerates, “with prudence,” businesses engaged in cryptocurrencies.
In February 2017, BSP issued Circular No. 944 requiring businesses engaged in the exchange of privately issued cryptocurrency for equivalent fiat money, to register with the BSP as remittance andtransfer companies.
BSP has also “strongly cautioned” the public against unscrupulous individuals or groups who offer virtual currency pyramid schemes disguised as initial coin offerings or investment products. The advisory likewise provides tips on securing virtual currency accounts.
Espenilla is emphatic in saying that “privately issued cryptocurrency is not legal tender. Unlike fiat money, such cryptocurrencies are not backed or guaranteed by any central monetary authority. Only the BSP has the sole power and authority to issue currency within the Philippines. Under the law, no other person or entity, public or private, may put into circulation, notes, coins or any other object or document which might circulate as currency. Our notes and coins are fully guaranteed by the Government and are legal tender in the Philippines for all public and private debts.”
While privately issued cryptocurrencies do not enjoy legal tender status, they are, however, as a matter of practice, used as a medium of exchange and a store of value, Espenilla concedes. “But aren’t so many other things?”
The governor related to Sharephil the red paper clip story which went viral. In 2005, a Canadian blogger—Kyle MacDonald—began a series of transactions which he posted online. He began with a red paperclip as a medium of exchange. He exchanged this for an interesting looking fish-shaped pen, which he traded for an odd-looking doorknob…then a camp stove…so on and so forth…
By his thirteenth barter—in a little over a year—MacDonald was in possession of a movie role (a chance to act in a movie), which was finally traded for a two-story farmhouse in a small Canadian town! And it all started with a red paperclip! It’s an interesting story —You can Google it!)
This red paper clip story has uncomplicated elements that differ starkly from cryptocurrency’s high-tech world of blockchains, miners and cryptography. There are lessons in this red paper clip story:
First, additional participants in a transaction exponentially increase value which is defined, measured and transferred through consent.Second, there is power in leveraging on digital technology as a connector of people.
Finally, people always count.
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