As the blockchain industry evolves in the Philippines, regulatory frameworks become paramount to ensure the protection of users and maintain the integrity of financial systems.
I caught up with Terry Ridon, Convenor of the Philippine think tank Infrawatch PH, for a discussion revolving around the current regulatory landscape, the Binance ban in the Philippines, and the broader implications for blockchain innovation in the country.
Ridon is satisfied with the existing regulatory environment, emphasizing the dual registration process that digital currency exchanges must undergo: first with a registration with the Securities and Exchange Commission (SEC) as a corporation, and secondly, with the Bangko Sentral ng Pilipinas (BSP) as a virtual asset service provider (VASP). This two-step process aims to safeguard local users in the event of unforeseen issues, providing a layer of protection against the possible collapse of digital currency exchanges.
However, Ridon identifies several challenges faced by digital currency exchanges operating in the Philippines, linking them to Binance’s global issues, particularly in the United States. He notes the penalties faced by the former head of Binance in the U.S., Changpeng Zhao, and the commitment of Binance to pay significant fines are some of the challenges that contribute to the skepticism of Philippine regulators towards digital currency exchanges.
Ridon also sheds light on specific aspects of Binance that drew regulatory attention. The peer-to-peer (P2P) exchange feature in Binance’s app, allows direct user interactions. As he explains, “Typically, the cryptocurrency exchanges deal directly with the user, [in] contrast to the P2P model of Binance in which various users interact with each other. So I think that is one big red flag for anti-money laundering (AML) regulators in the Philippines.” This, coupled with Binance’s reluctance to submit to Philippine corporate laws, adds to the challenges faced by the platform in the country.
Following the resignation of Binance’s CZ, who pleaded guilty to violating U.S. AML laws, the Philippine SEC has initiated restricting access to Binance, the world’s largest digital currency exchange, stating that Binance’s operator lacked registration as a corporation in the Philippines and operated without the required license and authority for securities trading. The SEC announced that the removal of access in the Philippines, as per its advisory issued on November 28, will be implemented within three months starting November 29, providing Filipino users with a window to withdraw their investments from the platform.
Given this development, what will happen to Binance customers in the Philippines? Ridon highlights the freezing and cancellation of accounts linked to Binance by local banks while underlining the importance of this incident as a warning for Filipino users, noting, “It serves as a disincentive for Filipino users from dealing with these types of unregistered and unlicensed, cryptocurrency exchanges like Binance.” He emphasizes the need for users to transact only with registered local exchanges to avoid potential risks associated with unlicensed platforms.
Kevin Stern was previously tapped to lead Binance’s operations in the Philippines; however, Ridon says Binance’s engagement with government agencies and private partners under Stern’s leadership did not yield the desired results.
“The actual effect that they would have wanted was to PR blitz their way through, and that has not been successful,” he notes. He points out that despite Binance’s PR offensives, the SEC’s warnings against investing in Binance remained steadfast. This reinforces the idea that regulatory compliance takes precedence over public relations efforts.
Ridon believes that as long as regulators allow technological innovation, they maintain a hands-off approach. He points out the measured approach the SEC took in issuing warnings against Binance, indicating that properly regulated and licensed exchanges need not fear excessive oversight.
Reflecting on the Binance case, Ridon emphasizes the critical lesson for other exchanges. He advocates for a collaborative approach, urging digital currency exchanges to work transparently with the SEC and the BSP. Compliance with regulations is presented as a key factor in gaining and maintaining public trust.
“It’s a critical lesson for all cryptocurrency exchanges, particularly those that would want to create new cryptocurrency exchanges in the Philippines to basically look at the lay of the land and work with regulators,” he notes.
In 2023, the SEC announced its plan to release guidelines on digital asset operators, hinting at a collaboration with the University of the Philippines Law Center. Ridon speculates that these guidelines might align with the U.S. SEC digital asset regulations, potentially categorizing digital assets as investment instruments subject to stringent scrutiny.
Comparing regulatory approaches, Ridon highlights the contrasting situations in the U.S., where regulatory actions have been more proactive. He expresses the hope for similar stringent measures in the Philippines, particularly in prosecuting individuals behind fraudulent digital currency schemes.
“We really like to see a more active SEC, also the BSP, because they had actually been a bit slow in moving with complaints relating to pseudo cryptocurrencies or essentially undertaking criminal prosecution. What they had been doing in the last few months has been issuing notices to the public or like public advisories warning against particular firms. But, we have yet to see whether or not the ringleaders of these firms had actually, in fact, been brought to court,” Ridon says.
Discussing the role of blockchain in various sectors, Ridon sees potential collaborations with government agencies in areas like healthcare and document processing. He underscores the importance of educating government officials about blockchain technology and its potential benefits, emphasizing the transparency it can bring to governmental processes.
Identifying challenges in regulating blockchain as a utility, Ridon points out the lack of understanding among government agencies. “I think the main challenge is, many government agencies, not just regulators, don’t actually understand the distinction between blockchain and other types of technology,” he notes. He stresses the need to explain blockchain’s utility and business cases, particularly in government applications.
Ridon envisions a robust regulatory framework that considers digital currency as an investment instrument, applying similar obligations to traditional investments. “The idea of this is essentially to protect the investing public and to protect their money,” he asserts. He believes this approach would instill confidence in the public and contribute to the responsible growth of the cryptocurrency sector.
On the role of self-regulation, Ridon acknowledges the efforts of registered and licensed exchanges in adopting best practices. However, he highlights the necessity of government oversight, emphasizing the potential risks associated with leaving the industry entirely to self-regulation.
When asked about international best practices, Ridon suggests adopting the proactive approach seen in the U.S., where regulatory bodies have taken swift action against digital currency-related fraud. He emphasizes the need for prompt and decisive actions against individuals perpetrating fraudulent schemes in the Philippines.
Ridon said think tanks like Infrawatch play a crucial role in influencing constructive dialogues between regulators and the blockchain industry. He commends their efforts in spearheading the campaign against Binance in the Philippines and underscores the importance of continuous collaboration to enhance industry understanding and regulation.
There is a need for a balance between innovation and regulation to create a robust and effective regulatory framework, Ridon says, emphasizing the importance of collaboration between industry players, government entities, and think tanks. The lessons learned from the Binance case serve as a guiding beacon for the responsible growth of the blockchain and “cryptocurrency” sector in the country. As he points out, “The balance between innovation and regulation will only hold true if they accept that regulation is an essential part of their business. Without subjecting themselves to local regulations, they would essentially open themselves to broader and greater regulatory scrutiny.”
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