Bangko Sentral ng Pilipinas (BSP) has issued a circular to all virtual asset service providers (VASPs) in the country to ensure that best practices are employed in handling customers’ funds.
The memo was specifically directed to VASPs involved in the custody of digital assets “to ensure that customers’ virtual assets are not being used for any business activities other than for safe keeping on the customers’ behalf.” Furthermore, the central bank warns the firms to ensure the adequacy of reserves and take all necessary steps to separate customer funds from their proprietary assets.
In a statement signed by CBSP Deputy Governor Huchi Fonacier, the banking regulator urged service providers to hedge third-party or operational risks while paying attention to the registration status of liquidity providers in their jurisdictions. The BSP advises firms that it will be in their best interest to have additional funding plans in the event of unforeseen liquidity crises stemming from third-party providers.
“VASPs that facilitate the conversion or exchange of fiat currency to VA or vice versa are expected to maintain sufficient unencumbered liquid assets to ensure that VA redemptions are adequately met at all times,” said BSP in a statement.
The circular was issued following the unfortunate collapse of leading projects in the virtual currency space, especially FTX, which cost investors losses running into billions of dollars. Other sudden implosions that rocked the ecosystem include BlockFi, Celsius, Voyager Digital, and Three Arrows Capital (3AC).
Shortly after FTX collapsed, BSP ordered local digital asset exchanges to provide details of their exposure to the exchange, but the contagion effect for individuals appears to be minimal.
BSP still views digital assets with pessimism
Despite the efforts made by the central bank to regulate the industry, it still eyes the asset class with skepticism. BSP’s Governor Felipe Medalla took the opportunity after FTX’s collapse to warn users of the inherent risks associated with digital assets.
“I have already said many times in the past that crypto assets are very risky and those who invest are advised to invest only what they can afford to lose,” Medalla said.
The central bank governor highlighted volatility and lack of investor protection as part of the challenges working against the industry. He cited FTX’s collapse and the spillover effect it had on the broader industry as proof of his stance toward digital assets.
To gain a better grasp of the industry, the BSP paused the application of VASP licenses for three years beginning on September 1, 2022.
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