By Mark T. Amoguis, Researcher

IMAGINE this: What if someone invented a currency that is free from any government scrutiny, that is accessible to all, and most importantly, is readily available on your Internet-linked handheld device(s)?

Enter cryptocurrencies, which include the likes of Ethereum, Litecoin, and Ripple and perhaps the most popular, Bitcoins.

The latter’s origins can be traced to the wreckage of the 2007-2008 Global Financial Crisis when Satoshi Nakamoto, a pseudonym of an anonymous programmer (or a group of programmers) wrote a white paper that year outlining the mathematical theory of a peer-to-peer currency, which in 2009, eventually evolved into what we now know as the Bitcoin software.

These Bitcoins rely on strong cryptography to create them as well as to keep them secure (hence the term cryptocurrency). They are also open-source, meaning no one controls or owns them and that anyone can monitor every transaction through their own computers.

Initially, Bitcoin was a plaything by cryptography geeks, but it ultimately gained traction when some of them started trading it in 2010.

However, trading cryptocurrencies tends to be volatile.

From near $0 in its early years, Bitcoin’s value went up over the years, reaching its peak in December last year at almost $20,000 apiece. Its value has later fallen about 70% and below the $10,000 mark amid concerns of increased regulation in developed economies such as South Korea and China. Since then, its price hovered around $10,000 apiece.

John Miguel T. Bailon, co-founder and chief executive officer at Philippine-based SCI Global Ventures, Inc., noted the increasing awareness of the cryptocurrency in the Philippines for investment and trading opportunities: “To me more than anything, it opens up the Filipinos to the concept of investing. Because Bitcoin is such a buzzword right now, people look into it as a speculative instrument,” he said.

“When people come into our office and they would say, ‘I’m saving some money. I want to buy P50,000 worth of Bitcoin,’ what we usually do is we try to scare them off not because we don’t want their business, but because we want to make sure that they understand that what we’re doing is a risk. And that this is an investment that you should understand the downsides,” he said.

SCI is the local company behind Bitcoin-related products such as Rebit (remittance service using Bitcoins), Bitbit (Bitcoin wallet), and Buybitcoin (Bitcoin exchange), among other things.

On the flipside, Mr. Bailon said that the buzz surrounding Bitcoin opens up prospective investors in the concept of passive income which include safer and relatively less volatile instruments such as equities: “So, I think in a more general view, Bitcoin has shown light onto this whole concept of investing. It’s like, ‘Oh, I can make money just by holding onto Bitcoin, but wait, there’s also stocks that are less risky, and there’s bonds, and there’s funds that I can get my money into.’ So it’s opening up people into this new avenue of passive income,” he said.

“Add to that is the financial inclusion,” said SCI’s co-founder and chief community officer, Miguel Antonio C. Cuneta, adding that “somehow people are able to access financial services that they weren’t able to do before because they didn’t meet the standards.”

SCI’s Mr. Bailon, however, noted while most people have heard of Bitcoin, it is actually blockchain, the technology behind it that was the “most important breakthrough” and not the cryptocurrencies themselves.

“Blockchain is the best way to record digital transactions of anything not just money. It can be information, it can be land titles… anything that you need to track in a secure manner. Blockchain is the best technology for these,” he added.

Blockchain is a distributed ledger technology (DLT) where all confirmed transactions (in chronological order) can be verified and being maintained by numerous computers all around the world. It is enforced with cryptography to keep it secure.

This implies that the blockchain technology is “disruptive” in nature as almost all of financial services nowadays are trusted third parties: “[B]lockchain removes the need for these trusted third parties,” SCI’s Mr. Cuneta said.

Mr. Bailon agreed, adding that core banking infrastructure could be improved by the blockchain technology.

“With the recent fiasco of BDO (BDO Unibank, Inc.) and BPI (Bank of the Philippine Islands) and all these human errors affecting settlement, the truth here is that those can be easily fixed by blockchain technology,” he said.

In June last year, some 1.5 million BPI account holders reported incorrect balances involving transactions made between April 27 and May 2, forcing the bank to shut down its electronic channels for almost two days. BPI said it was due to data processing error, which resulted in some P46 million mistakenly withdrawn from the bank accounts.

Not long after, BDO said that its automated teller machines (ATMs) were compromised, with several of its clients reporting losses. It was revealed in a Senate hearing that seven of 3,700 ATMS were tapped into using skimming devices that stole client data.

The “positive side effect,” Mr. Bailon noted was that transactions can be done in real-time unlike in traditional banking where banks settle at the end of each banking day.

“With blockchain technology, you make transactions in real-time. Once you move money within its core system, it’s already recorded unlike before where it ends up in a sort of like a limbo and gets applied at the end of the day,” he explained.

Besides trading opportunities, Bitcoins and other cryptocurrencies do have some “practical” uses. In the case of the Philippines, some have been using the virtual currency for remittances as well as payments, taking advantage of low fees for as low as 1% per transaction.

“Since remittances facilitated through cryptocurrencies or virtual currencies (VCs) are relatively more convenient, faster, and cheaper compared to traditional remittance schemes, this is where an average Filipino stands to benefit the most,” said Bangko Sentral ng Pilipinas Governor Nestor A. Espenilla, Jr. “Further, the entry of VC exchanges enhances competition in the remittance market which may further redound to lower transaction costs and improved service offerings.”

Luis Enrique A. Buenaventura II, chief technology officer at BloomSolutions, Inc., shared this view: “If you think about it, cryptocurrency itself is remittances,” he said during the Manila leg of Blockchain and Bitcoin and Conference last January.

“It doesn’t matter where you are in the world, you could be right in front of me or you could be half a world away and the amount of energy that’s spent is the same,” he said.

For SCI’s case, the main users are split between buyers and sellers in its Bitcoin exchange platform and its remittance partners serving the overseas Filipino workers (OFWs) in countries like South Korea, Mr. Cuneta said.

“OFWs do not have to directly know how to use Bitcoin and [other] cryptocurrencies because our platform allows them to send money home through our on-ramp partners who use blockchain technology to transact with us,” he said.

In addition, the BSP noted blockchain’s uses in the financial services industry: “At present, some BSFIs (BSP-supervised financial institutions) and industry associations are already in varying stages of exploring the use of blockchain technology for cross-border remittances, payment transactions and KYC (know-your-customer) process via blockchain-powered digital IDs,” BSP’s Mr. Espenilla said.

Should banks implement blockchain technology into their systems, the risks posed by the new technology are the same as with any technology introduced into the system, said SCI’s Mr. Bailon.

“I don’t really see much risk on how it can be used by banks. Maybe the risk will be that [of] the implementation because it’s such a new thing…” Mr. Bailon said. “In fact, all of the hacks [happened] not because of blockchain technology; it’s because of other technologies that are securing the system.”

SCI’s Mr. Bailon foresees blockchain to be utilized by banks in the near future.

“I think it will be embraced rapidly. You’ll see blockchain creeping into banks in the next two years, I think. And the beauty here is that the customer facing side of things will not really change. Maybe it will improve. But behind the scenes, blockchain is being implemented right now in some banks and I’m sure most banks will move towards it in the next two to three years,” he said.

Despite acknowledging blockchain’s benefits, the BSP’s Mr. Espenilla said that the technology “is not foreseen to radically change existing financial and market infrastructures in the industry.”

“While the new technology brings a lot of innovation and promise, industry players are more likely to integrate DLT [distributed ledger technology] into the mainstream platforms to facilitate certain areas in the sector,” Mr. Espenilla said.

“DLT shall take an evolutionary rather than revolutionary track. DLT is still in its early stages and has not yet been proven robust for wide-scale implementations,” he added.

Jimmy Nguyen, CEO of nChain Group in the US, said during the January Bitcoin conference that the Bitcoin network can’t be regulated because it’s decentralized, but that “sensible” regulation must still be introduced.

He outlined two things for a sensible regulation for cryptocurrencies: (1) regulations should define the cryptocurrencies limitations or exemptions and (2) that the countries should ensure and recognize cryptocurrencies as legal form of payment and tender.

The latter point, in particular, was realized when Japan in April last year became the first country to formally recognize Bitcoin as legal tender, enacting regulations that mandated its virtual currency (VC) exchanges to register and comply with KYC and anti-money laundering requirements and maintain capital reserves.

For S&P Global Ratings, it said that if the cyptocurrencies like Bitcoins become an asset class, the impact financial service firms will be more “gradual.”

“[W]e believe that their future success will largely depend on the coordinated approach of global regulators and policy makers to regulate and enhance market participants’ confidence in these instruments,” S&P said in a report entitled “The Future of Banking: Cryptocurrencies will need some rules to change the game.”

In the Philippines, the BSP introduced in February last year Circular No. 944, regulating VC exchanges — not the cryptocurrencies themselves — by requiring them to be registered and to install internal controls against money laundering.

Although the central bank does not endorse any cryptocurrency as a legal tender as it is not backed by any company or commodity, it seeks to keep track of transactions, which could help combat money laundering and terrorist financing, while upholding consumer protection.

So far, it has authorized two cryptocurrency exchanges in the country: Betur, Inc. (operating as and SCI’s wholly owned subsidiary Rebbitance, Inc. last year. The central bank is also studying applications from 12 new players looking to set up VC exchanges in the country as of end-2017.

According to the BSP, citing information from the two registered VC exchanges, the combined Bitcoin transactions in the Philippines in 2015 were estimated at $2 million per month. The total value more than doubled in 2016 and 2017, where the combined Bitcoin transactions averaged $6.9 million and $8.8 million per month, respectively.