BSP raises the bar for consumer protection

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) has raised the bar for consumer protection in the aftermath of the collapse of cryptocurrency giant FTX that led to requests for withdrawals with an estimated $6 billion over three days.

BSP Deputy Governor Chuchi Fonacier said that the regulator remains cognizant of emerging threats and developments in the virtual asset (VA) landscape, particularly on practices that endanger the safety and security of customer funds.

“In the wake of the FTX debacle, reports indicate that FTX allegedly misused customer assets to fund unauthorized business activities. As a result, FTX suffered from liquidity issues, prompting the exchange to cease further customer withdrawals, and subsequently file for bankruptcy,” Fonacier said.

Fonacier said the central bank issued Memorandum Order 2022-051 cautioning all BSP-licensed virtual asset service providers (VASPs), particularly those providing safekeeping and administration services for VAs, to ensure that customers’ VAs are not being used for any business activities other than for safekeeping on the customers’ behalf.

VASPs refer to entities that offer services or engage in activities that provide facility for the transfer or exchange of virtual assets – any type of digital unit that can be digitally traded or transferred, and can be used for payment or investment purposes.

Pursuant to BSP Circular 1108, VA custodians are expected to ensure adequacy of reserves for VAs held in custody and institute mechanisms to properly record and segregate customers’ VAs from their proprietary VAs.

Likewise, related-party transactions should comply with appropriate reporting and disclosure requirements in accordance with relevant regulations and standards.

Fonacier reminded registered VASPs to employ robust risk management systems and practices in managing their liquidity, third party, and operational risks, among others.

“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,” she said.

Fonacier said VASPs engaging with third-party liquidity providers should adopt appropriate due diligence procedures and conduct periodic risk assessment.

In determining the risk profile of liquidity providers, she pointed out that VASPs should consider important factors such as, the license or registration status, legal and supervisory framework of the jurisdiction from which the liquidity providers are domiciled as well as supervisory and enforcement capabilities of relevant regulatory bodies, among others.

In addition, the BSP official said that contingency funding plans should also be established in the event of prolonged service delivery failure or untimely cessation of the third-party liquidity providers.

Last August, the BSP issued a three-year moratorium on the grant of licenses to new VASPs amid varied risks that may undermine financial stability.

The central bank’s Monetary Board approved a modified approach to the grant of VASP license to maintain the integrity and stability of the financial system and strengthen consumer confidence in the digital ecosystem.

Existing BSP-supervised financial institutions (BSFls) that wish to expand operations by offering VASP services, including non-custodial VASPs that plan to offer safekeeping and custodial services, could still apply for a VASP license provided that they have a Supervisory Assessment Framework (SAFr) composite rating of at least stable.

As of end June, the BSP had granted licenses to 19 VASPs.

US prosecutors are now laying the groundwork for a potential fraud case against FTX founder Sam Bankman-Fried and others involved in the collapse of the cryptocurrency giant.