The Bangko Sentral ng Pilipinas (BSP) has issued a strong reminder to all registered virtual asset service providers (VASPs) not to engage in any business activities other than for the safekeeping of assets in the wake of the collapse of cryptocurrency exchange company, FTX.
In a memo (Memorandum No. M-2022-051), signed by BSP Deputy Governor Chuchi G. Fonacier on Dec. 7 and released on Friday, Dec. 9, the BSP said the FTX bankruptcy is a stark example of emerging threats in the virtual asset (VA) world that affect practices and 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,” said Fonacier.
Using FTX as a cautionary tale, Fonacier said all VASPs, particularly those providing safekeeping and administration services for VA such as VA custodian, should ensure that customer VAs “are not being used for any business activities other than for safekeeping on the customers’ behalf.”
“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. Meanwhile, related-party transactions should comply with appropriate reporting and disclosure requirements in accordance with relevant regulations and standards,” said Fonacier.
The BSP official also reminded VASPs to have “robust” risk management systems to manage their liquidity as well as 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. Moreover, those engaging with third-party liquidity providers should adopt appropriate due diligence procedures and conduct periodic risk assessment,” said Fonacier.
She also reminded all VASPs to be especially critical in assessing the risk profile of liquidity providers and check the following: license and registration status; the legal and supervisory framework of the jurisdiction from which the liquidity providers are domiciled; and supervisory/enforcement capabilities of relevant regulatory bodies/enforcement agencies.
“(A) contingency funding plans should be established in the event of prolonged service delivery failure or untimely cessation of the third-party liquidity providers,” said Fonacier.
The BSP imposed a three-year ban on VASP licensing beginning on Sept. 1, 2022. The BSP’s Monetary Board explained the licensing ban as a modified approach which involved the closure of the regular application window for new VASP licenses for a period of three years and grant of new VASP licenses only to existing BSP financial institutions (BFIs).
The modified approach to VASP licensing gives BSP more time to assess the existing VASPs' overall performance and risk management systems, as well as to monitor their impact on financial services and financial inclusion agenda, and their place in the BSP’s Digital Payments Transformation Roadmap.
Under the modified approach, the BSP said existing BFIs with strong risk management systems may still apply for a VASP license.
The BSP refers to virtual currencies as VAs. It issued a circular to govern VASPs in 2017. The VASP regulation expands the BSP’s previous rules on virtual currency exchanges to include businesses that perform an exchange between one or more forms of VAs, the transfer of VAs and the safekeeping or administration of VAs.