The Philippine Securities and Exchange Commission (SEC) has unveiled new guidelines for Crypto-Asset Service Providers (CASPs), a move designed to enhance market integrity and investor protection. However, these regulations, particularly the steep capitalization requirements, are sparking concerns that they might inadvertently stifle innovation and discourage smaller players from participating in the burgeoning local crypto market. With the Philippines experiencing widespread adoption of crypto-assets, valued at an estimated $40 billion from July 2023 to June 2024, the impact of these new rules, laid out in SEC Memorandum Circular No. 5, is under intense scrutiny.

A P100 Million Hurdle for Crypto Startups

Under the new SEC rules, corporations aiming to operate as CASPs in the Philippines must register with the corporate regulator and maintain a minimum paid-up capital of at least P100 million. This substantial capital, which must be in cash or property and explicitly excludes crypto-assets, is intended to ensure operational resilience and sufficient financial resources for the business. Beyond this hefty financial prerequisite, a corporation is also mandated to apply for a specific license from the SEC to legally operate as a CASP, adding another layer to the entry process.

Overregulation or Necessary Safeguard?

Jiro Luis S. Reyes, CEO of the crypto education platform Bitskwela, has voiced strong concerns, labeling the P100 million capital requirement as “overregulation.” He argues that such a high barrier is a “major problem for most builders in the Philippines” and suggests that a tiered system would be a more equitable approach. Reyes highlights that because the CASP rules broadly cover “any CASP,” this requirement could apply to virtually “anyone who wants to build a homegrown Pinoy Web3 product,” potentially pushing local innovators to seek more favorable regulatory environments abroad. This scenario, he fears, could lead to “less innovation for us,” disadvantaging smaller Filipino companies.

Uneven Playing Field: Big vs. Small

The significant capital requirement inherently creates an uneven playing field within the Philippine crypto market. According to Reyes, “Larger players will have an easier time penetrating the market — there are clearer rules now, which work in their favor.” In contrast, he notes that “for smaller players and communities, it feels like a loss. There’s not much upside for them at this stage.” This dynamic suggests that while the regulations aim to bring order, they might inadvertently consolidate power among well-capitalized entities, making it difficult for grassroots innovation to thrive.

Call for a Differentiated Approach

Arlone P. Abello, founding chairman of the Innovative Movement of the Philippine Association of Crypto Traders, echoes the sentiment that a more nuanced approach is needed. He advocates for a “differentiated approach on the CASP registration requirements depending on the size of the corporation.” While acknowledging that these requirements contribute to “operational accountability,” Abello suggests that they “could be more challenging for early-stage startups with limited resources,” emphasizing that “a differentiated approach may help support innovation while upholding oversight.”

Strengthening Investor Protection Beyond Capital

Beyond capitalization, Abello also recommends that the SEC consider introducing rules specifically on anti-manipulation and insider trading to further bolster investor protection. He asserts that these are “important investor protection measures,” and their reintroduction through future rules or guidance would be “helpful” in supplementing the current framework and aligning with international investor protection standards. Such measures would add crucial layers of integrity to the burgeoning crypto market.

The Need for Regulatory Harmony

To ensure a cohesive and effective regulatory environment, Abello suggests enhanced coordination among relevant regulators. He specifically points to the SEC, Bangko Sentral ng Pilipinas (BSP), and the Department of Information and Communications Technology (DICT). Improved collaboration among these bodies is crucial “to ensure a harmonized compliance environment, especially for multi-layered business models” prevalent in the crypto space. Such inter-agency cooperation could streamline processes and prevent conflicting regulations.

Driving Trust and Sustainable Growth

Despite concerns from smaller players, industry veterans also see the positives in regulation. Winsley Royce Bangit, GCash Vice-President & Group Head for New Businesses, believes that regulating CASPs will ultimately “help build trust, protect consumers, and legitimize the industry.” He emphasizes that “clear regulatory guidelines create a more stable environment for innovation and allow responsible players like us to grow sustainably while ensuring user security.” GCash, through its GCrypto platform, already serves 2.7 million users and offers 48 cryptocurrencies, underscoring the demand for regulated services.

Comprehensive Requirements for CASPs

The SEC’s guidelines are comprehensive, mandating that corporations submit a range of documents including a detailed business plan, a written description of their software and hardware components, and specific business conduct rules. Furthermore, CASPs must provide clear listing and delisting standards for the admission of crypto-assets to trading. These detailed requirements aim to ensure that all operational aspects are transparent and adhere to regulatory standards, providing a robust framework for oversight in the rapidly evolving digital asset market.

Cultivating a Fair and Transparent Market

The SEC’s motivation behind these stringent guidelines stems from the significant crypto adoption in the Philippines, with an estimated $40 billion worth of cryptocurrency value received by the country from July 2023 to June 2024, as reported by Chainalysis. The Commission stated, “The continued growth and development of new crypto-asset markets, services, and business models relies on clear, proportionate, and robust regulatory frameworks, which can ensure that markets are fair, efficient, and transparent.” In April, the SEC also opened applications for participation in a strategic sandbox, offering a controlled environment for CASPs to test and pilot new products, balancing innovation with necessary oversight.