The enigma that is blockchain

Everyone seems to be talking about it, but not many have a clear understanding of what it is and how it works.

I’m talking about blockchain, the technology that digital currency, cryptocurrency and Bitcoin are built on.

Techtarget.com defines blockchain as a record-keeping technology designed to make it impossible to hack the system or forge the data stored in the blockchain, thereby making it secure and immutable. It is a type of distributed ledger technology, a digital record-keeping system for recording transactions and related data in multiple places at the same time.

Blockchain is also considered a type of database, but it differs substantially from conventional databases in how it stores and manages information. Instead of storing data in rows, columns, tables, and files as traditional databases do, blockchain stores data in blocks that are digitally chained together, it said in a report.

It explained that Bitcoin, launched in 2009 on the Bitcoin blockchain, was the first cryptocurrency and popular application to successfully use blockchain. However, the use of private ledger blockchains has expanded to other applications. Logistics companies use blockchain to track and trace goods as they move through the supply chain while government central banks and the global financial community have been testing blockchain technology as a foundation for currency exchange.

Meanwhile, various industries are using blockchain as the basis for smart contracts or self-executing digital contracts written in code. Blockchain’s use and industry applications have grown far outside its original cryptocurrency application to also include cybersecurity, internet of things, and non-fungible tokens or NFTs which are digital assets representing real-world objects and are bought, sold and traded online.

The same article noted that some of blockchain technology’s real-world applications include supply chain management, in healthcare particularly storing and sharing of patient data, identity management, voting systems, finance and banking, media and entertainment, among others.

Research from the McKinsey Technology Council suggests that by 2027, up to 10 percent of global GDP could be associated with blockchain-enabled transactions.

We’ve asked commissioner Kelvin Lester Lee of the Securities and Exchange Commission (SEC) to give his views on this emerging breakthrough technology. Lee direct oversees key regulatory functions of the SEC, including securities regulation and information and financial technology. Lee is one of the champions of fintech in the country, having played a pivotal role in the establishment of the SEC’s PhiliFintech Office which focuses on fintech regulation and policy recommendations.

Q: How should government treat blockchain technology in such a way as to foster its growth but at the same time protect the public?

Lee: Government has been very open to blockchain. Different agencies have embraced blockchain and are attempting to find different possible use cases for the blockchain in order to take advantage of its immutable features in particular.

At the SEC, our approach has always been to balance regulating blockchain and digital asset services providers so as not to hamper innovation but make sure that investors are sufficiently protected.

The SEC is in fact exploring using digital signatures for our company and securities registration functions using the blockchain under a technical assistance grant from a multilateral bank.

The Supreme Court has also been exploring the use of blockchain in order to establish a legal framework for electronic notarization. The Court has also used blockchain technology for remote legal education.

Other agencies in government have also been working on blockchain adaptation and deployment.

Q: How could blockchain help foster economic growth in the country?

Lee: Blockchain can help ensure transparency. It operates on a decentralized ledger system, making transactions transparent and immutable. This, therefore, helps fight against financial crimes such as market manipulation, insider trading, and large-scale fraud, among others, because all transactions can be traced to its origin creating a single source of truth.

Blockchain also helps to streamline processes. For instance, the Philippines is one of the largest recipients of remittances in the world. Through blockchain, the process of cross-border money transfer can be faster, cheaper, and more secure, therefore, our OFWs can trust the financial system and increase the influx of remittances in the country.

Blockchain can also be utilized to securitize or fractionalize high value assets that would otherwise be unaffordable for retail investors. Therefore, it can be a transformative technology that can enhance economic activity.

However, take note,that the potential of blockchain goes even beyond this. With proper support from both the private and public sector, we can fully harness the benefits that blockchain can offer not only to economic growth but to all aspects of the community.

Q: What role does blockchain play in our financial system and how can it help promote financial inclusion?

Lee: Blockchain has been positively used in the financial system. For instance, the Bureau of the Treasury has rolled out the Bonds.ph app which is a fintech app powered by the blockchain where users can purchase retail treasury bonds (RTB). This was done in partnership with Unionbank and  the Philippine Digital Asset Exchange (PDAX), a cryptocurrency exchange.

Another example of blockchain use in the financial system is when Unionbank assisted rural banks in the Philippines that don’t have access to the Philippine Clearing House to speed up interbank payments using blockchain.

By allowing more faster and immutable transactions through the blockchain, the blockchain can help ensure the safety and sanctity of the financial system. It can also allow easier access to the financial system, such as the example of the Bonds.ph, thereby allowing more options for financial inclusion.

Q: What laws/regulations do we currently have for cryptocurrency? Should its trading be regulated and in what way?

The BSP currently has its Virtual Asset Service Provider (VASP) circular which regulates cryptocurrency platforms in the Philippines. The SEC will soon release its Digital Asset Offering Rules and its Digital Asset Securities Service Providers/Digital Asset Exchange Rules which will govern the regulation of cryptocurrencies which are securities and the platforms that trade them in the country.

Yes, the trading of cryptocurrencies, specifically those that are considered securities under Philippine laws, should be regulated. Section 8 of the Securities Regulation Code (SRC) is very specific that no securities can be traded in the Philippines without a registration statement duly filed and approved by the SEC. Thus if a cryptocurrency or digital asset would take the form of a security, or operate as such, as defined under Sec. 3.1 of the SRC,  then the requirement of registration (and therefore the requirement to be regulated) will necessarily apply.

The SEC is however aware of the challenges that can be brought about by an overly strict interpretation of the provisions of the SRC. Thus the need for the Commission to issue a separate set of rules and regulations that will apply to cryptocurrencies that are traded or considered as securities under our laws.

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