Capital markets, banks go digital
Authorities are allowing digital asset exchanges in order to facilitate new ways of capital-raising
17 Sep 2019 | Daniel Yu
Even as regulators continue to strengthen the equity and fixed income markets in the Philippines, the country is also pushing ahead with alternative platforms that will usher in new ways of capital-raising. Regulations on digital assets and digital asset exchanges are expected to be rolled out in September 2019 dovetailing the rules on crowdfunding, which were released in July.
 
At the same time, banks are sharpening their digital focus. “These are really exciting times,” says Edwin Bautista, president and CEO of UnionBank. “Big disruptions are underway.” The bank launched PHX, the world’s first commercial bank-issued Philippine peso stablecoin listed on the Philippine Stock Exchange.
 
“Crowdfunding, digital assets, tokens, digital asset exchanges – part of the fintech space – are moving forward,” Ephyro Luis Amatong, commissioner, Securities and Exchange Commission, points out. “We also have to catch up with our regulation and support financial innovation.”
 
Emilio Aquino, chairman of the SEC, notes that following the release of the crowdfunding rules “information and communication technology have made a significant impact on our financial environment.” With the easier access to finance for startups or small and medium-sized enterprises, he also sees the need to ensure the integrity and fairness of financial systems and the protection of investors.
 
Defining digital assets, also known as tokens or coins, is a key part of that process. “We have a mechanism where there is a disputable presumption that any digital asset offering is a security token offering,” notes Amatong, explaining the approach of the SEC. “If you can demonstrate to us that it is not a security token offering – there is no investment taking – but a utility token, then these tokens are exempt (from the SEC rule).”
 
If it is a security token, he continues, then it will be regulated by the SEC as a normal security issuance. “However, there will be a different mechanism – you will need to show us how it works and that it works – effectively acting as digital registry or securities depository.”
 
Most of the issuers are using blockchain technology or the providers of blockchain – providing the securities features of blockchain, Amatong expects. “The other disclosure requirements, similar to a normal securities offering, would apply. With the same level of scrutiny and certainty.”
 
He shares that the SEC met with some use-cases and potential issuers “where we are pretty certain these are not for investment-taking”. PHX, for example, is seen as a utility token. “We have been in touch with UnionBank from the beginning. They have not gone through the formal process but the way it was described, it seems like a utility token; it does not appreciate in value. [However], once our rules go out, there is a grandfather mechanism and we will ask them to come forward.”
 
UnionBank’s Bautista says the PHX’s value is pegged to the Philippine peso. Developed as an open system, it will be a funds transfer mechanism among rural banks initially. The first PHX transfers were conducted on i2i, the bank’s blockchain network for rural banks, on July 25. By mid-August, 130 rural banks have signed up with each bank processing 10 to 15 transactions.
 
“We are looking to extend PHX by signing up pawn shops and others,” he elaborates. “We are also linking it with the clearing systems in other countries. We piloted the first successful one with OCBC of Singapore, which was overseen by the Monetary Authority of Singapore and the BSP (Bangko Sentral ng Pilipinas).”
 
Once links are established with more overseas clearing systems, this could potentially disrupt the age-old function of correspondent banking: moving money from one financial institution to another usually via a US money-centre bank, for small payments. “Before you know it, no one will use SWIFT anymore,” laughs Bautista.
 
The incentive for the participating rural banks is immediate fund transfer. In the past, there was no way to move funds to each other before as they were not part of any clearing system, Bautista points out. “This is totally new.”
 
It also could take days or weeks for funds to be transferred previously. Participating banks are also able to use UnionBank as a backdoor to the National Retail Payment System, the country’s instant payment electronic platform.
 
Will PHX lead to lower costs for the consumers who are sending funds? “We are not disrupting the fee structure although the cost will be lower for the participating institutions,” Bautista clarifies. “The key is the speed – you can match that of Western Union. Whether you pass on the savings is up to the institution. Eventually, competition will drive the cost down.”
 
With digital asset exchanges, SEC’s Amatong indicates that the way forward is to be more open about the requirements to allow the fintech to innovate. However, he adds that “the basic requirements of any exchange – disclosure, clearing and settlement, certainty, asset segregation – all apply”.
 
For example, he relates that these digital asset exchanges may not need brokers, which is the idea of disintermediation. “But you need to demonstrate to us that it works; you have a matching mechanism that is neutral and that there is no price manipulation or front running; there is effective price discovery; that information is distributed to the users of the exchange.”
 
If a digital asset exchange allows retail investors to participate, this will require greater scrutiny. “In crowdfunding, we set limits on the amount you can raise as a whole from retail investors and the amount each retail investor can invest. For qualified investors – individual or institutional, we allow higher limits,” explains Amatong.
 
A digital asset exchange will also have to disclose what happens with failed trades. “What is the payment mechanism? What if the money does not arrive at the other end? In a conventional exchange, you have the brokers and the central securities depository; they are absorbing that risk. In a digital exchange, how do you ensure that without these intermediaries?” says Amatong.
 
To review the technical aspects of a digital asset exchange, Amatong admits the agency would need expertise, which it is unlikely to get right away even though SEC funding has increased. “Our mechanism at the moment is to require third-party validation that we can trust. We are engaging with software associations. Some accounting firms can also do tech audits.”
 
In Asia, while other exchanges are also working on the regulatory framework, he believes no one has an IT group that can meet all their needs.
 
However, Amatong points out that the SEC would want regulator-level access to the platform, the same level of surveillance that it has for normal exchanges. “We will need to beef up our IT anyway, whether it is for the traditional exchange or a digital asset exchange. IT has come, IT is here to stay. It is not future tech; it is present. The ability to deal with technology is something we acknowledge.”
 
The promise of the technology is can it deliver the same level of certainty and security as a conventional clearing and settlement mechanism and central securities depository at a lower cost and be scalable? he asks. Could alternative products such as commodities, which they don’t trade at the moment, make use of tokens?
 
Amatong says as a regulator, the SEC wants innovation. But it also wants to minimize risk. “We don’t want to compromise on investor protection. But we want to take advantage of the potential greater efficiency of the technology.”
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