1. What are bitcoins and virtual currencies? How do they work? How are they used?

What
is the purpose of these?

Virtual currencies are generally referred as any type of digital unit that is used as a medium
of exchange or a form of digitally stored value created by agreement within the community of
virtual currency users. 1 Bitcoin in particular, as a virtual currency, is pretty much like cash that
can be used in the internet. In the recent years, Bitcoins and its implications and complexities
have been the subject of several studies and inquiries.2

Bitcoin is supported by a distributed network of users and relies on

advanced cryptography techniques to ensure its stability and reliability. It is
simply a chain of digital signatures saved in a wallet file. The chain of
signatures contains the necessary history of the specific Bitcoin so that the system
may verify its legitimacy and transfer its ownership from one user to another upon
request. A users wallet consists of the bitcoins, it contains a public key and a
private key. The public key is the address to which another party can send bitcoins
and the private key is what enables the wallets owner to send his own bitcoins to
someone else.3

Bitcoin is sometimes referred to as a cryptocurrency because it relies on

the principles of cryptography (communication that is secure from view of third
parties) to validate transactions and govern the production of the currency itself.
Each Bitcoin and each user is encrypted with a unique identity and each
transaction is recorded on a decentralized public ledger (also called a blockchain)
that is visible to all computers on the network, but does not reveal any personal
information about the involved parties. The public ledger verifies that the buyer
has the amount of Bitcoin being spent and has transferred that amount to the
account of the seller.4

2. Are they recognized as payment instruments?

Although some states have started to address bitcoin transactions, its legal status is still to be
determined in most of the states worldwide. The issues surrounding the legal status of bitcoins
involve its classification as a foreign currency, security or commodity.5 In can be used like cash
in transactions in places where it is treated as either money or currency and therefore Bitcoin
investment is subject to regulations concerning investment of money such as in Brazil, Germany,
UK, Greece, and Japan. While other states are open to Bitcoins and other virtual currencies, there

1
BSP Circular 944; see
2
See David Lee Kuo Chuen (ed.), Handbook of Digital Currency: Bitcoin, Innovation, Financial Instrument and
Big Data; and Baron et. al. National Security Implications of Virtual Currency: Examining the Potential for Non-
State Actor Deployment.
3
Jonathan Turpin, Bitcoin: The Economic Case for a Global, Virtual Currency Operating in an Unexplored Legal
Framework. Indiana Journal of Legal Studies. Volume 21, Issue 1, Article 13 (2014)
4
Elwell et. Al. pp 1-2
5
Disini Law Office, Global Bitcoin Regulations (2015).
are also countries which imposed a ban on their usages either totally (Iceland, Bolivia, Ecuador,
Vietnam, UAE and Bangladesh) or partially (ban on banks but not on common citizens in China
and Sweden restricts ban in certain industries such as buying and selling scrap metals and waste
products).6

3. Are they the same as electronic money?

E-money is a mechanism to interact with government-issued and regulated currencies such as

euro or dollars. In contrast, bitcoins is an independent virtual currency which has no regulation.

Table 1. Comparison between e-money and Bitcoin7

E-money Bitcoin
Format Digital digital
Unit of account Fiat currencies (USD, EUR) Bitcoins (BTC)
Costumer Financial Action Task Force (FATF) anonymous
identification standards apply for customer identification
(though such standards permit simplified
measures for lower risk financial products)
Means of production Digitally issued against fiat currency of Mined/mathematically
central authority generated
Issuer Legally established e-money issuer (which Community of
may be a financial institution) people/miners

4. Are they the same as a payment system? Are they covered by the Philippine Payments
and Settlements System?

Payment systems as a macroeconomic term in a broad sense refer to a mechanism which

provides the circulation of money and in a narrower sense can be defined as a set of
infrastructural and institutional elements ensuring the transfer of funds between economic
entities. The Bangko Sentral ng Pilipinas explained that it consist therefore of networks that link
the members with existing rules and procedures for the use of this infrastructure.8

Virtual currencies, particularly bitcoins, as a consensus network of users, then enable a virtual
payment system. It also involves a peer to peer transaction since it is characterized by a
decentralized system without any central authority. However, bitcoins and other virtual
currencies are not covered by the Philippine Payments and Settlements System (PhilPPaSS)
since they are not backed by the government.9

6
Law Library of Congress, Regulation of Bitcoin in Selected Jurisprudence, January 2014 Report
7
Consultative Group to Assist the Poor, Bitcoin Versus Electronic Money, p. 3
8
BSP, PhilPaSS Primer, p1. The BSP further stated that a payment system normally requires (1) standard methods
of transmitting payment messages between members, (2) agreed means of settling claims within the members or
participants and, (3) common operating procedures and rules.
9
See PhilPaSS primer pp. 7-8 for the transactions transmitted to the PhilPaSS for processing and settlement
5. Advantages and Disadvantages

Various governments and people around the world have different responses towards
Bitcoins and virtual currencies. A closer look at their potentials and drawbacks is
imperative in delineating their implications and extent of usage.

A number of studies have identified the potentials and advantages of using Bitcoins and
virtual currencies which include the following.

1. Payment freedom- using bitcoins facilitates lower transaction costs, increased

privacy, and do transactions to local and international10

2. Erosion of purchasing due to inflation11

On the other hand, there also associated disadvantages and risks in using bitcoins and
other virtual currencies which resulted to the negative and strong responses from various
governments. Some of these include the following.

(1) value fluctuation / exchange rate volatility which is the greatest risk to those have
portions of their wealth In bitcoins; the most significant factors affecting the volatility of
bitcoins include the lack of widespread adoption by consumers, the lack of acceptance by
merchants, and the reliance on speculation.12

(3) Bitcoins network system security is uncertain and users digital wallets are not
immune from theft and fraud; malicious software tasked with stealing bitcoins can be
created.13

(4) facilitates criminal and illegal transactions14

(5) lack of trust since bitcoins are not backed by any government.15

6. Extent of usage

10
Elwell et al., 5.
11
Ibid., 5-6.
12
Jonathan Turpin, 345; Elwell et al.,6
13
Ibid., 346.; see Elwell et. Al. p8 for a list of security breaches on the Bitcoin network
14
Baron et al. National Security Implications of Virtual Currency: Examining the Potential for Non-State Actor
Deployment.
15
Jonathan Turpin, 345-348.
The occurrence of an increasing number of bitcoin users and suppliers has expanded the usages
of bitcoins in the virtual community. A study conducted few years ago reflected the size and
value of bitcoin transactions worldwide.

As of June 2015, there were about 14.2 million bitcoins in

circulation, with a total market capitalization of $3.5 billion (at an
exchange rate of about $240 per bitcoin); this is down from the highest
market capitalization of nearly $14 billion in March of 2013 (at a rate of
$1,150 per bitcoin). There are currently over 110,000 Bitcoin transactions
per day, with a roughly linear increase in transactions from June 2012, at
which point there were around 20,000 transactions per day.16

Nowadays, in places where Bitcoins are not totally banned, people use bitcoins in various
transactions to settle utility bills, credit card payments, purchase mobile credits, buy real world
goods, among others.

References:

Turpin, Jonathan B., Bitcoin: The Economic Case for a Global, Virtual Currency Operating in
an Unexplored Legal Framework. Indiana Journal of Legal Studies. Volume 21, Issue 1, Article
13. Winter 2014

16
Baron et al., National Security Implications of Virtual Currency: Examining the Potential for Non-State Actor
Deployment.
Elwell, C., Murphy, M., Seitzinger, M. Bitcoin: Questions, Answers, and Analysis of Legal
Issues. Report by Congressional Research Service, December 20, 2013.

Baron, J., OMahony, A., Manheim, D., Dion-Schwarz, C. National Security Implications of
Virtual Currency: Examining the Potential for Non-State Actor Deployment. RAND Corporation,
California, USA. Available at http://www.smallake.kr/wp-
content/uploads/2016/02/RAND_RR1231.pdf

Disini Law Office, Global Bitcoin Regulations, May 15, 2015, Available at
http://www.elegal.ph/bitcoin-global-regulations/

The Law Library of Congress, Regulation of Bitcoin in Selected Jurisprudence, January 2014
Report https://www.loc.gov/law/help/bitcoin-survey/

Consultative Group to Assist the Poor, Bitcoin Versus Electronic Money,

http://www.cgap.org/sites/default/files/Brief-Bitcoin-versus-Electronic-Money-Jan-2014.pdf

Chuen, David Lee Kuo (ed.), Handbook of Digital Currency: Bitcoin, Innovation, Financial
Instrument and Big Data, Elsevier Academic Press, London, UK (2015).
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