Crypto assets continue to be a concern for government and regulators around the world as their novelty, diversity and accessibility opened them up to scrutiny from fiscal authorities, while their volatility opened investors up to susceptibility.
National Treasury recently published a report that evaluated South Africa’s anti-money laundering and counter-terrorist financing measures.
The report, a combined effort by the Financial Action Task Force (FATF) and the Eastern and Southern Africa Anti-Money Laundering Group, revealed that South Africa has major deficiencies in regulating crypto assets, especially crypto asset service providers (CASPs).
Why regulate the crypto space?
Crypto regulation is not a popular concept among investors, said Thomas Lobban, legal manager of crypto-asset taxation at Tax Consulting SA. “While anonymity and freedom still inform the appeal of cryptocurrencies, it has been proven that these volatile assets require regulation,” he said.
“This is not just for the overall good of the economy and the fiscus, but to protect people from the dangers associated with crypto investment.”
Though there were numerous scams reported, it was MTI Holdings that dealt the first major blow to crypto credibility in South Africa, Lobban said.
“With its CEO still missing in action and the FBI assisting with the investigation, it is speculated that MTI Holdings and its executive leadership made off with R8 billion
“The next blow came in April when the Cajee brothers of Africrypt, a Durban-based crypto trading platform, disappeared with an estimated R50 billion in Bitcoin. They remain at large.”
The shockwaves of these scams renewed the urgency for a regulatory framework covering crypto-asset platforms, though its implementation is slow and appears to be somewhat misdirected, Lobban said.
Sluggishness leads to overreaction
Standard Bank recently issued account closure notices to crypto trading platforms that offer arbitrage services. Crypto arbitrage is the process of buying digital assets in one jurisdiction for a low price and then selling it in another jurisdiction at a premium, exploiting price variances between the markets.
It is also rumoured that the South Africa Reserve Bank is turning up the heat by forcing banks to overregulate the crypto asset space, Lobban said.
“This exercise comes after news that SARB has blocked debit and credit card purchases of crypto from offshore exchanges. At face value, it seems like a firm step, albeit uncertain whether in the right direction, towards crypto regulation from an exchange control perspective.
“The Reserve Bank seems unable to explain the rationale behind publicising (and implementing) this restriction without making any change to the actual regulations.”
Tax Consulting South Africa said it contacted the SARB to obtain clarity as to why offshore purchases of crypto from debit or credit cards would be blocked.
“Their response was that South Africans would still be able to purchase from local CASPs with credit or debit cards, but not from offshore CASPs,” Lobban said.
In e-mail correspondence, the SARB representative replied by quoting B.16(A) from the Currency and Exchanges Manual for Authorised Dealers (CEMAD), which states that transactions using credit and/or debit cards are permissible, subject to provisions mentioned in subsections (D) and (E). Section B.16 (D)(i) is only applicable to South Africans going on a “journey”, which means you can swipe while you are travelling.
Section B.16 (E)(i) makes allowance for small foreign currency transactions over the internet, which means you can swipe online, but you cannot buy a Spanish villa by means of a card transaction. There is no mention of crypto in these regulations.
They did, however, include the following: ‘It should be noted that the purchase of crypto assets from a foreign Crypto Asset Service Provider (CASP) does not fall within the ambit of section B.16(E)(i) of the CEMAD’.
“There was no explanation as to why it would not be allowed, which raises questions around the purpose of this restriction,” Lobban said.
“FinSurv further issued a warning that it is a criminal offence to transfer crypto from South Africa to another country, as per the FAQs on SARB’s website. This creates a lot of confusion among investors.”
The art of confusion
Crypto assets are transactions reflected in a distributed (borderless) ledger. They are seldom held in a single jurisdiction at any given time – unless they are kept in cold storage or a similar format, Lobban pointed out.
“It has not yet been clarified when exactly a crypto asset is in South Africa or in another jurisdiction. Therefore, it is impossible for crypto investors to adequately understand if they are in conformance with the law in many cases. SARB seems comfortable to leave investors in this uncertain mindset.
“The prevailing theme is that the government seeks to quell or restrict foreign crypto-asset investment by South Africans, instead of trying to first understand it and educate those who are actively trading.
When asked for further clarification or legal reference as the country’s monetary authority, the SARB appears to be unable to specify how certain of its policy decisions fit into the current regulations, Lobban said.
“There is no action taken to address the concerns of South African crypto asset investors, not to mention the uncertainties they are sketching for CASPs.
“Until further clarity is provided by regulators, crypto investors should aim to keep abreast of changes in the regulatory landscape.”