South Africa makes bold moves to regulate crypto assets

South Africa’s Intergovernmental Fintech Working Group (IFWG) has made moves to regulate crypto markets in the country.

On Friday, the group released a paper which takes the position that the country should begin to regulate the crypto-currency markets.

In particular, the paper notes it is necessary to initiate “a staged approach to bring crypto-assets within the regulatory remit through the regulation of crypto-asset service providers”.

The IFWG is made up of members of various key players from the South African government, including the South African Revenue Service (SARS), South African Reserve Bank (SARB) and Competition Commission.

With the crypto space maturing rapidly, regulators around the world are accelerating efforts to either embrace or regulate crypto-currencies.

“Since the release of the Bitcoin white paper more than 12 years ago, the crypto asset ecosystem has grown to include more than 10 000 unique crypto assets as at the time of publishing this paper,” says Olaotse Matshane, IFWG chairperson.

“Global daily trading values have also increased significantly over the past few years, currently averaging in excess of $200 billion, and on some days exceeding $400 billion. While crypto assets’ viability as a widely used means of payment remains untested and an open question, the market has demonstrated significant resilience over the last decade, with the use cases for crypto assets as an alternative – albeit highly speculative and risky – investment class and as a cross-border remittance instrument, appear to be gaining some traction among retail customers.”

Matshane points out that policymakers, regulators and central banks have been clear that crypto assets are not “money” in the legal tender sense of the word, although they perform some of the functions of money.

“The Intergovernmental Fintech Working Group shares and reiterates this stance. However, by being excluded from the legal definition of ‘money’ and the associated existing legislation, the challenge is how to achieve regulatory and legal certainty in the most appropriate and responsible manner possible.”

According to Matshane, the IFWG aims to promote responsible innovation without unduly advantaging or disadvantaging either incumbent market participants or new entrants, thereby ensuring a level playing field for all participants.

“At the current conjuncture, deep insight into the South African crypto asset ecosystem is limited and largely based on anecdotal evidence. Clear policy stances on the variety of emerging crypto asset use cases are, therefore, required to deepen legal and regulatory certainty.”

The move to regulate crypto-currencies in SA comes as local exchanges earlier this year told ITWeb they were expecting more regulation as the price of Bitcoin continued to surge.

However, most of the exchanges were in favour of regulation, saying it ultimately brings clarity and protection to businesses and consumers.

Last month, SARS also started conducting a tax risk assessment exercise in respect of South African residents engaged in the mining, speculation and/or investment in crypto assets.

The revenue service reminded taxpayers to declare all crypto-currency-related taxable income during the year such income was received or accrued.

“This means that SARS is starting to look at methods to ensure taxpayers operating in the crypto space are tax-compliant,” says Tertius Troost, tax manager at Marzas SA.

“The onus lies with the taxpayer to declare all their income and if SARS finds that taxpayers are not disclosing their income from crypto assets, the taxpayer could be liable for fines and penalties and even criminal charges.”

Also last month, SARB embarked on a study to investigate the feasibility, desirability and appropriateness of a central bank digital currency (CBDC).

This, the central bank said in a statement, will include electronic legal tender for general-purpose retail use, complementary to cash.

“The possible incorporation of CBDCs and the utilisation of blockchain technologies by the SARB is definitely a move in the right direction that will benefit all South Africans,” says Wiehann Olivier, partner and digital asset lead at Mazars.

He believes some of the benefits include a reduction in the cost of transacting, faster turnaround on transactions and an overall increase of financial inclusion.

“There are, of course, some concerns from a privacy perspective which still need to be considered, but these are most likely to be addressed through privacy of information regulations. CBDCs could also pave the way for the incorporation of DeFi [decentralised finance] and ‘smart’ money, which will be to the advantage of all South Africans and empower them even further.”

Commenting on the IFWG position paper, Richard Gardner, CEO of Modulus, says currently, the country boasts one of the largest markets in Africa for digital assets, though its policies have been so inconsistent that some entrepreneurs in the sector have relocated to more friendly jurisdictions.

Gardner believes this lack of regulation has left exchanges largely on their own to ensure proper operation.

“This is an important step towards regulatory parity, particularly given that the working group has had input from key sectors of the government, including the revenue service, reserve bank, and other key commissions,” he says.

“Over the past month, in particular, we’ve begun to see countries jockeying over position in regard to crypto policy, given the strong emergence of CBDCs. China really changed the game with their robust testing regime of the e-yuan.

“In response to that, we’ve seen countries like El Salvador make major moves of their own,” notes Gardner, alluding to the country’s president making an announcement at a crypto-currency convention that he aimed to adopt Bitcoin as a national currency.

He adds that South Africans are known to be friendly to crypto-currency, particularly as compared to other parts of the continent which have banned their use.

“It is entirely reasonable that South Africa, seeing itself as an outlier in terms of regulatory environment, wants to get out from behind the eight ball. Governments and regulators are always behind technology. The key, for economic growth, is to be nimble enough to adapt to new technology before you miss out on it altogether. It would be wise for South Africa to take significant action to shed its image of being the home of regulatory nightmares,” Gardner concludes.