South Africa is moving with more urgency to stiffen oversight of cryptocurrency assets after a proliferation of scams.
A new regulatory timeline foresees finalizing a framework in three to six months, after the publication of proposals earlier in June that requires public comment before approval, according to Kuben Naidoo, chief executive officer of South Africa’s banking regulator known as the Prudential Authority.
“We are trying to put in place the regulatory framework quickly,” said Naidoo, who’s also a deputy governor of the South African central bank. “Our view is that crypto is a financial product and should be regulated as a financial product.”
The approach that’s taking shape means tougher rules could be imminent this year after a jolt of scandals that most recently included a suspected Ponzi scheme, which resulted in the disappearance of an estimated $3.6 billion in Bitcoin.
“Now we are defining this as a financial product and if there are scams where the public is being duped, given incorrect or false information, it is certainly a market conduct issue that should be taken seriously,” Naidoo said.
South African cryptocurrency service providers have been operating unchecked by regulatory powers even as the popularity of the asset class has taken off.
Last year, the collapse of Johannesburg-based Mirror Trading International was called the biggest crypto-related scam of 2020 by blockchain data platform Chainalysis.
“We are of the view that cryptocurrencies are risky and we want to ensure that the financial sector is aware of those risks and pricing for those risks properly,” Naidoo said.
Africa’s most developed economy is tightening the screws on the industry as digital currencies move from the periphery of the finance world to the mainstream and face deeper scrutiny worldwide.
In one of the most significant moves to date by a regulator amid a global crackdown, Binance Markets Ltd. was banned Sunday by the U.K. financial watchdog from doing any regulated business in the country. Huobi, one of the most popular cryptocurrency platforms in China, said Monday that users in the country are prohibited from trading derivatives.
Under global regulators’ plans to ward off threats to financial stability from the volatile market, banks will face the toughest capital requirements for holdings in Bitcoin.
Earlier this month, the Basel Committee on Banking Supervision proposed that a 1,250% risk weight be applied to a bank’s exposure to Bitcoin and certain other cryptocurrencies.
Regulators in South Africa will first move to establish know-your-customer rules for crypto exchanges and create systems for the surveillance of the asset class in order to prevent money being laundered out of the country, Naidoo said.
Thereafter, investor-protection guidelines and rules for managing capital risk in the banking sector should come into effect.
In a speech on Wednesday, Justice Minister Ronald Lamola said an inter-department working group that includes government agencies, the central bank and law enforcement is planning to “closely monitor the evolution of cryptocurrencies.”
Created to fight money laundering and terrorism financing, the entity recovered over 400 million rand ($28.1 million) in the last financial year, according to Lamola.
“Cryptocurrencies do not fit neatly within the current regulatory framework,” he said. “One of the unique features of cryptocurrency is its ability to operate without third-party intermediaries or similar safety mechanisms. The consequence though is that the potential financial and consumer risks are quite pronounced.”
Firms offering services related to digital currencies in South Africa have been eager for better rules to take shape and drive up trust in the asset class.
“Any incidents of fraud draw attention to the importance of regulation and we hope that the clear guidelines in South Africa — and globally — could lead to wider adoption by enhancing stability and trust in the market,” said Marius Reitz, general manager in Africa for Luno.
“Regulations will also raise standards and barriers to entry and weed out bad actors or service providers with a low regard and capability to safeguard customer information and money,” Reitz said.