South Africa’s plan to regulate cryptocurrencies — including tax and exchange controls
South African Reserve Bank (SARB) deputy governor Kuben Naidoo says that the public should not expect a “big bang” of cryptocurrency regulations with a fully-formed regime launching at once.
Instead, there will be a steady and consistent influx of regulatory measures within the coming months as the industry regulation begins to take shape.
This will begin with the finance minister’s amendment to Schedule 1 of the Financial Intelligence Centre Act.
After that, it would take over a year to get all the necessary regulations in place.
“It will probably still take us around 12–18 months to get all of our ducks in a row; to get everything in place,” Naidoo said during the most recent PSG Think Big webinar.
In the meantime, regulators could get some basic measures in place.
“We can start to have some Know Your Customer rules; we can start to license exchanges; we can start to get basic [exchange control] information collected,” he said.
One of the first ports of call would be to bring crypto-assets into South Africa’s regulatory regime under the auspices of the Financial Sector Conduct Authority (FSCA).
In November 2020, the FSCA proposed declaring crypto assets a financial product under the Financial Advisory and Intermediary Services (FAIS) Act.
“However, due to broader developments surrounding the regulation of crypto-assets unfolding, including proposals to include crypto-asset related activities holistically within the scope of the [Conduct of Financial Institutions] Bill, the draft declaration was placed on hold,” the FSCA has said.
In its three-year regulation plan published at the start of July, the FSCA said the declaration was postponed until it obtains further clarity on these broader developments, including envisaged timelines for implementing proposals.
“In the interim, the FSCA initiated further work in understanding the crypto-asset landscape, and in particular in the advisor and intermediary environment,” it stated.
“As such, the FSCA issued a survey (Request for Information) to Financial Services Providers to identify the involvement of existing advisers and intermediaries in the crypto asset environment.”
The FSCA said the survey’s outcome would be considered in conjunction with the broader developments surrounding crypto-assets and will ultimately inform a decision regarding whether it would proceed with the FAIS Act declaration.
Naidoo said that the SARB’s thinking on cryptocurrencies has evolved and now views it as a type of asset — and should be regulated as such.
However, he elaborated that SARB’s role as it looks to regulate the industry is not to “pick winners and losers” or help users mitigate market risks.
The ups and downs of the market fall outside the concerns of the regulatory framework in a free market, and investors are free to choose which assets to invest in.
Instead, South Africa’s central bank is primarily concerned with implementing a regulatory framework that ensures anti-money laundering legislation and exchange controls are adhered to, similar to investment and trading in other financial assets.
Naidoo does not see cryptocurrencies as a likely challenger to the authority of the Reserve Bank, as the technology is still developing and digital currency is still too volatile to be widely used as a means of payment.
However, the use of crypto for money laundering and other illicit activities is a source of concern.
He stated that 90% of transactions involving cryptocurrency in the US are for the purchase of opioids or gambling tokens.
“Another unfortunate reality is that crypto is being used by cybercriminals to demand ransoms, and to fund cross-border kidnappings and other international crimes.”
Therefore, the SARB and Intergovernmental Fintech Working Group are actively considering taking two immediate steps to reduce the risk of cryptocurrencies being used to evade existing regulations.
The first is to bring crypto-assets under the purview of the FSCA, and the second is a regulatory framework for exchanges and platforms that includes FICA-like Know Your Customer protocols, and exchange controls and the applicable taxation laws.
In addition, cryptocurrencies should come with a “health” warning.
This should indicate that South Africans must take the potential to lose money seriously and that owning cryptocurrency is not the same as making a bank deposit.
According to Naidoo, this approach is welcomed by most of the industry, with many players indicating that greater crypto regulation will help legitimise the use of the technology.
In Naidoo’s opinion, it will also go a long way in curbing the impact of money laundering and helping platforms build safe and trustworthy systems.
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