High time for South Africa to open the crypto taps

It is high time for South Africa’s traditional investment industry to offer crypto assets to its clientele, VALR co-founder and CEO Farzam Ehsani (middle) has told MyBroadband.

“We are already seeing significant movements in this direction,” Ehsani said.

“I’m not at liberty to share specific names, but VALR is working with several household names in the traditional financial industry to bring this asset class to the public.”

Venox founder Simon Dingle also told MyBroadband that they are in talks with several traditional institutions to help them provide crypto asset investment products to their clients.

Ehsani highlighted that the United States has approved eleven spot Bitcoin exchange-traded funds (ETFs), and Hong King has launched spot ETFs for Bitcoin and Ethereum.

“This follows many other jurisdictions, such as Canada, where these financial instruments have existed for several years,” he said.

“It is clear that while regulatory frameworks [will continue maturing], the crypto asset class itself holds tremendous promise for the benefit of humanity, and it is time that traditional investment funds get more involved,” said Ehsani.

However, Altify CEO Sean Sanders and Jaltech co-founder Gaurav Nair said significant regulatory obstacles still prevent widespread adoption of crypto assets as investments in South Africa.

Although recent regulatory changes have made it easier for independent financial advisors and discretionary fund managers to consider crypto investments, others still can’t access the asset class.

“Unfortunately, Regulation 28 of the Pension Funds Act explicitly prohibits pension funds from investing in cryptocurrencies,” Sanders said.

“This restriction serves as an indirect deterrent for all other asset managers who might otherwise take a more serious interest in the crypto asset class.”

Nair said regulations over Collective Investment Schemes (CIS) that aren’t governed by Regulation 28 would also need to be amended.

“Collective Investment Schemes have categories of permissible assets in Board Notice 90, and crypto does not appear on the list,” explained Nair.

Because of this, even CIS funds cannot invest in crypto directly even when they don’t fall under Regulation 28.

However, since crypto isn’t forbidden for such CIS funds, they could get exposure through another instrument allowed under Board Notice 90.

“We aren’t aware of anyone producing such instruments in the South African market other than Jaltech,” Nair said.

Regardless, the fund would still need to consider whether its mandate allows investing in such an instrument.

Luno South Africa country manager Christo de Wit agreed that more legislative changes are needed to pave the way for cryptocurrency-based unit trusts and ETFs in South Africa.

He said much work has been done to lay the foundations in the past two years.

“The regulatory environment for crypto progressed swiftly from crypto being declared a financial product in October 2022 to Luno and other crypto asset service providers obtaining their financial services provider licences in April 2024,” De Wit said.

“These regulatory changes lay the foundation for greater adoption and crossover from traditional financial institutions into the crypto asset space.”

Besides further regulatory changes, Sanders said institutions will need thorough institutional-level education and enhanced protections to invest significantly in crypto.

This includes insurance against cybercrime and theft related to crypto assets.

“Moreover, the involvement of major local wealth managers like Investec or Allan Gray could be crucial in promoting wider institutional adoption, although this is likely to take some time,” he said.

Sanders said South African fund managers might feel compelled to embrace crypto as central banks and leading wealth managers in more developed economies increasingly integrate crypto assets into their treasuries and portfolios.

“The shift towards crypto is a long-term endeavour, not a quick race, especially as fiat currencies tend to lose value over time,” Sanders said.

Regarding how investment product providers think of crypto as part of a larger portfolio, MyWealth Investments CEO Annatjie Van Rooyen told MyBroadband that it remains a high-risk, high-reward asset class.

“Crypto investments have a track record of high volatility with long-term returns reflecting the correlation between risk and return,” Van Rooyen said.

“Investors should use this asset class as one of many building blocks in a diversified portfolio and familiarise themselves with any possible liquidity constraints,” she said.

“This investment class should, in my opinion, not exceed 5% of the total investment portfolio of a client.”

Nair, who is also Jaltech’s fund management head, said he sees crypto as having a two-fold function in a portfolio: growth and diversification.

“Crypto should take up a very high-risk segment of an investor’s portfolio,” Nair said.

“Historically, crypto has been a great portfolio diversifier, with low correlation to traditional markets — even below traditional hedges like industrial commodities or gold.”

Regarding crypto’s growth potential, Nair cautioned that crypto investing is similar to investing in Internet companies in the early 2000s.

“There’s massive potential, but also high risk when it comes to individual assets — and if the Dot Com boom taught us anything, it’s difficult to pick long-term winners.”

He noted that Amazon was just an online bookseller in those days.

“As with Internet investing, it’s difficult to outperform the index by stock picking or timing the market perfectly,” said Nair.

“We recommend investors follow similar advice that would have worked remarkably during the last two decades in Internet stocks:

“Steadily build an investment through a method of dollar cost averaging into a diversified index — don’t bother trying to pick winners.”

Sanders agrees with this strategy, saying that this was precisely the thinking behind Altify’s product portfolio.