Warning to people who use their own crypto wallets in South Africa

People who use non-custodial crypto wallets may soon find it more difficult to transfer their tokens to local exchanges to sell back to fiat currency or trade for other cryptocurrencies.

The Financial Intelligence Centre (FIC) recently issued Directive 9, which implements a version of the Financial Action Task Force (FATF) “travel rule” in South Africa.

It will enter into force on 30 April 2025 and essentially requires crypto platforms in South Africa to identify the parties to a cryptocurrency transaction and verify the data.

Data that must be sent alongside crypto transactions include the sender’s full name, ID or passport number, residential address or country of birth. The beneficiary’s full name must also be provided.

There are some concessions for transactions below R5,000. However, any transaction suspected to be linked to money laundering, terrorist financing, or the illegal proliferation of weapons of mass destruction must be flagged for verification.

Originating and intermediate crypto asset service providers (CASPs) must securely store this data to protect users’ privacy and the integrity and availability of the required information.

In addition to stipulating regulations for CASPs to identify senders and receivers, the FIC’s directive also addresses private or non-custodial crypto wallets, which it calls “unhosted wallets”.

Unhosted wallets are what people in crypto would call self-custody or self-hosted wallets. These are any wallets not provided by third parties like CASPs.

Self-custody is a cornerstone of the technology and the movement that spawned it.

The FIC has directed crypto asset providers in South Africa to develop, document, maintain and implement effective risk-based policies and procedures to handle private wallets.

Their policies must include how and when additional information on the unhosted wallet is obtained if the CASP determines that there is a higher risk of money laundering, terrorist financing or proliferation financing.

Essentially, exchanges and other crypto asset services must determine for themselves what level of risk they are willing to take on when accepting transfers from private wallets.

This may mean something relatively simple like demanding proof of identity and a declaration of the customer’s source of funds — or not accepting such deposits at all to avoid the risk entirely.

When MyBroadband previously asked CASPs about the possibility that they would refuse to accept transfers from self-hosted wallets to avoid any risk, Altify, Luno, and Valr said it was possible but unlikely.

Valr pointed out that this risk already existed before the travel rule. It highlighted that CASPs must already block transactions from wallets on a global sanctions list.

“The large exchanges around the world are already utilising the services of chain analytics providers to screen transactions against these sanctions lists and flag transactions from wallets associated with illicit activities,” Valr stated.

Luno welcomed the shift from a rules-based regime to a risk-based one.

It acknowledged that, theoretically, it would allow a CASP to disallow transactions to or from unhosted wallets, based on their risk appetite.

However, it added that CASPs could also treat it as just another risk indicator among many to determine the probability of money laundering, terrorist financing, and proliferation of weapons of mass destruction.

Altify founder and CEO Sean Sanders said that jurisdictions like South Korea and Japan require users to sign waivers for such transfers, putting the risk and regulatory reporting requirements on them.

Another major change in the works for private wallets is that South African regulators reportedly want to enforce exchange control limits on them.

This is according to crypto industry veteran Carel van Wyk. Van Wyk co-founded Luno and subsequently founded MoneyBadger.

MoneyBadger provides the infrastructure for companies like Pick n Pay to accept cryptocurrency payments.

Van Wyk said that regulators are on track to apply individual Single Discretionary Allowance (SDA) and Foreign Investment Allowance (FIA) limits on self-custody wallets.

The SDA and FIA effectively limit the amount of money South Africans can send overseas without exit tax implications to R11 million per year.

Under South Africa’s current exchange control regulations, it is technically illegal to transfer cryptocurrency from a local wallet to an overseas wallet or platform.

Decentralised exchanges and other decentralised financial applications that run on smart contract blockchains like Ethereum, Solana, Cardano, Fantom, and Polygon are considered offshore.

The Intergovernmental Fintech Working Group on crypto asset regulation recommended in 2021 that the Minister of Finance amend South Africa’s exchange control regulation to include crypto assets in the definition of ‘capital’.

It also recommended that the Financial Surveillance Department of the South African Reserve Bank amend the necessary regulations to allow cross-border crypto transactions within the current reporting framework.