Cryptocurrency is an innovation in financial technology that is generally understood as a virtual or electronic form of value or currency. It is created through decentralising encryption algorithms and is used as an alternative instrument for payment. To date, South African financial consumers have welcomed cryptocurrencies in their various forms. The Digital 2022: Global Digital Overview reflected that in January 2022, 19.4% of internet users in South Africa owned cryptocurrency. This is almost double the average of 10.2% of internet-using cryptocurrency owners measured across 50 countries worldwide.
South African regulators have been far less welcoming of this innovation. Trading in cryptocurrencies is “legal” because there is no national prohibition on such trade. However, the Financial Services Conduct Authority (FSCA), the South African Reserve Bank (SARB), and other financial regulators have warned consumers that no regulatory remedies exist for those who fall prey to crypto-related financial crimes. Not only are consumers unprotected, but perpetrators are also unpoliced. In 2020, South African investors lost approximately R9 billion in Bitcoin investments to a fraudulent company known as Mirror Trading International. In 2021, Africrypt which was based in South Africa at the time defrauded consumers around the world out of more than R50 billion in cryptocurrency investments. It is noteworthy, too, that ransomware attacks and crypto scams are the two types of crypto-related offences predominantly observed on the African continent.
South African financial regulators have strictly reserved endorsement of cryptocurrencies as instruments of trade. However, the regulators have recognised the pressing need for regulatory consumer protection due to increasing crypto-related crime. In 2018, the Intergovernmental Fintech Working Group (IFWG) established the Crypto Assets Regulatory Working Group (The CAR WG) to develop a regulatory framework for entities that will be known as crypto asset service providers or CASPs for short. Since then, the CAR WG has published working papers providing recommendations for the future regulation of cryptocurrencies, or “crypto assets”, which is the preferred term in South Africa. During the construction of the regulatory framework, the FSCA published a draft notice in November 2020, which proposed a declaration of crypto assets as financial products in terms of the Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS). The draft declaration defined crypto assets as “any digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes, but excluding digital representations of fiat currencies or securities that already fall within the definition of financial product”. The declaration remains a draft proposal pending considerations of incorporating crypto asset regulation into the Conduct of Financial Institutions Bill. However, the CAR WG has begun the process of adding casps to the list of accountable institutions under the Financial Intelligence Center Act 38 of 2001, which will subject them to the know-your-client and anti-financial-crimes regulations of the country.
Crypto assets have not remained entirely exempt from legal requirements in wait of the above regulation. In 2018, the South African Revenue Services (SARS) declared in a press statement that crypto assets constituted financial assets and that any income derived from the trade of such assets was taxable in terms of the Income Tax Act (58 of 1962). SARB has taken a similar stance on the issue. The movement of crypto assets in and out of South Africa is subject to established exchange control requirements, despite SARB’s declaration that virtual currencies are not a government-sanctioned legal tender comparable to the Rand. Additionally, the Financial Surveillance Department under SARB is not approving requests for cross-border exchange transfers intended for crypto asset purchases. Such transactions are not permitted by the Currency and Exchanges Manual for Authorised Dealers or the Currency and Exchanges Manual for Authorised Dealers on foreign currency with limited authority.
The technical complexities of crypto assets have proved difficult to regulate effectively. Nevertheless, the associated dangers have not dissuaded consumers from using and being prejudiced by this financial innovation. South Africans can anticipate dynamic attempts from South African regulators to protect the financial industry and the global economy at large.