Bitcoin no currency? South Africa regulates crypto as a financial asset

The South African Reserve Bank plans to introduce regulations next year that will classify and treat cryptocurrencies as financial assets to balance investor protection and innovation.

The use of cryptocurrency in South Africa is in a healthy environment, with an estimated 13% of the population using some form of cryptocurrency according to research from the global exchange Luno. With more than 6 million people in the country with exposure to cryptocurrency – regulation of the space has long been a matter of debate.

Companies or individuals seeking to provide advice or brokerage services related to cryptocurrencies must currently be recognized as a financial services provider. This means that a number of checkboxes are met to comply with the global guidelines established by the Financial Action Task Force.

South Africa’s National Treasury budget review, published in February 2022, formally introduced the move to declare cryptocurrencies as financial products. The state also plans to improve monitoring and reporting of cryptocurrency transactions to comply with exchange regulations in the country.

South African Reserve Bank deputy governor Kuben Chetty has now confirmed new legislation will be introduced over the next 12 months, in an online series hosted on July 12 by local investment firm PSG. Center Act (FICA).

This is important, as it will allow the industry to be monitored for money laundering, tax evasion and terrorist financing, which is a heavily debated byproduct of the decentralized nature of cryptocurrencies and blockchains.

Related: South Africa Completes Technical PoC for Wholesale CBDC Settlement System

Chetty highlighted the path the SARB will take over the next 12 months to introduce these new regulations. First, it will declare cryptocurrencies as a financial product allowing them to be listed as a scheme under the Financial Intelligence Center Act.

Thereafter, a regulatory framework for exchanges will be developed that includes certain KYC requirements, as well as the need to comply with tax and exchange control laws. Exchanges are also expected to issue a “health warning” to highlight the risk of money loss.

Chetty noted that the SARB’s attitude to the industry has changed significantly over the past decade. About five years ago, the institution thought there was no need for regulatory oversight, but a gradual shift in the perception to define cryptocurrencies as financial assets has changed that attitude.

“By all definitions it is [cryptocurrencies] not a currency, it is an asset. It is something that is tradable, it is something that is created. Some have support, some don’t. Some may have a real underlying, real economic activity.”

The deputy governor insisted that the SARB did not consider cryptocurrencies a form of currency, given the perceived inability for everyday retail use and associated volatility.

Chetty agreed that continued interest in the space creates the need to regulate the sector and facilitate the merger with mainstream funding “in a way that balances the excitement and hype with the required investor protection”.

The SARB also continues to explore the potential introduction of a central bank digital currency (CBDC), having recently completed a technical proof-of-concept in April 2022. The second phase of Project Khokha involved using a blockchain-based clearing, trading and settlement system with a handful of banks that are part of the Intergovernmental Fintech Working Group (IFWG).