(Disclaimer: This does not constitute financial advice)
The need for crypto regulation
Since Bitcoin’s official launch in January 2009, the growth of this technology has been exponential, growing much faster than the internet in the early 1980s. With such growth, responsibility needs to be taken from all parties involved in the Crypto space.
The discussion surrounding the regulation of Crypto assets started in 2014. However, the South African national policy position was largely unregulated and crypto-related activities were exercised at the risk of the parties involved, without any regulatory support if something did go wrong in the process of the crypto-related activity. This has changed.
Why are regulations necessary?
In recent years, regulatory authorities have taken a keen interest in regulating crypto-related activities. Interest in crypto assets and related activities by individuals is being shown repeatedly, but this is not the only major factor playing a role in the motivation for governing bodies to act.
The world’s biggest crypto scam, namely Mirror Trading International (MTI) was perpetrated in South Africa amounting to $885 million being placed in final liquidation. More recently we also had the Africrypt scam. This and a combination of different factors have put pressure on regulatory authorities to regulate crypto activities for the possible recourse or elimination of such events.
A certain level of governance is called upon as the need for supervision of Crypto Asset Service Providers (CASP) & Crypto Asset Trading Providers (CATP) is necessary, to a certain extent, to ensure the protection of all consumers of such platforms.
This is a new area for our regulators in South Africa and the growth of crypto has included a growing concern for regulation, but a great deal of thought is being put into the process of regulating the space and how to move forward.
Regulation needs to catch up with innovation.
– Henry Paulsen
Position Paper on Regulations
The Intergovernmental Fintech Working Group (IFWG) in conjunction with the new Crypto Asset Regulatory Working Group (CAR WG) has compiled a position paper on crypto assets. The paper was published on 11 June 2021. The paper sets out a vision, purpose, reasoning, recommendation, process, and how-to implementation of crypto regulations.
- Members of Intergovernmental Fintech Working Group (IFWG) is:
- South African Reserve Bank (SARB)
- Financial Intelligence Centre (FIC)
- The Financial Sector Conduct Authority (FSCA)
- National Treasury (NT)
- National Credit Regulator (NCR)
- South African Revenue Service (SARS)
- Competition Commission
- Crypto Assets Regulatory Working Group (CAR WG) (CAR WG was established with the help and support of IFWG. CAR WG is comprised of IFWG members to specifically review the South African position on crypto assets. The objective of the CAR WG is to formulate a coherent and comprehensive policy stance on crypto assets.)
- Participants in the South African crypto-asset ecosystem industry
- Financial Action Task Force (FATF)
- Committee on Payments and Market Infrastructures (CPMI)
- Basel Committee on Banking Supervision (BCBS)
- Bank for International Settlements (BIS)
How was regulation approached
The Crypto Assets Regulatory Working Group (CAR WG) has structured its approach to drafting the Position paper on crypto assets, containing the regulations and recommendations into three Pillars:
Descriptive characterisation of crypto assets and related activities, including the continued analysation and investigation of new developing crypto-related activities.
Identifying key risk areas and developing mitigating measures available to address these risks and intervention procedures for regulatory authorities to combat the risk responsibly.
Continuous monitoring of crypto and crypto-related activities. Identification of the evolution of channels for the risk possibility, that such a risk will influence the financial sector and economy.
The governing bodies agree that crypto assets can no longer remain outside of the South African regulatory scope. Crypto Assets Regulatory Working Group (CAR WG) has recommended South Africa make use of a staged approach. As part of the staged approach, some recommendations have been made to the governing bodies and will take time to implement, while others are already underway – both will naturally form part of the crypto assets market and crypto assets service providers (CASP) market in South Africa.
In the recommended position paper on crypto assets the detailed recommendations for regulations were grouped into 3 categories:
- Implementation of Anti-Money Laundering and Combating the Financing of Terrorism framework,
- Framework for monitoring cross-border financial flow and
- Application of financial sector laws; meaning that in the future it is recommended that crypto be seen as a financial product as it is excluded in the definition currently.
In addition, there are two more priorities:
- Implementation of prudential regulation. Prudential regulation is a regulation that requires financial firms to hold adequate capital and control risks for their investees as the risk could ultimately spill over and pose a threat to financial stability. This work is being carried out by the Basel Committee on Banking Supervision (BCBS). South Africa will follow the BCBS’ lead in this area.
- Implementing a monitoring program for crypto assets. This will provide a platform to include the growth of regulation with the growth and expansion of all crypto asset-related developments.
Regulatory papers effect on SA banks
South Africa is a member of the Financial Action Task Force (FATF). The FATF has recently revised it’s standard namely, Recommendation 15 on New Technologies. The newly revised standard requires jurisdictions to regulate crypto assets and Crypto-Related Service Providers for Anti-Money Laundering (AML) and Countering the Financing of Terrorism purposes (CFT).
This means that jurisdictions such as South Africa must ensure all Crypto-Related Service Providers (CASP) are licensed or registered, and subject to effective AML/CFT systems for monitoring and supervision.
Currently, no South African resident is allowed by law to use their debit or credit cards to purchase crypto assets internationally, if they do try and use their debit/credit-card to purchase crypto assets on a foreign CATP/CASP platform they will receive a block from their national bank.
You are not allowed to buy crypto assets on a South African crypto asset trading platform and send the crypto assets to a foreign or offshore-based crypto asset exchange platform, therefore you will receive a block from your bank. The banks ultimately report to the SARB. SARB does not have the capacity or manpower to ensure that each transaction complies with the requirements set out in the Exchange Control Regulation 10(1)(c), thus causing a blanket ban on the transaction.
How to trade internationally
Now for the moment, you have been waiting for.
How can you trade internationally if you cannot acquire crypto assets on a South African crypto asset trading platform and send the crypto assets to a foreign or offshore-based crypto-asset exchange?
As an individual, you are entitled to a discretionary allowance of up to R 1 million and/or an individual foreign investment allowance of up to R 10 million with a Tax Compliance Status (TCS) PIN, per tax year. You can use these allowances to transfer funds abroad via an Electronic Fund Transfer (EFT).
You will need to make use of SARS for your Tax Compliance Status Request. Once your request is approved by SARS, you will be issued with an overall tax compliance status and a PIN. The PIN provides you with a way to authorise any third party to view your tax compliance status online via e-Filing. Once you have provided the PIN to a third party, the PIN will enable the relevant organisation or government department to view your current tax compliance status online. It will present them with your overall compliance status as at the date and time they check it instead of your status as it was at the date that the PIN was issued to you. To protect the confidentiality of taxpayer information, no other information will be accessible. CH Consulting can assist you in your application process.
Once your funds have been transferred to an account abroad via EFT – using the said allowance, you can purchase crypto on a foreign exchange.
Our country has several institutions that can assist you in legally moving your money offshore and onto a foreign crypto exchange platform. You are welcome to contact us, and we will happily put you in touch with an entity that can assist.