South Africa’s major cryptocurrency exchange platforms believe that the country’s promised regulation for the industry will bring significant benefits and growth.
The South African Reserve Bank (SARB) and the Intergovernmental Fintech Working Group’s (IFWG) position paper on cryptocurrencies, which was published in July 2021, has recommended that crypto asset service providers (CASPs) should be regulated in a phased approach.
The paper’s reforms were welcomed by South African cryptocurrency exchange platforms, who agree that the absence of regulation in the industry is currently their greatest inhibitor.
“The lack of regulatory clarity has been restrictive to the entire crypto industry,” said VALR CEO Farzam Ehsani.
Revix CEO Sean Sanders adds to this, stating that “building customer trust is a lot more challenging as you don’t have a license or a regulatory number to show to customers.”
Although the crypto industry was generally positive about the IFWG’s position paper, many players in the space raised concerns with a hard-line FAQ document released alongside it.
It restricted customers from buying foreign crypto assets using their credit and debit cards. It also criminalised any offshore transfers made from their own wallets or through local exchanges and wallet providers.
Additionally, customers were restricted from moving their cryptocurrencies to decentralised exchanges or DeFi protocols from a local wallet, since the SARB’s Financial Surveillance Department (FinSurv) views these platforms as foreign.
“All professional, insured crypto custody partners are based offshore, so the SARBs decision to do this actually indirectly harmed South African consumers in their ability to securely store their crypto holdings,” said Sanders.
The South African cryptocurrency market needs revised regulations to avoid unintended consequences like this, protecting consumers while fostering innovation.
“A clear framework that is measured and appropriate will allow innovation to flourish and will allow South Africa to take its rightful place on the world stage,” said Ehsani.
The IFWG’s Crypto Assets Regulatory Working Group has recommended the introduction of a licensing framework, the application of FICA to the industry, and expanded exchange control regulations.
The first stages of the reforms will focus on introducing a licensing framework to the digital asset industry, followed by FICA requirements.
David Porter from AltCoinTrader agrees that introducing a licensing framework like this would “help prevent unlicensed operators benefitting too much from any scam they may conceive.”
Regarding the application of FICA to the industry, Luno and other local crypto industry players are already voluntarily registered with the Financial Intelligence Centre.
“Formalising the inclusion of Crypto Asset Service Providers within scope of the FIC Act will ensure the compliance bar is high for all industry participants and require high levels of anti-money laundering (AML), know your customer (KYC) and anti-terror financing (ATF) procedures,” said Luno Head of Legal and General Counsel Lucy James.
Porter said that customers can still buy cryptocurrencies that aren’t available locally, but it involves a lengthy process of transferring funds to a foreign crypto exchange to purchase their desired token.
“One can imagine the types of opportunities that get lost over a couple of days in the crypto markets,” said Porter.
“The alternative would be to buy a crypto asset available on local exchanges, e.g. USDT (a stablecoin pegged 1:1 with the US dollar), send it near-instantaneously to the foreign crypto exchange, and use it to buy your token in a matter of minutes… not days.”
Another complication is that repatriation of value to South Africa through crypto assets is not permitted as part of your single discretionary allowance (SDA) or foreign investment allowance (FIA). This is partly because the transaction is currently not reportable on the FinSurv reporting system.
The SDA lets South Africans transfer up to R1 million offshore annually without a foreign tax clearance certificate. The FIA allows individuals to transfer up to R10 million overseas with a tax clearance certificate.
“In essence, this means you can use up your SDA or FIA buying crypto assets from overseas-based crypto exchanges, but when you bring that ‘capital or right to capital’ back into the country, they do not credit your SDA or FIA,” Porter said.
Therefore, allowing customers to buy digital assets that aren’t listed on local crypto exchanges by expanding the exchange control regulations is sorely needed.
Revix’s Sanders said that local players would benefit immensely from regulations extending beyond cryptocurrencies to include other digital assets like security tokens and NFTs.
“We’d like to offer fractionalised security tokens covering traditional stocks, unlisted companies, real estate, commodities, and so much more,” he said.
Sanders said they would like to see South Africa’s cryptocurrency space regulated in a progressive, forward-thinking way.
“Regulation is critical to protecting customers, and it’s an essential ingredient in the effective functioning of global financial services. The problem is that South African financial regulators aren’t known for being innovators or forward-thinking,” Sanders said.
He said that they would like to see a German or Swiss approach to crypto regulations, where the regulators put the necessary consumer protections in place while considering the innovation and job creation opportunities that the crypto industry can bring to South Africa.
“Crypto and digital assets, including security tokens and decentralised finance, are the future of the financial services space — our regulators need to embrace this, or we risk falling further behind other developed markets.”