Not clear yet, if the regulator is comfortable
The South African Reserve Bank (SARB) announced the intention to declare cryptocurrency as a financial product. The question is… will we finally see crypto regulation in South Africa?
FAnews spoke to Danny Joffe, Head of Legal at Hollard Insure about the implications for regulators and insurers.
All the hype
“We all know how big cryptocurrency has become over the last few years. Almost everyone is talking about investing in some of the more well-known cryptocurrencies such as Bitcoin or Etherium, and before the recent crash, how you cannot lose,” said Joffe.
“Lots of apps were brought out, making it easy for laypeople in the streets to own wallets and buy and sell online, without them really considering the various risks that may be present. This is not unique to South Africa. All over the world there is a fascination with Bitcoin, which is the main crypto and even specialised funds have been initiated that one can invest in,” he added.
“It has also become the international currency by which many international transactions are done, as it’s easy to pay without any banks or compliance regulators detecting, no clearances are required, and it does not appear to leave formal audit trails that can be checked by state officials. The money resides and is transferred through online wallets,” continued Joffe.
The risk here, according to Joffe, is of cyber thieves. Hackers are those transacting over what they call the “the dark web” and given its an international currency which is not regulated and cannot be easily tracked, there are various risks present.
Implications for regulators
Given this context, Joffe mentioned that we need to consider the implications Bitcoin has for insurance regulators in South Africa.
“At the moment, it appears the South African Revenue Service (SARS) is looking carefully at how to regulate gains made as a result of cryptocurrencies and the SARB would certainly be interested in trying to regulate its impact on, for example, foreign exchange regulations,” he said.
With regards to insurers, Joffe said its obvious impact would be with policies where foreign currency is part of the premium or claims being paid. “Marine policies are an example where premium, or claims may be required to be paid in foreign currency. Instead of having to take hedges against currency volatility and deal with foreign exchange regulations, it may be easier for insurers with international cover and policyholders to charge premium in Bitcoin and pay claims in Bitcoin, assuming the extreme volatility in cryptocurrencies was to iron itself out (which is a major assumption). It’s one international currency that is easily transferred in and out. As stated, the volatility is preventing this from happening but if that ended, I believe regulators would be forced to deal with the issue of international currencies, which are the future.”
“Liability cover often requires the insurer to pay in international currency as the cover is given throughout the world, with the exception of the USA and Canada, and one international currency such as Bitcoin would make everyone’s life easier in quantifying and paying claims. Paying overseas suppliers would likewise become simpler. The Reserve Bank and Prudential Authority, again, would need to think how this needs to be governed,” emphasised Joffe.
The second issue, according to Joffe, is if a policyholder requests to pay their premium in Bitcoin (this will become more popular in the future), to prevent the compliance red tape of current regulations and because that is the currency, they, as a company, trade in primarily. “If this becomes more widespread, the regulator will need to get involved. Premium returns in Bitcoin may well become the way of the future, but there would need to be specific regulations around this, if it starts happening.”
In the insurance space
“Another interesting example of insurers needing to deal in Bitcoin, is where there is a cyber insurance policy, and a policyholder has been hacked and its data stolen. The thieves often demand a ransom in Bitcoin, again because it’s easy to transport over international borders and cannot be tracked, as bank accounts are not involved. If insurers decided to pay the ransom (whether its legal to do so or not is the subject of another article), they would need to do so in Bitcoin and they would, therefore, need to have access to Bitcoin wallets which are relatively sizable,” said Joffe.
“Finally, products which insure crypto wallets, the theft of these wallets, hedge funds in Bitcoin or tracking Bitcoin have already begun and are becoming more popular. It’s not clear yet, if the regulator is comfortable this carry on as it is currently, or if there is a need for tighter and stronger regulations for products like this, and how they are paid. Cyber cover for the wallets may only be proper indemnity if the Bitcoin is replaced in Bitcoin, for example. What is clear is that the practice of using crypto in the insurance space will become more widespread, but it’s not just the insurance regulators that can act by themselves. There needs to be a comprehensive strategy throughout, involving SARS, the Reserve Bank, the Financial Intelligence Centre (FIC) and many other state organs to make sure that there is consistency and certainty going forward in owning and dealing with these currencies,” concluded Joffe.
Writer’s Thoughts
As mentioned above, the practice of using crypto in the insurance space will become more widespread, but there needs to be a comprehensive strategy to make sure that there is consistency and certainty going forward in owning and dealing with these currencies. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
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