Your crypto asset future beckons

It will take at least 12 to 18 months for the Financial Sector Conduct Authority (FSCA), National Treasury (NT)) and the South African Reserve Bank (SARB) to implement a regulatory framework for crypto assets, though it remains unclear how products and product providers will evolve in that space. “It will probably still take us around 12 to 18 months to get all of our ducks in a row and get everything in place,” said Kuben Naidoo, Deputy Governor of the SARB, during a recent PSG Think Big webinar. He noted that the crypto assets regulatory framework would evolve in stages over this period, and that more time would likely pass before the central bank adopted or implemented any crypto-related solutions.

Declaring a new financial product

One of the first stages along the route to regulation of crypto assets and cryptocurrencies would be for the minister of finance to amend schedule 1 of the Financial Intelligence Centre (FIC) Act to declare crypto assets as a financial product. The second stage would be for the FSCA to develop the framework for the licensing of crypto asset exchanges, and for all product providers to begin to implement the necessary know your customer (KYC) rules. “My hope is that we can do this step-by-step, once the minister has amended schedule 1 of the FIC Act,” said Naidoo. But it will take longer to work through the foreign exchange implications of crypto asset trading. 

According to the SARB, the exchange of one asset for another within South Africa’s borders is legal. So, you could, for example, swap any number of Bitcoin for a car or home or property without attracting additional regulatory scrutiny, provided the asset is local. However, at the point where you change your rands for crypto assets or change crypto assets for rands, you introduce regulatory requirements such as KYC. Things become more complicated when the property you purchase is offshore. “If you want to trade across borders using crypto assets there will have to be a form or record keeping,” Naidoo said. 

The question PSG put to the Deputy Governor was whether South Africa was behind the curve in adopting crypto assets. Naidoo explained that the SARB and other regulatory authorities were “smack bang in the middle” of figuring out how crypto assets might fit into existing processes and systems. “We are not behind the curve; for now, most central banks are focused on how to regulate the broad crypto environment and learning from its application in other markets,” he said. By way of example, the SARB was working closely with its peers in Australia, Singapore and the United Kingdom on the application of cryptocurrencies in central banking and payment systems. One area where all authorities are exercising caution is in separating the positive technological aspects of blockchain and distributed ledgers from the risks that attach to hype and speculation. 

The SARB’s view on cryptocurrencies

It was interesting to reflect on how the SARB’s view on cryptocurrencies had evolved over the past six years. Around 2015, the central bank saw the likes of Bitcoin and Ethereum as speculative tradable assets that were occasionally backed by tangible value and / or economic activities. They were not seen as currencies. The SARB was, however, concerned about the exchange control, money laundering and tax implications of the widespread adoption of these assets. “Our view has changed, and we now regard Bitcoin as a financial asset, and we hope to regulate it as a financial asset,” explained Naidoo. “There is a need to regulate Bitcoin and bring it into the mainstream in an orderly fashion, but in a way that balances the excitement and the hype with investor protection”. 

This writer enjoyed the Deputy Governor’s frank assessment of the role of the central bank in the crypto asset debate as being to ensure that adequate protections are in place for those who choose to invest or trade in the emerging asset class. This means that the SARB cannot take a view on the merits of the asset class or the various financial products that might flow from it: “our job is not to pick winners or losers; but we do feel that cryptocurrencies are too volatile to be used in the payment space”. It would appear the future we are steering towards is one where crypto assets are regulated as financial products, with the conduct of exchanges and product providers that offer or transact in such assets falling under the FSCA. 

The regulatory framework that is eventually adopted will not alter the requirement for your clients to comply with the prevailing exchange control and tax regulation. Naidoo went to lengths to describe the process of moving money across borders, including the need to comply with basic reporting requirements when availing of the ZAR1 million per annum offshore allowance, and the more comprehensive tax certificate and declaration of source of funds when moving larger sums. It is worth noting that these requirements are also relevant to clients who wish to use crypto currencies to affect the movement of funds offshore. “If you want to take out an amount in cryptocurrency, if its value is below ZAR1 million there is nothing required; but if it is above ZAR1 million you need to get tax clearance and show source of funds,” noted Naidoo. 

Keeping the ‘bad actors’ out

The integrity of the broader financial system is non-negotiable, and the SARB and other regulatory authorities remain in consultation with industry on the best approach to crypto asset regulation. “There are concerns about how we enforce the regulations and about the regulatory oversight that we propose, but in the main, most of the stakeholders that we have spoken to welcome our approach,” concluded Naidoo. “There [is consensus] that [our approach to regulation] legitimises the industry by allowing the good players in and keeping the bad players out. It prevents money-laundering and provides a safe investment or transactional platform for investors”. 

And if they get the regulatory framework right, your clients will be free to invest in or speculate with Bitcoin, Ethereum and other crypto assets and cryptocurrencies to their heart’s content. The caveat being that they understand the risk and volatility inherent in the asset class, and appreciate that there is often a limited value underpin to what they are investing (sic) in. From a central bank perspective, the value in the crypto asset evolution is less about the assets, and more about the technology that underpins them. It is hoped these technologies will eventually contribute to reductions in costs, financial inclusion and transactional efficiencies throughout the banking system. 

Writer’s thoughts:
It seems bizarre that so many of your clients are buying and selling cryptocurrencies while the regulators are still mulling over a regulatory approach to the asset class… Do you feel that you have a responsibility to advise or assist your clients with crypto asset transactions despite the financial product not being officially regulated? Or is crypto investing something you steadfastly refuse to get involved with? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.