Authorities will eventually formalise crypto-currencies

As financial authorities and governments around the world start to see the inevitability of crypto-currency, could SA still become a hub of crypto-currency innovation?
Rabelani Dagada
By Rabelani Dagada, Professor, University of Johannesburg
Johannesburg, 23 Sept 2021
Professor Rabelani Dagada from the University of Johannesburg.
Professor Rabelani Dagada from the University of Johannesburg.

Since the ushering of the democratic dispensation in 1994, there have been many instances where South Africa was in the spotlight due to unpleasant issues. These include high levels of crime, low levels of illiteracy, high levels of inequality, youth unemployment of 74.9% and a general unemployment rate of around 44%. It has also been in the top 20 countries with highest numbers of COVID-19 infections.

However, SA has had its moments basking in glory. The transition to democracy in 1994 was relatively peaceful. The national football team, Bafana Bafana, won the African Cup of Nations in 1996. Since 1994, the national rugby team, Springboks, have won the World Cup three times.

SA’s liberal constitution has been described as one of the best in the world. Two South African entrepreneurs, Mark Shuttleworth and Haroon Meer, developed cyber security inventions which attracted international attention.

In August 2021, the World Bank ranked SA’s Auditor-General as one of the two national audit offices globally that has full independence.

Unfortunately, SA squandered an opportunity to be the first to have crypto-currency listed on the stock exchange. The Johannesburg Stock Exchange (JSE) twice refused to approve the application by a local financial services firm to list what would have been the world’s first Bitcoin-based exchange-traded fund (ETF) on the basis there was no regulatory framework in SA to do this.

Sygnia had initially planned to launch this ETF in 2018. The second application was declined by the JSE in May 2021.

Had the JSE agreed to list the ETF Bitcoin, SA would possibly have become a hub of crypto-currency innovation, especially if one considers the country has highly-sophisticated financial services among the developing economies.

Luno, which was launched in SA, is one of the leading crypto-currency trading platforms globally. The JSE has now been overtaken in listing crypto ETFs by Canadian Horizons ETFs and Chicago Mercantile Exchange. El Salvador has also overtaken SA in allowing Bitcoin to be used as a legal tender for the buying and selling of goods and services in its economy.

Time waits for no man

This is despite the South African Reserve Bank (SARB) being the first central bank worldwide to take the necessary steps to formalise crypto-currency regulations. SARB has been concerned that digital currencies can be used to evade foreign exchange controls, and had intended to introduce new regulations to govern virtual assets. This would conclude the consultation process that started in 2014.

Other organs of state in SA that were concerned about the lack of a crypto-currency regulatory framework were the South African Revenue Services and Financial Intelligence Centre. These institutions, through the intergovernmental fintech working group, published a “Consultation paper on policy proposals for crypto-assets” in January 2019.

This formed the basis of a regulated way forward for crypto-asset service providers operating in SA. This framework influenced the contents of the “Guidance for a risk-based approach to virtual assets and virtual asset service providers” published in June 2019 by the Financial Action Task Force, an international standards-setting body of which SA is a member.

To fully appreciate the extent to which regulators are pushing back on digital currencies, one just has to observe their attitude towards Facebook’s crypto-currency, called Diem.

This regulatory process, which started before 2014, should have been finalised by now, and Sygnia should have been able to list its Bitcoin ETF in 2018. Sadly, the process has stalled and is moving at a snail’s pace.

Other than the JSE’s rejection of Bitcoin ETF, First National Bank closed crypto-currency-linked bank accounts in 2020, owing to regulatory uncertainty and the risks presented by the lack of formal regulations. This led to disappointment among the local virtual currency exchanges and intermediaries trading in digital currency.

It is not only in SA that regulators are slow to embrace crypto-currencies, as China has also been clamping down digital assets.

Carpe diem

To fully appreciate the extent to which regulators are pushing back on digital currencies, one just has to observe their attitude towards Facebook’s crypto-currency, called Diem (formerly known as Libra). In May 2019, Facebook and some its partners announced they were going to launch a blockchain-based digital currency in 2020 through a standalone non-profit entity named the Diem Association, headquartered in Switzerland.

Unlike Bitcoin, Diem will be more stable, as claimed in its founding white paper: “The world needs global, digitally-native currency that brings together the attributes of the world’s best currencies: stability, low inflation, wide global acceptance and fungibility.”

A major difference between Diem and other virtual currencies is that some assets would underpin it.

Diem executives positioned it as a currency that would enable the unbanked around the world to participate in commercial activities.

Many analysts and central banks around the world were sceptical about Diem’s intentions. They questioned the integrity of the big technology companies based on their previous scandals, regulatory infringements, market dominance, monopolistic tendencies and excessive profiteering intentions.

Analysts asserted that Diem is a moneymaking scheme for the founding companies, and claimed it was not introduced solely for socio-economic purposes. They further claimed that investors introduced Diem so that they could participate in financial services by circumventing regulatory authorities. If Diem operates outside regulatory boundaries, it would become a shadow bank and might undermine monetary sovereignties of nations.

Former US president Donald Trump, who usually supported business on major policy matters, was not convinced about the introduction of Libra. On 12 July 2019, he tweeted: “If Facebook and other companies want to become a bank, they must seek a new banking charter and become subject to all banking regulations.”

Other influential people who expressed harsh remarks and suspicion towards Libra include Bruno Le Maire (French finance minister), Markus Ferber (member of European Parliament), Maxine Waters (member of the US house committee on financial services) and Jerome Powell (chairman of the US Federal Reserve).

The only prominent figure who was a little bit receptive was Bank of England governor Mark Carney, who commented there was a need to keep an “open mind’ about digital systems for money transfers, but noted that anything that works in a technological world should be systematic and comply with regulations.

Central banks are more eager to introduce their digital currencies, and are lukewarm towards crypto-currencies that are not under the jurisdiction of any central bank.

In May 2020, China launched the crypto-yuan. Other nations may find the idea of having a sovereign digital currency tempting and it is a matter of time before they initiate theirs. In September 2021, the Bank for International Settlements announced it will test the use of central banks’ digital currencies with SA, Malaysia, Singapore and Australia.

Resistance is futile

Technology has prevailed against violent and regulatory opposition. During the era of the industrial revolution, some workers in Britain rioted against mechanised manufacturing firms. Blue-collar workers waged a war against technology. They physically destroyed production machinery, cotton and woollen mills.

The term “luddites” came into force during this time – referring to persons who are vehemently opposed to the introduction of new technology at work which they believe threatens the continued existence of their jobs. Recently, some people in the UK and SA falsely accused 5G technologies of causing the COVID-19 pandemic, and destroyed some mobile networks’ base stations.

Nonetheless, crypto-currency, a product of money and technology, will prevail and will eventually get regulatory frameworks to formalise it for payments. One of the reasons for the authorities to formalise crypto-currencies is the fact that they hold lots of taxable tax.

Big business has already embraced the inevitability of crypto-currencies’ formalisation and are accepting Bitcoin as payment. These companies include Tesla, Amazon, Microsoft, Pavilion Hotels & Resorts, AXA Insurance, Starbucks, Visa, Paypal, airBatic, Southeby’s, Coca-Cola, LOT Polish Airlines, Expedia, Lush and Mastercard.

It’s clear that if SA wants to be a crypto-currency hub, its policy-makers and regulators should finalise the crypto-currency public policy.