If National Treasury gets its way, South Africans who do not comply with proposed regulations dealing with crypto-currency could face jail terms of up to five years, a R1 million fine, or both.
In addition, if people are found guilty of a breach of the rules, government will also be able to force them to hand over passwords, PINs or access codes so crypto assets that have been lawfully seized and forfeited can be accessed and sold.
The proposed Draft Capital Flow Management Regulations will replace the 1961 Exchange Control Regulations and bring crypto assets formally within South Africa’s capital flow management framework.
Crypto-currency exchange VALR says: “The stated aim is to modernise oversight of cross-border flows, address gaps in crypto transactions and strengthen reporting on larger activities.”
The planned draft regulations are meant to bring South Africa’s foreign exchange rules in line with global standards set by the Organisation for Economic Co-operation and Development and the Financial Action Task Force, which aim to curb money-laundering, terrorist financing and illicit financial flows, explains law firm Bowmans.
The new rules were flagged during February’s National Budget when finance minister Enoch Godongwana said National Treasury would “shortly publish draft regulations under the Currency and Exchanges Act, to include crypto assets in our capital flow management regime”.
Initially open for comment until 10 June, the public now has until 18 May to make representations.
The law is the law
Under the regulations, anyone buying, selling, lending or transferring crypto assets above a threshold – yet to be set – need to use authorised crypto asset service providers. Traders must also submit written declarations within 30 days of obtaining crypto assets, detailing when and how they were acquired and where they are held.
Crypto asset transactions will require a stated purpose, and using crypto assets outside of that purpose would trigger a mandatory sale, VALR says.
In addition, the regulations empower authorities, including border control, to search individuals, demand declarations and seize assets from those suspected of violating the rules, VALR explains.
National Treasury can attach crypto assets if there is a suspected breach of the rules even before a case is finalised. That includes assets believed to be linked to a contravention, proceeds from such activity, or anything transformed from those proceeds.
Once attached, the state can take control of the assets, including moving them into accounts or designated crypto addresses under its control. Section 24 also gives authorities the power to freeze accounts holding crypto assets, preventing any withdrawals or transactions without permission during the process of an investigation – regardless of who holds the account.
Jail time
Contravention could result in a R1 million fine, five years’ imprisonment, or both. The rules also make provision for penalties equal to the full value of the crypto, funds or transaction involved, which could see a fine of more than R1 million.
If there is a shortfall between the value of crypto assets or funds seized and the total value of a transaction that was in contravention of the regulations, authorities can go after additional assets to cover the difference.
The regulations do allow seized assets to be returned if National Treasury is satisfied they were not linked to a contravention, but this is not automatic.
While noting that it will submit detailed and constructive comments, VALR says: “We believe these provisions are overly restrictive and undermine the nature of crypto assets and the practical exercise of self-custody rights.”
‘Prudent’ measures
National Treasury says South Africa has adopted a prudent approach to managing cross-border capital flows by gradually recalibrating exchange controls to reflect its macro-economic policy stance.
The department says it has been reviewing the forex control framework under the Exchange Control Regulations of 1961. “These reviews aimed to refine policies and support South Africa’s growth and global integration… Global integration drives foreign investment growth and technology exchange, while also developing human capital and knowledge, and mitigating investment risks through diversification.”
The proposed changes come amid an ongoing legal battle in which the South African Reserve Bank is trying to persuade the courts that crypto falls within the ambit of the 1961 “apartheid-era” law.
Set to be heard in the Supreme Court of Appeal this year, the matter hinges on last year’s North Gauteng High Court ruling that blocked its forfeiture of R16.4 million held at Standard Bank, after judge Mandlenkosi Motha found the old regulations had no bearing on digital assets, also citing the central bank’s own 2020 position paper.
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