The South African Reserve Bank (SARB) is set to face a “legal brick wall” when it faces off against Standard Bank next year in the Supreme Court of Appeal (SCA) seeking to regulate crypto-currency as forex.
This is according to Joon Chong, a partner at law firm Webber Wentzel, who says SARB cannot use the courts to circumvent the legislative process required to expand regulatory definitions.
“Judicial interpretation cannot substitute for legislative intervention,” Chong says.
SARB wants digital currency regulated under the 1961 Exchange Control Regulations.
The SCA is set to hear a seminal case next year, which hinges on the legal definition of crypto – whether it is capital such as money. This comes after the High Court ruled in the middle of the year that the apartheid-era regulations were designed to prevent capital outflow and a “run on the rand” but they do not currently cover crypto-currency.
Chong says while SARB may well be able to charge a levy on money leaving the country, digital assets such as Bitcoin are not, in fact, defined as either money or assets in terms of its own regulations, which it has already acknowledged need amending through a legislative process.
Contentious issue
Earlier this year, the central bank’s seizure of Bitcoin was challenged by Standard Bank in the North Gauteng High Court in Pretoria. The virtual currency was held in an account at the bank as collateral for a R40 million overdraft it had granted to the now defunct Leo Cash and Carry (LLC).
SARB's argument was that LLC breached foreign exchange regulations by trading internationally in crypto-currency. SARB is now hoping to overturn this decision in the SCA.
Standard Bank took the position that the law does not recognise crypto as legal tender, so these assets are not formally recognised and can’t be regulated.
Chong points out that SARB needs legislative reform, not litigation, to bring crypto under its control. Previous case law, she explains, actually works against the central bank's position.
Wrong forum
Chong cites a 2011 case, Oilwell v Protect International, which decided that intellectual property was not “capital” under the regulations and forced the bank to amend the law through Parliament. Capital comprises assets, resources, or wealth in terms of its legal definition.
Chong notes the precedent set in this matter is clear in that SARB must go to Parliament to expand the scope of the regulations and cannot achieve this through the court system.
“When a new form of value [money or assets] emerges, the appropriate course is legislative amendment by Parliament rather than ad hoc judicial interpretive expansion of existing definitions.”
Shuttleworth case doesn't help SARB
Chong then examines the Shuttleworth v SARB case and why it does not support the central bank's SCA crypto appeal. This high-profile matter, heard in 2015, also reinforced that SARB could not change the law without following a legislative approach.
Mark Shuttleworth is best known for being the first citizen of an independent African country to travel to space. He also founded Canonical, which developed the Linux-based open-source Ubuntu operating system.
Shuttleworth’s internet security firm Thawte Consulting, launched in 1995, was sold for about $575 million – then some R3.5 billion – in 1999.
When Shuttleworth emigrated, he wanted to move R2.5 billion to the US. The reserve bank blocked the transfer until he paid a 10% levy. The matter went all the way to the Constitutional Court, with Shuttleworth arguing the levy was a tax and therefore required Parliamentary approval.
Although Shuttleworth lost, with the court ruling that the levy was a control mechanism to regulate money flow and not a tax, Chong emphasises this ruling did not expand the definition of money itself. The case confirmed exchange controls were Constitutional for protecting the currency's value but stopped there.
As a result, the Shuttleworth precedent has no bearing on whether crypto-currency falls within the existing definition of ‘money’ under the regulations – which is the crux of SARB's current SCA appeal.
“In Shuttleworth, everyone agreed that the funds were conventional currency; the question was whether the levy was constitutional. In Standard Bank, by contrast, the dispute is definitional: can Bitcoin, an intangible digital code, be ‘capital’ under a 1961 text that predates computers,” asks Chong.
SARB's argument undermines its case
Perhaps most significantly, Chong explains that SARB is contradicting itself in court. The central bank's own position papers show it has already determined that crypto is not covered by the current regulations, as items such as Bitcoin are not assets that fall under forex controls.
To fix this loophole – created by technology moving far beyond what the 1961 regulations could have anticipated – amendments are required, SARB and other entities in the Intergovernmental Fintech Working Group have acknowledged.
As a year ago, the process to amend the regulations to include crypto assets within the definition of “capital” was ongoing, notes Chong. There is an inherent contradiction in SARB's position: if digital currency was already covered by the regulations – as it is now arguing in court – there would be no need to amend them.
SARB's own position creates a “fundamental contradiction," says Chong. Judge Mandlenkosi Motha raised a similar issue in the High Court ruling, noting that SARB’s own position paper concluded that “exchange regulations do not govern the transfer of crypto-currencies in and out of South Africa. Any cross-border exchange can therefore not be authorised by SARB.”
In the meantime, Chong notes there is regulatory uncertainty.
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