SARB makes U-turn on crypto regulation, outlines SA’s framework
After years of taking the stance that it would not regulate the crypto-currency industry, the South African Reserve Bank (SARB) says it has re-examined its previous position and is now working to introduce a regulatory framework to govern crypto transactions.
This was the word from Kuben Naidoo, deputy governor of the SARB, speaking during a webinar titled: “The future of money, banking and crypto”, organised by financial services firm PSG Konsult.
Naidoo is a member of the SARB monetary policy committee and oversees the financial stability and currency cluster, which incorporates the SARB’s economic statistics department, the national payment system department, the fintech unit, the financial stability department, and the risk management and compliance department.
During a discussion with financial journalist and broadcast anchor Alishia Seckham, focused on crypto-currency trading in SA, Naidoo pointed out the framework for a regulatory regime for the use of crypto-currencies will play a key role in ensuring investor protection and confidence, as well as create a safer crypto ecosystem in SA.
Almost six years ago, the central bank of South Africa had no intention to regulate the crypto currency industry as it is classified as an asset, rather than a currency, he added. From a regulatory perspective, having definitional clarity on the nature of crypto-currency is crucial, as it directly influences its classification and concomitant regulatory treatment.
“Our view has changed and we now regard it [crypto-currency] as a financial asset and we hope to regulate it as a financial asset. There has been a lot of money that has flowed in and there is a need to regulate it and bring it into the mainstream,” explained Naidoo.
“We want to create a regulatory environment that will make digital currency safer. (Whether it goes up or down is not an issue.) The job of the central bank is not to pick winners and losers in an investment race, but to regulate it so that people have an adequate health warning and investor protection.”
The SARB is primarily concerned with implementing a regulatory framework that ensures anti-money-laundering legislation and exchange controls are adhered to, he added.
“The use of crypto for money-laundering and other illicit activities is a source of concern. 90% of transactions involving crypto-currency in the US are for the purchase of opioids or gambling tokens.”
He highlighted the importance of discerning between the hype around the virtual currency and the positive technological advancements – which could potentially improve the local payments system.
In just a few years, the adoption of crypto, as well as the entry of new players into the South African market, has sky-rocketed.
Over the last 12 years, the global crypto asset ecosystem has grown to include more than 10 000 unique crypto assets, according to the Intergovernmental Fintech Working Group, which is made up of various South African financial sector regulators.
Daily trading values have also increased significantly over the past few years – currently averaging in excess of $200 billion, and on some days exceeding $400 billion, says the group.
While the crypto hype has led to some exciting developments in the redefining of ownership and value transfer, it also has many adverse effects.
Crypto-currency’s volatile nature has seen Bitcoin boom and crash several times over the past few years. Its latest decline took place last month, with Bitcoin falling below $20 000 on 18 June − the first time since December 2020, says the Economic Times.
Ensuring crypto caution
SA’s structural approach to the regulation of crypto will be conducted in a systematic and phased manner, that balances the excitement and the hype around it with the investor protection requirements, noted Naidoo.
Outlining the pillars of the regulatory framework, he pointed out the SARB and Intergovernmental Fintech Working Group are actively considering taking several steps to reduce the risk of crypto-currencies being used to evade existing regulations:
- Bring crypto into the regulatory regime under the auspices of the Financial Sector Conduct Authority, and for the Financial Intelligence Centre to list it as part of a schedule under the Financial Intelligence Centre Act.
- A regulatory framework needs to be developed for crypto exchanges and platforms, which includes know your customer protocols, as well as exchange control and the applicable taxation laws.
- Crypto-currencies should come with a ‘health’ warning, indicating the potential to lose money should be taken seriously and that owning crypto-currency is not the same as making a bank deposit.
- Crypto exchanges will have to comply with all exchange control laws.
“These are the basic elements. At this stage, all we want to do is to declare crypto-currency a financial product. The exchanges would have to comply with exchange control laws such as anti-money-laundering and counter financing of terrorism rules. They would also have to comply with exchange contracts rules in the same way that people who trade in any currency and make cross-border transactions are subjected to those laws.”
Responding to a question about whether SA’s stagnation on policy introduction has resulted in the country coming late to the party, Naidoo is adamant that most central banks across the globe took the time to watch and observe the industry, prior to taking regulatory decisions.
“We are doing what most regulators are doing and what most central banks are doing, and pretty closely what advanced economies like the UK, Singapore and Australia are doing.
“We are watching them very closely and I don’t believe that we are behind the curve in virtual currency. Most central banks are focused on two things: regulating the broad crypto environment, and secondly, learning from it to see how it can take on-board some of those lessons.”