Reserve Bank's crypto-currency proposals clear confusion
The South African Reserve Bank's (SARB's) proposal to introduce tighter controls on crypto-currencies provides legal certainty for those dealing in crypto assets.
So says Candice Gibson, senior associate at Norton Rose Fulbright SA, commenting on the SARB's consultation paper on crypto assets published last week.
SARB says the purpose of this consultation paper is to:
* Provide an overview of the perceived risks and benefits associated with crypto assets.
* Discuss the available regulatory approaches.
* Present policy proposals to industry participants and stakeholders.
According to Gibson, the comments contained in the SARB's consultation paper are merely proposals at this stage.
As such, she says, any interested person, such as someone who buys or sells crypto assets, or who "mines" crypto assets, for example, is provided with the opportunity to comment on the proposals until 15 February.
She points out SARB has proposed SA moves to a higher level of regulation in 2019 from that of 2018. This approach is referred to in the consultation paper as "limited regulation", says Gibson.
"This is in contrast to an entirely regulated system where predefined conditions exist. What 'limited regulation' means is that specific requirements will be placed on providers of certain services in respect of crypto assets, without setting predefined conditions for formal regulation."
Gibson notes the consultation paper indicates the Financial Intelligence Centre (FIC) will include crypto asset service providers as an accountable institution and, as such, will have to comply with the Financial Intelligence Centre Act, 2001 (the FIC Act).
"Despite the significant room for abuse of crypto assets, law-abiding consumers require legal certainty regarding the treatment of crypto assets from a tax and exchange control perspective.
"Currently, there being no regulation from an exchange control perspective, the acceptance by merchants of crypto assets for the payment of goods or services is left to the discretion of the merchant selling the goods or providing the services."
She adds that while the South African Revenue Service (SARS) issued a statement on 6 April 2018 stating it will continue to apply "normal income tax rules to crypto-currencies", there is still confusion as to how to account for any income, gains or losses in a taxpayer's tax return in respect of crypto assets from a SARS perspective.
"Guidance is also definitely required from an exchange control perspective when dealing with crypto assets."
She notes that regulation of crypto-currencies offers consumer protection. "The activities involved with the purchase and trade in crypto assets are undertaken at the consumer's sole and independent risk, with no legal recourse to the SARB in the event the consumer loses their funds due to the lack of regulation.
"Consumers are left vulnerable as sellers of crypto assets are not regulated and numerous reported instances where trading platforms have been hacked and consumers have lost their funds. At this stage, there is simply no legal recourse for the consumer, which renders them vulnerable.
"The use of crypto assets which are not regulated enables consumers to circumvent South African exchange control rules as no SARB approval needs to be obtained for funds leaving South Africa. In addition, South African authorities are unaware of the flow of funds or the movement of capital to and from South Africa."
Gibson adds that what is noteworthy for consumers is that the consultation paper indicates it is not SA's intention to ban the buying, selling or holding of crypto assets, or to ban crypto assets for payments.
"However, the SARB remains of the view that as a result of crypto assets not being recognised as a currency, consumers will most likely be exposed to harm in an unregulated environment. Consumers will, therefore, need to remain cautious when delving into the world of crypto assets."
According to Angus Brown, CEO of crypto-currency company Centbee, people often think of regulation as "establishing controls", but it also means "to make regular".
He points out that regulation helps to bring order to a situation, bringing the chaotic to the mainstream. "Although early adopters typically have a high risk appetite, most people shy away from disorder, especially when it is associated with illegal activity.
"If we truly want Bitcoin to succeed, it needs to be owned and used by hundreds of millions of people. To achieve that, Bitcoin has to be perceived as safe, easy-to-use and easily available. We must recognise that regulators as the agents of government are the gatekeepers."
Brown is confident a transparent and respectful approach towards regulators will help them develop enabling legislation.
"Regulation can help customers and existing financial institutions gain more comfort in crypto-currencies and drive the adoption of Bitcoin."
Richard Gardner, CEO of Modulus, a US-based developer of trading technology, says SA has a real opportunity here to lead on issues faced by the industry on the African continent.
"A deep dive into issues like money laundering may prove useful to other countries with a deep crypto footprint on the continent."