Absence of blockchain regulation confuses policy-makers
There is currently no regulatory framework in SA to govern blockchain transactions and, as a result, policy-makers at public institutions are left grappling with a number of complexities.
This was the word from Dr Neil Croft, senior lecturer at the University of Pretoria, speaking yesterday at the ITWeb Governance, Risk and Compliance 2018 event.
Discussing the implications of the lack of regulation around distributed ledger transactions, Croft explained that institutions such as the South African Revenue Service and other government entities face enormous challenges when it comes to accurately reporting and calculating SA's gross domestic product (GDP) growth rate.
"Financial institutions are not able to account for the crypto-currency entering and leaving the country as part of SA's GDP calculations of import and exports. The reason why we are not able to account for these transactions is because the physical location of the funds is often unknown. For example, you could reside in SA but have a digital wallet sitting at an exchange or server in China or anywhere else in the world, and furthermore the funds flowing into and from the wallet are anonymous, so this is a real problem."
The lack of a regulatory framework around blockchain transactions has pushed the Reserve Bank to look into the different aspects of blockchain and how to regulate it, he added.
"This will be very difficult for them and they will probably look to start with the local exchanges, but even then, the blockchain community is beginning to move away from centralised exchanges to decentralised ones. This means that a user can transact with another and no central exchange will facilitate the fiat to crypto-currency transaction and vice versa.
This then opens the door for money laundering and other crimes. However it is important to note that "bad people sometimes do bad things on good systems," he asserted.
Some of the recommendations that policy-makers have deliberated, Croft explains, is the implementation of a similar approach to Swiss Banks where clients enjoy anonymous bank accounts. Because of the failure to charge taxes on these unknown individuals, taxes are charged to the bank as a whole.
Croft further explained that some companies are currently working on creating internal blockchain and crypto-currency policies, but there is no clear framework to work from, because most are still trying to fully understand the inner workings of the blockchain and its complexities.
"We are still trying to understand the risks associated with blockchain and to come up with policies is going to take a long time. This is indeed a difficult task because you would be trying to govern something which is designed to be ungovernable and something that is designed to be self-regulating and self-maintaining - it will be very difficult to control that, and possibly the biggest conundrum we face today."
Although the blockchain system is designed to be unregulated, Croft points out that the only place where regulation can take place is where the users exchange fiat money for crypto-currency - it's on these platforms that some form or regulation could take place.
Regulators globally have raised the alarm over crypto-currencies, saying the technology may aid money laundering and terrorist financing, hurt consumers and undermine trust in the global financial system.
US lawmakers are moving to consider new rules that could impose stricter federal oversight on the emerging asset class, Reuters reports.
Bipartisan momentum is growing in the Senate and House of Representatives for action to address the risks posed by virtual currencies to investors and the financial system, with political parties saying that regulation could be needed if crypto-currencies threaten the US economy.
"There's no question about the fact that there is a need for a regulatory framework," says Republican senator Mike Rounds, a Senate Banking Committee member.
In the US, digital assets currently fall into a jurisdictional grey area between the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Treasury Department, the Federal Reserve and individual states.
"The SEC is probably the lead on the issue," says Republican representative Bill Huizenga, chairman of the House Financial Services Subcommittee on Capital Markets, which will hold hearings on the issue in coming weeks.
France and Germany want crypto-currencies on the agenda for the upcoming G20 meeting of the largest advanced and developing economies.