Crypto regulation could still be 12-18 months away due to the need to amend several laws to accommodate this new asset class, and to licence crypto exchanges.
SA Reserve Bank (Sarb) deputy governor, Kuben Naidoo, told a recent PSG Think Big webinar that the central bank had come around to the idea that cryptos are not a currency, but a financial asset, and should be regulated as such.
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Crypto “bore all the hallmarks of a Ponzi scheme, though there’s genuine potential in the technology, in the payments space,” said Naidoo. Most crypto exchanges welcomed the Sarb’s approach to crypto regulation as it would legitimise the industry and keeps bad players out.
Naidoo spelt out some of the steps needed to regulate cryptos:
- The Minister of Finance needs to amend Schedule 1 of the Financial Intelligence Centre Act (Fica) to declare crypto a financial product;
- The Financial Sector Conduct Authority (FSCA) needs to develop the regulatory framework around licensing of crypto exchanges;
- The Sarb is close to finalising the exchange control rules and requirements for cross-border crypto transactions;
- The Financial Intelligence Centre needs to finalise the Know Your Customer and Anti-Money Laundering rules around crypto transactions;
- Cryptos would have to come with a health warning, advising potential customers that there is a risk of losing money.
All of this could take 12-18 months. The Sarb and Intergovernmental Fintech Working Group are introducing regulations to avoid the kind of regulatory arbitrage which allows crypto players to escape the kind of scrutiny applicable to conventional financial assets.
Naidoo pointed out that it was not Sarb’s role to pick winners and losers in the crypto space or to develop regulations that would mitigate risks to users. The central bank is primarily concerned with implementing a regulatory framework that ensures anti-money laundering legislation and exchange controls are adhered to, just as they are for investment and trading in other financial assets.
There is a concern that by far the majority of transactions involving cryptos (as opposed to cryptos used for investment purposes) involve illicit activities, such as buying drugs or for gambling.
“Another unfortunate reality is that crypto is being used by cyber criminals to demand ransoms, and to fund cross-border kidnappings and other international crimes,” said Naidoo.
There’s little prospect of cryptos undermining the authority of the Sarb, though the use of crypto technologies such as stablecoins could have value in reducing the cost of remittances. Fiat remittances can cost 10-30% for small amounts of money shipped across borders, whereas stablecoins can do the same for 1% or less.
Naidoo says the bank has built several blockchains and run large volumes across these networks as part of its fintech initiatives and its research into central bank digital currencies (CBDCs) – which are a digital version of the fiat rand. The initial uses for CBDCs are likely to be regional, and for currency remittances. Crypto is too volatile to be used as a payment system, added Naidoo.
The Sarb is participating in Project Dunbar, an initiative that brings together the Reserve Bank of Australia, the Central Bank of Malaysia, the Monetary Authority of Singapore and the Sarb in the development of cross-border CBDCs. The aim is improve the efficiency of the local payment system – bringing down costs and the time that it takes to clear and settle in the payment system. He predicts that a CBDC would most likely be used for cross-border payments, either for goods and services or remittances, but this will take several years before it becomes a reality.