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Crypto regulations mean stiffer audit requirements for exchanges

This will help attract investment into this rapidly growing sector.
Auditors will have to get creative in this ever-changing industry. Image: Shutterstock

In 2019 South Africa was ranked as the top country for ownership of cryptocurrency, with over 10% of South African internet users owning cryptocurrencies like bitcoin – the highest per capita in the world. These figures, reported in the Global Digital Report 2019, confirms that South Africa has truly embraced the digital revolution.

As more and more South Africans come to the realisation that cryptocurrencies are here to stay, they also tend to wonder how cryptocurrency gets its value.

The answer is actually quite simple.

Cryptocurrencies like bitcoin obtain their value through the supply and demand of willing buyers and sellers in an open and informed market unaffected by any pricing regulation or interference from intermediaries.

Their transparent, fair value is one of the characteristics that make cryptocurrencies such an attractive form of modern money. Furthermore, cryptocurrencies have the added benefit of being transferrable across the world in a matter of minutes. All of this is made possible by the blockchain technology that underpins cryptocurrencies.

What blockchain technology tries to achieve is to have a decentralised ledger where there is no need for an intermediary such as a bank managing and updating the ledger, but rather that the transactions on the distributed ledger are verified by unrelated individuals by way of a consensus algorithm.

However, the influx of unregulated capital into transactional and transnational economies has gained traction in the circles of investors, national securities and monetary regulatory agencies.

Since there is currently no single regulating body that regulates cryptocurrency in South Africa, many local businesses and entrepreneurs that want to operate in a regulated industry have had to venture abroad to set up shop in other regulated countries – consequently pushing away possible investors.

Fortunately, South Africa’s financial authorities released the Position Paper on Crypto Assets in April 2020, which aims to create a strong regulatory framework for crypto assets in accordance with the Financial Action Task Force’s anti-money laundering and counter-terrorism funding regulations. With these progressions, traditional audit firms will soon also have to adapt in the same way Mazars has in order to serve clients who operate in the cryptocurrency space.

In November, the Financial Sector Conduct Authority (FSCA) published a ‘draft declaration’ that defines crypto assets as a financial product under the Financial Advisory and Intermediary Services (Fais) Act.

Read: Crypto intermediaries must now be licensed FSPs

Listen: The FSCA’s Brandon Topham explains to Ciaran Ryan why crypto regulation is coming and how it will help unearth scams.

This means that anyone giving advice or acting as an intermediary – such as a crypto exchange – would have to register as a financial services provider and comply with the requirements of the Fais Act.

While there are some who believe that blockchain’s transparency will eliminate the need for an auditor of financial statements, the reality is that blockchain will merely become a tool for the auditor to audit more efficiently and enhance the reliance of the information they are issuing an opinion on. The auditor will have to remain agile in ensuring that their audit approach can be adapted to mitigate any possible risks, but also to capitalise on the possible efficiencies the technology might offer.

While the same reporting standards as outlined in the International Financial Reporting Standards will apply to the cryptocurrency sector in South Africa, auditors will have to get creative in this ever-changing industry.

According to global trends, for example, auditors can account for cryptocurrencies as ‘inventory’ or ‘intangible assets’, but some hurdles may arise where they are required to obtain assurance over various assertions relating to cryptographic assets recorded on a public blockchain which they need to enable them to issue an audit opinion.

In a situation like this, auditors will need to think outside the box when obtaining the required assurance, such as rights and ownership of an asset that is designed to protect the privacy of the owner.

This approach of thinking outside of the box requires one to first understand the technology.

There’s no certainty on how the cryptocurrency sector will continue to challenge the audit profession in the future, but one thing is for sure – it’s going to be one heck of a ride.

Wiehann Olivier is a partner at Mazars.

Listen: Wiehann Olivier explains to Ciaran Ryan why crypto regulation will help build trust and accelerate their rate of adoption among investors

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Bollocks!

”Cryptocurrencies like bitcoin obtain their value through the supply and demand of willing buyers and sellers in an open and informed market unaffected by any pricing regulation or interference from intermediaries”

What you are saying is that the market can only operate without pricing regulation?

The crypto cow is so healthy and full of money. The FSCA that did not regulate crypto earlier in the year, now saw this cow. We need to protect people they say. They have to have a reason. Tell me me: I take this risk on my own when I put R10,000 on risk in buying bitcoin. If I loose it in trade, will they refund me? No, it is my risk. If I make R100,000.00 then they want gains. So sick of this regulation junk.

“Anyone giving advise”???? should be registered.

So if Brandon “advises” investors to take their money out of Mirror Trading International?? It is “Advise”

Is he registered as a FSP??? Don’t think so.

Cant be a good thing if the regulator does exactly what he is supposed to avoid from happening.

It was actually reckless. It shows that he is more concerned about his own opinion, than causing loss with reckless advice. This Mirror Trading became a ball game that the FSCA just want to win, and if they win, everyone else lose. So, you tell the people pull out your money, you carry on portraying them as a ponzi, you raid them and splash it all over the media. Still nothing happen. What will an obsessive man do next to proof he is right? Can he just say that he tried to warn the public about Mirror Trading and that they trade there at their own risk? Is he so unaware that people move away from FIAT currency because the system is too expensive and one sided. Mirror Trading is about trading, and trading is a risk. Everyone get told it is a risk with no advice.

Interesting article. However I have to disagree about one thing…South Africans are possibly the biggest Crypto investors because of lack of trust in the Government and their continual push to nationalism the SA Reserve Bank, not because they’ve truly embraced digital technology! In my opinion.

Like any usual potential investment, one must do ones own ‘due diligence’ The Authorities, and the financial industry they try to protect, are now hurting as it has solutions and opportunities they cant match, so now they want to control Crypto industry. We would be happy to comply with their rules but as they have had at least 7+ years to learn about it can they take the time to understand it? They still, ‘conveniently’ get this wrong!
How can they be trusted to be unbiased in their approach when its hurting their old money industry? Not under the guise of ‘keeping people safe’ or preventing ‘money laundering’ or banks shenanigans as these are still rife in their 100 year old industry!

End of comments.

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