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.
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