As crypto assets such as bitcoin continue to enjoy popularity among speculative investors, the South African Reserve Bank (Sarb), together with other financial services regulators, has kickstarted the process for the review of “limited regulation” of these products.
Dr Arif Ismail, head of fintech at the Sarb, says there is currently no recourse for consumers who find themselves defrauded in any scams related to crypto assets.
“While these consumers may be protected under the Consumer Protection Act, it is unclear how that protection would be practically applied,” he explains.
The level of regulation currently being proposed is roughly in line with that already in place in countries such as Argentina, Singapore, Canada, the Czech Republic and the United States as well as jurisdictions that include New York, Jersey and Luxembourg.
Early last week, the Sarb released a discussion document outlining its proposals for the way forward and inviting members of the public and industry stakeholders to send their comments.
Ismail says the move was prompted by the Sarb’s observations around fraudulent activity and anecdotal evidence from monitoring global events, although it had not received any formal complaints from the public.
The devil is in the detail
Once public and stakeholder comment has been collated, the Sarb plans to update the discussion document into a policy paper for release in the second quarter of this year. “The devil is always in the detail but our timeline is to try and have some clarity by the end of the second quarter,” Ismail says.
In May last year, the Hawks reported that it was investigating the BTC Global cryptocurrency scam. At the time, the Hawks reported that more than $50 million had been lost in the scam – with South Africans investing between R16 000 and R1.4 million each. Moneyweb was unable to reach the Hawks for an update on the case.
Ismail notes that the risk of fraudulent activities such as money laundering, terrorist financing activities, circumvention of exchange controls and the masking of illicit financial flows is potentially high, particularly in light of the capacity for anonymous transactions when dealing in crypto assets.
As part of the move towards clamping down on this, the Sarb proposes that crypto asset service providers be required to:
· Register with the Financial Intelligence Centre (FIC)
· Conduct customer due diligence, including ongoing monitoring
· Keep records, and
· File reports on suspicious and unusual transactions, cash transactions of R25 000 and above, and (if aware) any property that it either possesses or controls that may be linked to terrorist activity or terrorist organisations.
The paper is also proposing that crypto asset service providers that fail to comply will be penalised for non-compliance, although the details of this have not been finalised yet. “We are still clarifying our view on banks and investment companies that may choose to invest in crypto assets, and trying to decide on the most appropriate form of regulation,” says Ismail. “Our challenge is to address the inherent risks for consumers without stifling innovation, and it may well be that the regulation of crypto assets could fall under existing legislation.”
Marius Reitz, country manager for global cryptocurrency company Luno, hailed the publication of the discussion document as a welcome step forward in the industry. “Luno already requires its clients to provide proof of identification and proof of address, very similar to FICA [Financial Intelligence Centre Act] requirements, so we fully support this going forward. A more formal process will definitely reduce the opportunity for fraudsters operating via crypto asset platforms,” he says.
Reitz notes that the most common use for crypto assets in South Africa is for speculative investing, with bitcoin being the most popular cryptocurrency, according to a survey carried out by Luno at the end of last year. The value of a bitcoin at the time of writing was US$3 607, according to digital currency news site CoinDesk. Reitz says South African consumers are able to purchase fractions of a bitcoin, starting at R20.
The survey of South African consumers showed that:
· 69% are familiar with cryptocurrency
· Almost a third (29%) own a cryptocurrency and 53% are interested in buying it
· Only 18% declared no interest in owning cryptocurrency
· Of the respondents who own cryptocurrency, 83% see it as an investment
· 23% use cryptocurrency for online transactions and only 12% currently use it to transfer money to friends and family
· 40% agreed that cryptocurrency is a safe investment, and 61% deem it profitable
· 74% would like to pay with cryptocurrencies in a shop or online
· Men (80%) are more familiar with the subject than women (58%).