SA’s plan to regulate cryptocurrency

Proposals aim to severely limit anonymous transactions in cyberspace.
Those offering investments in crypto assets will need to register as investment funds if the proposals are adopted. Image: Shutterstock

One of the most important outcomes of the proposals to build a regulatory framework to oversee investments in and transactions using cryptocurrencies is that it will remove anonymous and secretive transactions.

Secondly, it will also remove the anonymity of entities that provide any service, platform and investment opportunities or issue and offer cryptocurrencies.

It seems that South African authorities took a simple view of the difficulties in regulating this new, ever-changing and evolving asset:

If the proponents of cryptocurrencies maintain that it is the money of the future, let’s treat it like money, and treat anybody who deals with its exchange and investment as financial service providers.

The Interdepartmental Fintech Working Group (IFWG) – comprising the SA Reserve Bank, the Financial Sector Conduct Authority (FSCA), National Credit Regulator, National Treasury, the SA Revenue Service and Financial Intelligence Centre (FIC) – has just released a draft of its policy position paper on crypto assets.

Removing the ‘excuse’

The working group says the purpose of the paper is to provide specific recommendations for the development of a regulatory framework for crypto assets, including suggestions on the changes to existing regulations to include cryptocurrencies.

That would solve the basic problem: at the moment anybody who tries to do anything can use the fact that there is no legislation regulating crypto assets and transactions as an excuse.

While cryptocurrencies are popular because they are not issued by a government or regulated by any governmental authority, regulation was bound to follow to ensure that any crypto network doesn’t become a haven for criminals.

The IFWG paper mentions money laundering or criminal activity, unmonitored cross-border flow, tax evasion, and the financing of terrorism as the main problems facing regulators.

In short, the working paper suggests that all participants in the industry be regarded as crypto asset service providers (Casps) and need to register as such.

This includes trading platforms, providers of vending machines, issuers of cryptocurrencies or tokens, providers of investments or derivatives of crypto assets, digital wallet providers and providers of custody services.

A recommendation proposes an amendment of the Financial Intelligence Act to include all these entities as accountable institutions. This would require registration of these businesses and compliance to all the provisions of the act.

Specifics

According to the IFWG paper: “This will include conducting customer identification and verification, conducting customer due diligence, keeping records, monitoring for suspicious and unusual activity on an ongoing basis, reporting to the FIC [Financial Intelligence Centre] any suspicious and unusual transactions, reporting cash transactions of R25 000 and above (or the applicable threshold at any given time), and reporting in respect of control of property that might be linked to terrorist activity or terrorist organisations.”

Other obligations will include developing and implementing a risk management compliance programme to ensure compliance with the act and training employees to that effect.

Another recommendation calls for an amendment to the Financial Sector Services Act to include entities involved in the crypto market as a financial service, with the result that every Casp needs to comply with the FSCA regulations.

The FSCA will be tasked with enforcement in much the same way it regulates and enforces rules controlling an investment manager.

Recommendations 11 to 18 of the policy paper deal with crypto assets as a currency, with the IFWG seemingly taking the approach of treating it like any other foreign currency. The Reserve Bank is tasked with asking the finance minister to amend the applicable exchange control regulations to include cryptocurrencies.

This small change will require dealers facilitating cryptocurrency trading to register as authorised foreign currency dealers and adhere to the same rules as an authorised dealer dealing in pound, dollar, euro, yen or kwacha.

Cross-border and offshore

These regulations include the reporting of cross-border transactions using cryptocurrency, as well as the transfer of rands or other currencies offshore to buy the digital currencies. A specific balance of payments category will be created to report crypto asset transactions.

The IFWG proposes that the issue of new cryptocurrencies through a so-called initial coin offering should be treated similar to the issue of (unlisted) shares and over-the-counter financial instruments. This would put initial and new coin offerings under the umbrella of the Financial Markets Act.

Thus, any entity that wants to issue new crypto assets to SA citizens would be required to prepare a detailed prospectus.

“The document should set out specific requirements and details on disclosures about the company, a governance plan, any agreements between the customers and ICO [initial coin offering] issuer, comprehensive independent audits and specific reports (to be confirmed) to regulators,” states the position paper.

Reframing

The working group also looked at the issue of regulating funds that invest in crypto assets. Once again, it proposes the use of existing legislation. It was recommended that the pooling of crypto assets be regarded as constituting an alternative investment fund.

This means that entities and individuals that offer investment in crypto assets will need to register as investment funds. It also means that existing alternative investment funds will be able to include crypto assets in their portfolios.

The implementation of the recommendations of the policy paper – a total of 30 – will have far-reaching effects on cryptocurrencies.

It will bring a host of regulations to an industry that prides itself on being outside the traditional regulated financial markets, necessary to curb criminal activity.

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Raait, now we wait for the Crypto Guys to comment. After they filled their nappies. LOL.

South Africa is about to efficiently police something no first world country is able to. Needed a good laugh, thanks.

If only they were so efficient in controlling the illegal tobacco industry.

Oh, wait! It’s a branch of Luthuli House and thus off-limits.

Govt (any government for that matter) trying to control the crypto sphere, will be like answering the question “How many crypto-coins can you fit inside a card-board box?”

….the authorities will respond by saying “You withhold critical information from this question for us to answer properly. “LISTEN PROPERLY…you did not mention the size of the box”.

..
..silence
..

Nevermind.

I’m waiting for a proposed Covid-19 guideline that will stipulate “To avoid contamination, the public is to please refrain from touching or handling crypto-coins”.

….and SARS/Treasury will aim to tax “interest & dividends” earned on crypto accounts, spending resources on drafting a Bill, just to realise it doesn’t exist in crypto.

A voice is whispering over my shoulder: is Govt eyeing to loot crypto money as well? (…with be called “virtual stealing”)

‘Virtually yours,

Im confused, I read the released paper 3 months ago, in Feb? These are recommendations from consultation from the SA crypto industry( R150 mil) volume yesterday. Thier regulatory sandbox is already underway. This is smart approach trying to keep SA regs up to date. Instituional SA adoption and VC capital is waiting for regs so they can jump in. I know this for a fact. Fintech is arguably the only industry that still has hope, in the failed state that is SA.

The commercial banks have been doing their best to crush crypto in SA, leaning on the lack of regulation as the straw man hiding their longer term competitive fears. They pay lots of lip service to embracing block chain but don’t support those at the forefront of it

….you can trade in currency when you stop over in numerous countries
I use Electrum crypto wallet. One can go into any side alley forex exchange and buy bitcoin. Bali, Jakarta to Hongkong and across to Istanbul
Good luck SARS
I don’t trust cryptocurrency other than bitcoin

I heard facebook launched their crypto currency but where is the privacy there

Buying hotel rooms to restaurants to electronics

End of comments.

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