An analysis of cryptocurrency regulation within South Africa and the impact that cryptocurrency has on existing financial regulations.
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Date
2021
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Abstract
This research critically analyses a novel yet unknown area of law within South Africa — the
regulation of cryptocurrencies. ‘Cryptocurrency’ refers to what is known as a Decentralised
Convertible Virtual Currency (DCVC). In addition, cryptocurrency can be understood to be a
subset of the collective term known as ‘crypto asset’. Crypto assets encompass all
cryptocurrencies, security tokens and utility tokens. It is often referred to as Financial
Technology or Fintech.
The technology that underpins cryptocurrency is referred to as blockchain. Simply put,
blockchain allows for information to be transacted between two points in a simple yet secure
manner. This is done digitally through the use of the internet. In essence, a blockchain refers
to information being stored in an encoded form on a peer-to-peer network. A blockchain may
also be referred to as a ledger. Through a blockchain, a transaction is also more transparent, as
it allows each party to the transaction to view all information relating to the blockchain.
Blockchain technology can be applied to different aspects of various industries, such as
contracts.
The basis of a cryptocurrency is to create a medium of exchange that is anonymous,
secure, as well as relatively fast in terms of a transaction. However, one of the most important
characteristics of a cryptocurrency is that it is unregulated. Through being unregulated, it
allows cryptocurrencies to be used to circumvent financial regulations and engage in activities
such as terrorism, money laundering and tax evasion. The reason for this is because
cryptocurrencies are not linked to any central regulatory body, that can oversee cryptocurrency.
According to the South African Reserve Bank 2014 Position Paper, there are no express
regulations for cryptocurrency in South Africa. Furthermore, cryptocurrencies are not
recognised as legal tender in South Africa as they are not issued or controlled by a central
regulatory body. Therefore, cryptocurrencies cannot be used as substitute as a legal tender.
Through the 2014 Position Paper, risks were highlighted with regards to cryptocurrency
transactions. However, no regulations were identified that could remedy these risks.
Following the 2014 Position Paper by SARB, SARB established the Intergovernmental
Fintech Working Group (IFWG) and the Crypto Assets Regulatory Working Group (CARWG)
in conjunction with the South African Revenue Service (SARS). Their goal is to review the
position of cryptocurrency and consider any public policy in terms of cryptocurrency. In 2019,
the IFWG and CARWG released a Consultation Paper, that further developed the
understandings found in the 2014 Position Paper. Through the 2019 Consultation Paper, the term crypto asset was adopted. As of April 2020, the IFWG, together with the CARWG
released a Position Paper, which highlights various recommendations that can be used within
South Africa in the general regulation of cryptocurrency, serving as the latest stance regulatory
bodies have in relation to cryptocurrencies. Furthermore, the term crypto asset was also further
developed and understood to be a collective term that includes cryptocurrencies as a subset.
It is also imperative to understand that many laws that apply to fiat currencies pre-dates
the creation of cryptocurrencies. Therefore, many of these laws do not apply in regulating
cryptocurrencies and will need further interpretation as well as amendment to be adapted in
line with the concept of a cryptocurrency. Hence, by analysing the Twin Peaks model, and
determining how cryptocurrencies interact with relevant laws found within the Prudential
Authority and Financial Sector Conduct Authority, a greater understanding can be found as to
how to regulate cryptocurrencies.
As it stands, the applicability of regulations is dependent on whether fiat currency is
involved in a cryptocurrency transaction. If a cryptocurrency is being dealt with solely, the
laws tend to falter due to the fact that South African regulators do not classify cryptocurrency
as a legal tender.
Therefore, there is a possibility that users of cryptocurrency will be able to circumvent
laws put into place to protect and preserve the financial sector of South Africa. The reason for
this is that, many regulations within South Africa currently only apply to the definition of legal
tender as mentioned by the SARB position paper of 2014.
Hence, in order for cryptocurrencies to be accepted within South Africa, there is a need
for greater analysis of regulations, and in addition foreign countries such as the United
Kingdom and the United States of America can be analysed. These countries provide a greater
understanding as to how regulatory bodies can provide regulation for this novel technology
within South Africa.
It can therefore be deduced, that through a greater understanding of this technology,
there will be greater acceptance and better regulation of cryptocurrencies.
Description
Masters Degree. University of KwaZulu-Natal, Durban.