An analysis of cryptocurrency regulation within South Africa and the impact that cryptocurrency has on existing financial regulations.

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.