South Africa’s bid to regulate crypto assets: 2022 Alert Quarter 2 2022

By JULIET SIWELA, Published in Financial Law

As at 9 May, crypto assets are not regarded as notes or coins issued by the South African Reserve Bank. Crypto assets are currently not controlled or regulated. Their price is determined by the supply and demand of their market. In essence, crypto assets are not regarded as legal tender in South Africa, which is creating a state of uncertainty in the regulatory landscape, perpetuating the billion-dollar crypto scams in South Africa to date.

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It is notable that the 2022 Budget Review has alluded to crypto assets for purposes of promoting financial innovation to improve competition and inclusion.

On the other hand, the Intergovernmental Fintech Working Group (IFWG) published a position paper on crypto assets in June 2021. The paper offers a coordinated and phased approach to regulating crypto assets in South Africa. It provided that the South African regulatory authorities are developing a number of interventions based on the recommendations in the aforesaid paper. These interventions include:

  1. The protection of consumers by considering the declaration of crypto assets as a financial product under the Financial Advisory and Intermediary Services Act (2002). According to this declaration, any persons providing advice or intermediary services related to crypto assets must be recognised as a financial services provider under the Financial Advisory and Intermediary Services Act and must comply with the requirements thereof. These will include crypto asset exchanges and platforms, as well as brokers and advisors.
  2. The enhancement of monitoring and reporting of crypto asset transactions to comply with the Exchange Control Regulations of 1961. The goal is to include crypto assets in the regulations.
  3. Crypto asset service providers (CASPs) being regarded as such.
  4. The inclusion of crypto asset service providers as accountable institutions within the Financial Intelligence Centre Act (2001). This change would address concerns around money laundering and terror risk financing through crypto assets and align the Act to the standards set by the Financial Action Task Force for virtual assets and related service providers. The proposed amendments to the Financial Intelligence Centre Act (2001) were published for public consultation in June 2020, and are expected to be finalised during 2022.
  5. The inclusion of crypto asset services in the relevant licensing activities under the Conduct of Financial Institutions Bill and the inclusion of the definition of "financial service" in the Financial Sector Regulation Act.
  6. The treatment of the pooling of crypto for distribution as an alternative investment fund that should be incorporated within the relevant licensing activities in terms of the Conduct of Financial Institutions Bill. It is further recommended that collective investment schemes and pension funds should not be allowed to have exposure to crypto assets.

Crypto asset transactions are currently subject to the general principles of South African tax law. In essence, normal income tax rules will apply to crypto assets. Crypto assets' gains or losses are required to be declared as part of taxable income. Thus, the onus is on taxpayers to declare all crypto asset-related taxable income in the tax year in which it is received or accrued; failure to do so could result in interest and penalties.

The aforesaid approaches for the regulation of crypto assets are essential for reconciling key policy imperatives to address crypto asset related risks, such as money laundering, terrorist financing, and consumer protection, while preserving the potential for technological innovation offered by crypto assets as envisaged by the 2022 Budget Review. However, there is an expectation for further regulatory developments for crypto assets in South Africa.

Siwela writes in her personal capacity as an Attorney and Notary Public.