Bitcoin not a currency? South Africa to regulate crypto as financial asset

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The South African Reserve Bank is set to introduce rules next year that will categorize cryptocurrencies and treat them as financial assets, in order to balance investor protection and innovation.

According to research by global exchange Luno, cryptocurrency use is in a healthy place in South Africa, with around 13% of the population owning some form of cryptocurrency. With over six million people in the country having cryptocurrency exposure, the regulation of the space has long been a topic of discussion.

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Companies or individuals that provide cryptocurrency-related advisory or intermediary services are currently required to be recognized as financial service providers. This involves completing a number of checkboxes to comply with the global guidelines set by the Financial Action Task Force.

South Africa’s National Treasury Budget Review published in February 2022 marked the beginning of the move to formally declare cryptocurrencies as financial products. The state is also planning to increase the monitoring and reporting of cryptocurrency transactions in order to comply with exchange regulations in the country.

South African Reserve Bank deputy governor Kuben Chetty has now confirmed that the new legislation will be introduced in the next 12 months, speaking on Tuesday in an online series hosted by local investment firm PSG. This will bring cryptocurrencies under the purview of the Financial Intelligence Center Act (FICA).

This is important, as it will allow the region to be monitored for money laundering, tax evasion and terrorism financing, which have been a heavily debated byproduct of the decentralized nature of cryptocurrencies and blockchain.

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Chetty highlighted that SARB will work over the next 12 months to introduce this new regulatory environment. First, it will declare cryptocurrencies as a financial product that allows them to be listed as a schedule under the Financial Intelligence Center Act.

Thereafter, a regulatory framework will be developed for exchanges which will include the need to meet certain Know Your Customer (KYC) requirements as well as tax and exchange control laws. Exchanges will also be expected to issue ‘health warnings’ to highlight the risk of losing money.

Chetty said that SARB’s attitude towards this sector has changed a lot in the last decade. About five years ago, the institute thought that no regulatory oversight was needed, but a gradual shift in the notion of defining cryptocurrencies as a financial asset has changed that stance:

“By all definitions, it is [cryptocurrencies] Not a currency, it is an asset. It is something that is tradable, it is something that is built. Some have support, others do not. Some may have a real base, real economic activity.”

The deputy governor stressed that SARB does not consider cryptocurrencies as money, given the perceived inability to use daily retail and the associated volatility.

Chetty agreed that continued interest in the space creates a need to regulate the sector and facilitate its merger with mainstream finance “in a way that balances excitement and hype with the necessary investor protection.”

SARB also continues to explore the possible introduction of a central bank digital currency (CBDC), which most recently completed a technical proof-of-concept in April 2022. The second phase of Project Khokha involves using a blockchain-based system for clearing, trading. and agreements with a handful of banks that are part of the Intergovernmental Fintech Working Group (IFWG).