Article written by Precious Mmako, Candidate Attorney at Schindlers Attorneys
10 September 2021
CRYPTO ASSETS AND EXCHANGE CONTROL
Generally, there is no exact definition for Crypto-assets as they carry out different roles depending on their design and use. Crypto assets can include cryptocurrencies such as Bitcoin and Ethereum. Bitcoin and Ethereum were designed to function both as a payment instrument and a payment system. Crypto assets differ considerably in terms of their design and proposed use. Crypto assets such as Bitcoin can function as a payment system, an international remittance instrument, an investment, a means to pool investments, security, a means of capital raising. This article explores the relationship between crypto-assets and exchange control in the South African context.
Can crypto assets be classified as money?
Section 17 of the South African Reserve Bank Act 90 of 1989 (“the SARB Act”) defines money as:
- a tender, including a tender by the Bank itself, of a note of the Bank or 35 of an outstanding note of another bank for which the Bank has assumed liability in terms of section 15 (3) (c) of the Currency and Banking Act or in terms of any agreement entered into with another bank before or after the commencement of this Act, shall be a legal tender of payment of an amount equal to the amount specified on the note.
- a tender, including a tender by the Bank itself, of an undefaced and unmutilated coin which is lawfully in circulation in the Republic and of current mass, shall be a legal tender of payment of money.
Considering the above definition, money is limited to banknotes and coins issued by the SARB. Therefore, crypto assets are not acknowledged as money.
Position of regulatory bodies in respect of cryptocurrency
The National Treasury as a joint initiative with the SARB, the Financial Services Board, now referred to as the Financial Sector Conduct Authority (“the FSCA”), the South African Revenue Service (“SARS”) and the Financial Intelligence Centre (“the FIC”), issued the first public statement on crypto assets in 2014. The statement informed the public that the abovementioned regulatory bodies, do not regard cryptocurrencies as a “legal tender” and as a result, transactions regarding cryptocurrencies do not fall under their legislative framework. This means that the SARB does not regard cryptocurrencies as a legal tender, nor does it regulate transactions with regard to cryptocurrencies.
Does the exchange of cryptocurrency require prior SARB approval?
Together with the SARB Act, South Africa has the Exchange Control Regulations, 1961, (“the Regulations”), issued in terms of section 9 of the Currency and Exchanges Act 9 of 1933, which seeks to control the flowing of money into and out of South Africa. Regulation 10 (1) (c) sets out the restriction on the export of capital and reads as follows:
(a) No person shall, except with permission granted by the Treasury and in accordance with such conditions as the Treasury may impose—
“enter into any transaction whereby capital or any right to capital is directly or indirectly exported from the Republic”.
In addition to the above, regulation 10 (4) defines capital for the purposes of sub-regulation (1) (c) and reads as follows:
(a) “capital’ shall include, without derogating from the generality of that term, any intellectual property right, whether registered or unregistered; and
(b) ‘exported from the Republic’ shall include, without derogating from the generality of that term, the cession of, the creation of a hypothetic or another form of security over, or the assignment or transfer of any intellectual property right, to or in favour of a person who is not resident in the Republic.
Taking into account regulation 10 (1) (c) and the position that cryptocurrencies are not considered as a legal tender and also do not fall under the definition of capital, it can be regarded as the “right to capital”. Cryptocurrencies hold value. So, if such value is exported outside of South Africa, for example, to a foreign crypto exchange, then it can be considered as either the direct or indirect export of the “right to capital”.
Even though cryptocurrencies are not considered to be a “legal tender” or “capital”, any transactions involving the payment of cryptocurrencies outside of South Africa, or deemed to be outside of South Africa, will require prior approval from the SARB by way of an application via an authorised dealer of the SARB, provided that a tax clearance certificate has been obtained.
Recommendations on the framework for monitoring cross-border money flows by the Intergovernmental Fintech Working Group (“the IFWG”) and the Crypto Assets Regulatory Working Group (“the CAR WG”)
The IFWG as crypto assets regulatory working group, recommends that the Financial Surveillance Department (“the FSD”) of the SARB should take on the responsibility of supervising and regulating the monitoring of cross-border money flows with regard to crypto assets and Crypto Assets Service Providers (“the CASPs”).
This amendment would require the Minister of Finance to amend regulation 10(4) to include crypto assets in the definition of ‘capital’ for the purposes of regulation 10(1)(c) mentioned above.
Another recommendation is that the FSD should explicitly allow individuals, purchase crypto assets within their single discretionary allowance and the foreign capital allowance framework. It also recommends that the FSD should amend the Currency and Exchanges Manual for Authorised Dealers (“the Manual”) to allow authorised dealers to facilitate and report transactions with regards to the transfer of foreign currency for the purchasing of crypto assets overseas.
In addition to the above, the IFWG also recommends that there should be a distinct balance of payments category for the reporting of transactions for when an individual purchase crypto assets outside South Africa. This would become an obligatory reporting duty. This would require the authorised dealer in foreign exchange with limited authority framework to be expanded to allow for the appointment of CATPs for cross-border crypto asset-related transactions. CATPs should be authorised and supervised in terms of requirements similar to the current authorised dealer in foreign exchange with limited authority requirements.
It is further recommended that a new dispensation should be created under the exchange control framework to allow licensed CATPs to source or buy crypto assets outside South Africa for the purpose of selling to the local market, subject to specified limits to be determined by FSD. CATPs should also be required to report crypto-asset transactions to FSD. The FSD should determine the trigger of reporting unlawful and irregular transactions.
Crypto assets may be purchased and transferred within South Africa, without being affected by the regulations, if there is tax compliance and compliance with any other regulations. However, crypto-assets such as cryptocurrencies are to be sent outside South Africa or paid outside South Africa to a foreign crypto exchange, then prior SARB would be required. If the recommendations by the IFWG and CAR WG are considered and implemented, then the buying and transfer of cryptocurrency outside South Africa will be regulated.