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The financial surveillance department (FinSurv) of the Reserve Bank has made its views known on exchange control issues relating to the movement of crypto assets between digital wallets on an SA crypto exchange such as Ovex and a foreign crypto exchange such as Binance.
FinSurv considers it to be an unlawful export of capital in contravention of regulation 10(1)(c) of the Exchange Control Regulations and a criminal offence. This has become a topical issue as the popularity of crypto assets has soared in the last twelve months. The authority for this position is questionable, and will depend on each person’s facts and circumstances.
Cryptocurrency is an intangible asset. Traditionally, the situs of an intangible asset has been regarded as the place where it can be effectively dealt with. This was particularly relevant to assets such as shares, based on where the share register is located, or a trademark, based on where the register is maintained.
On the face of it, perhaps one could argue that a crypto asset can be effectively dealt with wherever the exchange carries on business, since the exchange keeps a record of ownership of the assets that it holds on behalf of investors. Therefore, arguably moving the crypto asset to an exchange in different jurisdictions may change its situs, and is therefore an export of capital. However, the position is unclear.
Upon closer examination, intangible assets may also be categorised as movable or immovable, and this also has implications for the situs of an asset. In the case of a movable intangible asset, the asset has no link to any particular place, and its situs follows the domicile of a person (for example, a debtor). It may well be that crypto assets are movable as they may have no particular location, in which case the asset would follow the domicile of the owner of the asset, since there is no other party involved.
This would make the export of a crypto asset impossible without a change in the owner’s domicile. In the case of the immovable intangible asset, its situs follows the place where it has a physical connection (for example, where a register is kept). In this case, the asset cannot be exported.
This was the finding of the Supreme Court of Appeal in Oilwell (Pty) Ltd v Protec International Ltd 2011 (4) SA 394 (SCA) in which it held that a trademark is not capable of being exported for the purposes of regulation 10(1)(c) of the Exchange Control Regulations. This led to a specific amendment to the regulation to include intellectual property in the definition of “capital”. However, it appears incorrect to categorise a crypto asset as immovable, as unlike a share register or a trademark register, a crypto asset’s record of ownership exists in the blockchain, which does not have a physical location.
FinSurv has not provide any detailed reasoning for its position, and it seems unlikely that its position will prevail in circumstances in which all that the person has done is move the crypto asset between SA and foreign crypto exchanges, and later returns the crypto asset (or other crypto assets for which the original crypto assets were exchanged) to his or her wallet on an SA crypto exchange.
The position also creates uncertainty for investors who simply move the asset from a local crypto exchange wallet to a hardware wallet or a private wallet for security reasons. Again, in these circumstances, FinSurv would be unable to complain that the investor has exported capital. If FinSurv wants to stop this practice it should ensure that specific and clear provisions regarding crypto assets are included in the forthcoming amendments to the Exchange Control Regulations.
Of course, there are other circumstances in which FinSurv is right. If the person, having moved the crypto asset to a foreign crypto exchange, sells the crypto asset for foreign currency or assets that have a physical location outside SA as part of a preordained scheme for exporting funds from SA, it would seem that there is an export of capital in contravention of regulation 10(1)(c) of the Exchange Control Regulations. Even if there is no export of capital from SA, an obligation arises for the person to repatriate the foreign currency or asset to SA in terms of regulations 6 and 7 of the Exchange Control Regulations respectively.
If a person finds himself or herself in hot water with FinSurv for having moved a crypto asset from a wallet on a local crypto exchange to a wallet on a foreign crypto exchange or another wallet, legal advice should thus be obtained based on the person’s particular circumstances.
There might not be a contravention of regulation 10(1)(c) of the Exchange Control Regulations, and any penalty imposed by FinSurv may be inappropriate.
For now, the safer route for investors would be to use their single discretionary allowance of R1-million per calendar year or their foreign investment allowance of R10-million per calendar year to fund their account with a foreign crypto exchange. In that case, the crypto assets purchased will form part of their authorised foreign assets and can remain outside SA indefinitely.
• Fyfe is director at Werksmans Attorneys.
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Published by Arena Holdings and distributed with the Financial Mail on the last Thursday of every month except December and January.