SEAN SANDERS: Cryptocurrency regulations welcomed, but the devil’s in the details

The SA Reserve Bank’s recent announcement that it is set to introduce a regulatory framework for the country’s cryptocurrency sector within the next 12 months is a move that has been widely welcomed by the industry.

This development reveals an evolution in the thinking of the bank, which has up to now not attempted to regulate the local cryptocurrency sector. It is now saying it believes regulation would play a key role in ensuring investor protection and confidence, as well as creating a safer crypto ecosystem in SA.

While SA lags behind the rest of the world in this area — crypto regulations and licences have been available for more than three years in some jurisdictions — the introduction of a regulatory regime puts the country at the forefront of the African continent. This is commendable.

However, some caution is advised at this stage as the specifics of the proposed crypto regulations are still largely undefined, and there is a lot of work that still needs to be done. Worryingly, recent industry engagements with the Reserve Bank have not demonstrated that it truly understands the crypto asset class and did not elicit a positive reaction from some of the country’s industry players.

Cryptocurrencies — a financial asset? 

Of concern is the bank’s recently adopted position that cryptocurrency should be regulated as a financial asset, which is a different approach from every other jurisdiction we have evaluated. This regulatory approach would seemingly lump all types of digital assets together, including traditional cryptocurrencies like bitcoin and ethereum, stablecoins like USD Coin and USD Tether, asset-backed tokens like Paxos Gold and non-fungible tokens (NFTs). 

This approach, while better than no regulations at all for the sake of protecting consumers, may not be the best industrywide solution as they will likely be purpose-built for crypto investment services over crypto payment services or crypto collectible services. This may hinder innovation within SA as entrepreneurs and blockchain developers look for better equipped jurisdictions. 

The Reserve Bank plans to develop a regulatory framework for crypto exchanges in SA that would be guided by traditional banking regulations such as know-your-customer rules and exchange control regulations.

Unfortunately, the bank’s treatment of cryptocurrencies as capital assets could mean that everyday South Africans could be required to use their single discretionary allowance of R1m to purchase cryptocurrency from a local crypto platform. This move would have a heavy affect on the SA crypto ecosystem, as crypto volumes on local exchanges would likely decline, forcing many crypto platforms to either reposition themselves to on-board global customers from an offshore location, or close down entirely.

Additionally, by restricting the total value of cryptocurrency SA residents can purchase on regulated local crypto platforms, the bank may end up inadvertently creating an underground crypto market, as crypto can be transferred peer-to-peer and stored on remote crypto exchanges. This is why it’s critically important that the right type of regulation is introduced — regulation that balances innovation and consumer protection.

By regulating cryptocurrencies, local crypto asset service providers would be required to implement the “Travel Rule”. This states that regulated providers of cryptocurrency assets must collect and share customer data with receiving exchanges when sending or receiving cryptocurrencies to align with global Financial Action Task Force (FATF) recommendations. This is aimed at preventing money laundering and tax evasion, and has already been implemented in South Korea and Singapore.

No mention of crypto custody

Equally concerning is that the proposed crypto regulations do not appear to cover the most important aspect of crypto ownership — crypto custody. Implementing a way to verify that crypto companies actually hold the crypto they claim to hold should be the primary focus for regulators given well-publicised recent developments.

Revix was the first crypto provider in SA to issue quarterly proof of reserve reports that are verified and signed off by leading audit firm Mazars. These reports provide an independent guarantee that the cryptocurrencies we claim to hold on behalf of customers are actually securely held.

As a crypto investment platform that has been around for over four years and, together with Mazars has pioneered verified crypto custody within SA, we would be eager to work with the SA regulators to help create regulations that — most importantly — protect the end consumer, while also meeting all anti-money laundering and exchange control reporting requirements. We have considerable experience in this space, having engaged with German, Swiss, Austrian, British and many other global regulatory bodies over the past three years.

It’s important to get it right

It has to be reiterated that it is exceptionally difficult, if not impossible, to introduce fair and progressive cryptocurrency regulations when you have exchange controls in place, and we encourage the Reserve Bank to guard against this.

The right type of regulation would be immensely positive for both the SA crypto consumer and the broader economy. We estimate that the crypto industry employs more than 8,000 people in SA with top-tier salaries, and adds more than R30bn to the country’s GDP. 

On the other hand, the wrong type of regulation would result in industry players moving elsewhere, enabling an environment for an underground crypto market to grow in SA. It is an outcome that should be avoided at all costs.

Sanders is founder and CEO of Revix.