MARIUS REITZ: Court ruling creates crypto opportunity

In a landmark judgment for SA’s financial system, the high court in Johannesburg has found that exchange control regulations (introduced in 1964) are outdated and do not account for digital currencies. This presents an opportunity for the cryptocurrency industry and government decisionmakers to work together in stimulating economic growth by leveraging the unique benefits of digital assets. 

It has been 16 years since the first and most well-known crypto asset, bitcoin, was introduced. Digital assets are increasingly seen as an important alternative asset class as their performance often counterbalances, or acts as a hedge against, the performance of traditional finance instruments such as stocks and bonds. Cryptocurrencies are increasingly being incorporated as an accepted asset class by fund managers throughout the world. 

SA was for a period at the cutting edge of digital asset regulation. Comprehensive regulatory proposals were published in an Intergovernmental Fintech Working Group (IFWG) position paper in 2021. The Financial Sector Conduct Authority has since provided licences for local crypto exchanges such as Luno. These service providers also flag suspicious transactions through the Financial Intelligence Centre. 

But SA has lost its edge as a leading digital asset provider, mainly due to not clarifying vague exchange control regulations. To be fair, this has been new terrain for the entire global economy. The decentralised nature of digital currencies holds many benefits, but it also creates a few ambiguities. For instance: under what circumstances can cryptocurrency transactions be considered a movement of capital out of a country?

In the May judgment, judge Mandlenkosi Motha ruled that our country’s exchange control regulations simply do not answer this question.

The case was brought by Standard Bank, challenging the Reserve Bank. It centred on the forfeiture of funds linked to crypto transactions by a specific client, but in essence the court had to decide whether the current exchange control regulations can be read as including cryptocurrencies as a form of capital. The judge found “there is no room for an unnatural and fictitious reading into the regulations to cover cryptocurrency”. He wrote that “a regulatory framework addressing cryptocurrency is long overdue”.

While this all might sound technical and specialised, what gets defined in regulations can have a direct effect on the SA economy, and on the average South African. Poorly defined exchange control regulations have kept South Africans, and even the SA Revenue Service, from benefiting from the extraordinary value of digital currencies. 

Digital assets are not designated as either “onshore” or “offshore” assets. This ambiguity discourages investment in digital assets by traditional institutional asset managers, simply because they do not know whether products are subject to strict foreign investment limits or not. This results in low investment levels, and many ordinary South Africans missing out. All while SA’s global counterparts are starting to take full advantage of the opportunity.

For example, bitcoin is by far the best-performing asset of the past decade. In 10 years it has delivered an annualised return of 230%. This is 10 times better than the Nasdaq 100 index, the best performing non-digital asset class of the same time period. Limiting access to these types of profits throttles economic growth and inclusion.

For example, if the government were to classify digital assets as “onshore” when they are held on locally licensed platforms, it would, at no cost to the fiscus, stimulate local crypto investments — not only in scope but also in the form of new investors. The returns generated in this way could be reinvested in SA and could also increase tax revenue for the government.

Furthermore, clearer regulations regarding exchange controls will enable crypto service providers to report any suspicious financial activities with greater accuracy. 

The court ruling must also be seen within the context of an international financial system that is increasingly embracing digital assets.

Crypto EFTs

Last year, the world’s largest economies saw a string of approvals for crypto exchange traded funds (ETFs) — investment products traded on stock exchanges that track the performance of a specific index or commodity.

Late last year, the first pension fund in Britain invested 3% of its portfolio in bitcoin — another example of how cryptocurrencies have become part of investment strategies.

After April’s Trump tariff announcements many investors also started thinking differently about digital currencies. In times of unpredictable policy changes, trade wars and the spectre of real wars, digital currencies offer different returns that can counterbalance traditional stock, bond and commodity markets. Tariffs directly affect companies linked to imports. Crypto’s value is not linked to trade in the same way.

But amid these major shifts SA runs the risk of missing out on the benefits of crypto growth due to outdated regulations. Rather than seeing the ruling as an “emergency” potentially causing a hypothetical “flood” of cryptocurrency exports before a “loophole” is closed (a largely overestimated fear), it should be seen for what it is: a real wake-up call for the drafting of regulations that will modernise our financial system. 

While the Reserve Bank has applied for leave to appeal the ruling, it would seem in the country’s best interest for all stakeholders to collaborate on new regulations that can help drive economic growth. In such a process a delicate balance must be maintained.

SA cannot, as happened in Nigeria, make its regulations so draconian that it drives users underground. Unregulated “peer-to-peer” transactions are virtually impossible to trace. This could have disastrous consequences for SA’s attempts to exit the Financial Action Task Force greylist, for example.

Countries such as Malaysia offer a far better example: clear protective laws that can be complied with while promoting economic growth.

The opportunity for economic advancement through crypto investments must be seized. If this is not done we will fall behind and merely watch as other emerging economies reap the benefits of being ahead of the curve.

• Reitz is GM for Africa and Europe at Luno.