Picture: 123RF STOCK PHOTO
Picture: 123RF STOCK PHOTO

If a document could roll its eyes dismissively and let out a long, anguished sigh, the one compiled by SA regulators on cryptocurrencies would do so.

Put together by the intergovernmental fintech working group (IFWG), the "Consultation Paper on Policy Proposals for Crypto Assets" does little to hide the regulators’ discomfort with the concept of cryptocurrencies.

The IFWG’s ambivalence is clear. It rejects the term "cryptocurrencies", insisting instead that these electronic tokens be called "crypto assets". For a start, they have been used as commodities and securities rather than just currency. They further fall short on the currency measure because they are not a particularly good or stable store of value, are only accepted as a medium of exchange in select circles and aren’t widely used as a unit of accounting.

While no financial regulator wants to give control of its currency to entities beyond the reaches of its authority, authorities have to adapt, given the increasing use of crypto assets as currency.

This leaves the working group — comprising representatives from the SA Reserve Bank, the Financial Sector Conduct Authority, the SA Revenue Service and the Financial Intelligence Centre (FIC) — in a bind. If it doesn’t regulate cryptocurrencies, consumers may not be properly protected.

There are also fears that the widespread use of these currencies could threaten the financial system. However, the IFWG concedes that this is unlikely in SA, given the relatively small cryptocurrency trade in the country. That said, the group does note the real possibility of these electronic tokens being used to fund terrorist activities and circumvent exchange controls.

Concerns around criminality are well founded. Last year South Africans were $50m out of pocket after being conned by a bitcoin scammer. With no regulatory framework in place, there was little in the way of legal recourse.

Looking to international practice, the IFWG says other regulators have taken one of two approaches: putting in place a strict regulatory framework, or taking a "let things happen", hands-off approach. It’s a double-edged sword: tight controls can stifle innovation, while a light touch could pave the way for reckless or criminal behaviour.

For its part, the IFWG says SA will follow a "limited regulatory framework" — in essence, looking at what regulations currently in effect would apply to the crypto market, then deciding if more are needed.

The group says this loose framework will come into being in three phases. First, crypto service providers will need to register with a regulator, most likely the FIC, which has the mandate to track criminal activity in the financial sector. These providers should also conduct customer due diligence and continually monitor crypto trades, filing reports on suspect and unusual transactions.

Once the registration phase is completed, the authorities will review the existing regulatory framework, and amend it as needed.

Finally, the amended regulatory framework will need to be assessed to determine if it provides sufficient safeguards to protect customers and service providers.

This cautious approach has been met with approval from some in the local crypto market.

"[The regulators] are not proposing to regulate cryptocurrency itself, but rather those persons or entities that provide services involving cryptocurrency," says Marius Reitz, country manager of Luno, a Naspers-backed company that offers a range of crypto services.

"Luno welcomes this approach, as it will provide consumers or potential consumers of those services with the comfort that the service [provider] they are dealing with is held to defined regulatory standards."

what it means

Regulators will analyse how existing regulations could be applied to the crypto market, then amend these as necessary

Angus Brown, a co-founder of crypto wallet provider Centbee, also backs the regulators’ efforts. He acknowledges, though, that it’s not easy to figure out the rules when the sector itself is unsure of how things will play out.

"Centbee recognises that it is not easy for regulators to draw up policy in respect of such a revolutionary new form of money, and that they need to be light-handed and technology-agnostic," he says.

Brown agrees that regulation will benefit the sector. "Regulation will also enable better transparency and hence efficiency — leading to better liquidity and less volatility in price."

It is also likely to squeeze less scrupulous players out of the market — along with those unable to provide their customers with the necessary level of protection.

The regulators might not be fond of these newfangled electronic tokens, but at least they have the beginnings of a plan to deal with them.

It’s good news for customers, investors and the serious operators who want some regulatory protection.