Crypto regulation in South Africa

South Africa’s mission towards implementing crypto regulations remains a slow and uncertain journey. Regulation in the crypto industry is essential to ensure that this new technology goes mainstream. Amongst the many benefits, the most noteworthy is customer protection. For cryptocurrency platforms, regulation is also important because it lays the foundation to develop key relationships, such as with banking institutions.

Source: Michalsons

The crypto regulatory landscape in South Africa is still in a state of uncertainty. While the Financial Services Conduct Authority (FSCA) is yet to implement any regulations, the regulator’s sentiment towards crypto regulations has evolved to the point that we can now expect some regulatory framework in the not so distant future. This movement has been bolstered by the growing concern of customer protection in the wake of South Africa’s $4 billion in crypto scams.

Source: Michalsons

The South African Revenue Service (SARS) defines digital assets as all items that are stored on a distributed ledger on decentralized networks, including currency and non-currency assets such as NFTs, security, and utility tokens. This definition places them under the Income Tax Act 58 of 1962 (ITA), which will cause their disposal to be taxed using “usual income tax rules for financial instruments such as equity shares or unit trusts.” 

These rules categorize assets as either capital assets or revenue-generating assets. This raises the question of what category any disposal of a digital asset belongs to and which will be a taxable event. However, digital asset investors will have a tough time proving that their gains or losses during disposal are capital in nature as digital assets are highly risky and volatile. 

“The intention of the taxpayer is key in determining whether gains or losses from the disposal of crypto assets are capital or revenue in nature. However, taxpayers face an uphill battle to prove that their gains or losses are capital in nature due to the high risk and volatile nature of this asset class,” she said. 

Chong added that South Africans should prepare for the new regime as the South African Reserve Bank (SARB) has stipulated a 12-18 months timeline for when its new digital assets AML/CFT and taxation framework will be ready.

Source: Coin Geek

The position paper identified that one of the objectives of regulating crypto assets is to combat tax evasion and impermissible tax avoidance arrangements. The South African Revenue Service (SARS) has confirmed that normal income tax rules apply to crypto and taxpayers need to submit their crypto gains or losses as part of their taxable income. A crypto asset can also be subject to capital gains if it is held and disposed of with capital intent.

There is also a clear stance on VAT in that the dealing in crypto assets itself does not give rise to VAT. However, services related to such dealings may well give rise to VAT if the VAT registration threshold is met.

Source: Michalsons

Attention around looming crypto regulations in South Africa has recently been brought to the fore by South Africa’s leading crypto exchange, Luno. Paul Harker, head legal of Luno, states that we are likely to see an amendment to the FIC Act to bring crypto service providers into the purview of the Act. There have been talks around this for a while now says Paul, and it is a much needed regulatory step to ensure consumer protection with a robust licence regime. The position paper shares a similar sentiment, and has highlighted the following five recommendations that are likely to be implemented within the next 12 months.

• Crypto asset service providers will be regarded as CASPs.
• Schedule 1 of the FIC Act is to be amended by adding CASPs to the list of accountable institutions. This means CASPs will need to register with the Financial Intelligence Centre.
• Crypto assets will be declared as a “financial product” under the FAIS Act.
• Certain crypto asset services will be included in the relevant licensing activities under the CoFi Bill and included in the definition of “financial service” in the Financial Sector Regulation Act (FSRA).

The pooling of crypto for distribution should be treated as an alternative investment fund that should be incorporated within the relevant licensing activities in terms of the Conduct of Financial Institutions Bill. Collective investment schemes and pension funds should not be allowed to have exposure to crypto assets. Also, the issuing and listing of derivative instruments or other securities that reference crypto assets as the underlying assets should not be permitted.

Source: Michalsons

The 2022 Budget Review made reference to crypto assets in the financial sector update. A project is underway that is seeking to clarify the relevant operational, legal and policy questions around a potential change to the adoption of a digital central bank digital currencies (CBDCs) and crypto asset regulations. The project findings are expected to be released in April 2022.

The review also indicated that the national treasury continues to modernise South Africa’s capital flows management framework. In this context, a reform is proposed to enhance the monitoring and reporting of crypto asset transactions to comply with the exchange Control regulations of 1961. The process to include crypto assets in the regulations is underway.

Source: Michalsons

South African investors are still in shock after a digital currency scam reportedly made off with R54 billion ($3.8 billion) and blamed it on a hack. Africrypt was around for two years, but in that time it had allegedly lured investment from high-net worth individuals and celebrities. Once it claimed it had been hacked, the company allegedly urged its investors not to report as authorities would frustrate recovery efforts.

The South African digital currency industry has barely recovered from the damage that Mirror Trading International inflicted on investors. MTI was a multi-level marketing scam that made off with close to a billion dollars from over 260,000 investors. It had grown beyond South Africa, with Texas and Canadian regulators declaring it illegal in their jurisdictions.

Source: Coin Geek

A unit of the South African Police Service said it’s started an investigation into an alleged cryptocurrency investment fraud that has affected more than 28,000 people and led to losses of more than 1 billion rand ($80.4 million).

The allegations involve “BitCaw Trading Company, commonly known as BTC Global,” the police unit said in an emailed statement on Friday. “Members of the public are believed to have been targeted as part of the scam and encouraged by BTC Global agents to invest with promises of 2 percent interest per day, 14 per cent per week and ultimately 50 percent per month.”

“BitCaw Trading was not involved in the BTC Global scam and we are shocked to see our name connected with it,” Andrew Caw, who set up BitCaw Trading, said in messages via Facebook on Friday. “BitCaw Trading assists people with buying & selling Bitcoin as well as other Bitcoin related services. We do not manage third-party money or offer any kind of investment” and BitCaw didn’t set up BTC Global, he said.

Source: The National News

Centbee’s Minit Money project has been announced for inclusion into the South African government’s regulatory sandbox, opening the door for one of South Africa’s most innovative blockchain businesses to make its mark on digital asset regulation in the country.The sandbox was set up by the Intergovernmental Fintech Working Group (IFWG), an organisation comprised of several South African regulators. Regulatory sandboxes like this are used to test new technologies or business models against existing and developing regulatory frameworks. It allows the chance for regulators to better understand emerging technologies, but it also provides companies with the opportunity to take an active role in the development of legislation and regulation which affects them and their business.

Source: Bitcoin Association