The long-awaited official crypto regulation may finally arrive in South Africa after the South African Reserve Bank (SARB) announces their intentions to introduce a regulatory framework for the country’s cryptocurrency sector within the next 12-18 months. As you can imagine, this move is like music to all the crypto enthusiast's ears and especially us here at Altify. 

Some have thought that the SARB and other regulators in South Africa were ‘clueless’ about crypto, but this could not be further from the truth. This development shows progress and understanding by the SARB, which had not yet imposed regulation on the local cryptocurrency sector. The SARB is now saying that regulation would play a key role in ensuring investor protection and confidence, as well as creating a safer crypto ecosystem in South Africa. This is precisely the role these new regulations need to fill, protection for investors without stifling innovation in the industry. 

While South Africa lags behind the rest of the world in this area – crypto regulations and licenses have been available for more than three years in some jurisdictions – the introduction of a regulatory regime now puts the country at the forefront of the African continent. This is indeed commendable and will help bolster South Africa as a new technology hub going forward.

However, we must take these words with a pinch of salt, as the rumoured regulations have been in the works for many years now. Some caution must also be advised at this stage, as the specifics of the proposed crypto regulations are still largely undefined, and a lot of work still needs to be done.  
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Worryingly, recent industry engagements by the SARB have not demonstrated that it truly understands the crypto asset class. Some recent engagements have ruffled the feathers of many industry participants, as some of the proposed regulations could stifle the chances of South Africa becoming a global cryptocurrency hub - causing a possible exit of talent and business to friendlier jurisdictions. 

Cryptocurrencies - a new financial asset?  

Of concern is the SARB’s recently adopted position that cryptocurrency would be regulated as a financial asset, which is a different approach from every other jurisdiction we at Altify 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). 

While better than no regulations at all, this approach may not be the best industry-wide solution as this regulation will likely be purpose-built for crypto investment services over crypto payment services or crypto collectible services. This may hinder innovation within South Africa as entrepreneurs and blockchain developers look for better-equipped jurisdictions.

The SARB plans to develop a regulatory framework for crypto exchanges in South Africa which would be guided by traditional banking regulations such as Know-Your-Customer (KYC) rules and exchange control regulations. The great majority of credible industry participants have already adopted strict KYC and Anti Money Laundering (AML) processes but ensuring its enforcement would be a net benefit to the industry and reduce the chances of ‘bad actors’. 

Unfortunately, the SARB’s treatment of cryptocurrencies as capital assets could mean that everyday South Africans could be required to use their single discretionary allowance of R1 million to purchase cryptocurrency from a local crypto platform. This move would heavily impact the South African crypto ecosystem as crypto volumes on local exchanges would likely decline drastically, forcing many crypto platforms to either reposition themselves to onboard global customers from an offshore location or close down entirely.

Additionally, by restricting the total value of cryptocurrency South African residents can purchase on regulated local crypto platforms, the SARB may end up inadvertently creating an underground crypto market as crypto can be transferred peer-to-peer and stored off 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 (CASP) would be required to implement the Travel Rule. This rule 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.

What about crypto custody? 

Equally concerning is that the proposed crypto regulations do not appear to cover the most critical aspect of crypto ownership – crypto custody. Without a safe way to own and store your digital assets, the industry will struggle to gain credibility. 

Implementing a way to verify that crypto companies actually hold the crypto they claim to should be the primary focus for regulators, given well-publicised recent developments.

Incidentally, Altify was the first crypto provider in South Africa 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 Altify claims it holds on behalf of customers are actually securely held.

“As a crypto investment platform that has been around for over 4 years and, together with Mazars, pioneered verified crypto custody within South Africa,  we would be eager to work with the South African 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.” - says Sean Sanders, Founder and CEO of Altify.

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 SARB to guard against this. 

The right type of regulation would be immensely positive for both the South African crypto consumer and the broader economy. We estimate that the crypto industry employs over 8 000 people in South Africa with top-tier salaries and adds more than R30 billion 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 South Africa.  It is an outcome that should be avoided at all costs.