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.

Position paper on crypto assets

The Intergovernmental Fintech Working Group (IFWG) published a position paper on crypto assets on 11 June 2021, confirming that crypto assets will be brought into the SA regulatory purview. The paper provides 25 recommendations in relation to the following three pillars of regulation:

  • Implementation Anti-money laundering (AML) and counter-terrorism financing framework’
  • A framework for monitoring cross-border financial flows; and
  • The application of financial sector laws.

Regulations expected in 2022

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.

Crypto Assets & Tax

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.

2022 Budget Review

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.

The road ahead

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.