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Regulation of cryptocurrencies is certain for SA, but the wheels turn slowly

Regulation of cryptocurrencies is certain for SA, but the wheels turn slowly
Illustrative image | Sources: The headquarters of the South African Reserve Bank in Pretoria, South Africa, on 23 June 2017. (Photo: Waldo Swiegers / Bloomberg via Getty Images) | South African currency. (Photo: Gallo Images / Foto24 / Brendan Croft) | Rawpixel

The SA Reserve Bank is working on a regulatory framework for cryptocurrencies that will ensure anti-money laundering legislation and exchange controls are adhered to. But, first, the Minister of Finance needs to amend the Financial Intelligence Centre Act to declare crypto as a financial product.

The adoption of cryptocurrencies as well as the entry of new players into the market has skyrocketed in just a few years. 

In evaluating cryptocurrencies, it is important to distinguish between technological advances, potential improvements to the payments system and the hype, Kuben Naidoo, deputy governor of the South African Reserve Bank (SARB) and a member of the Monetary Policy Committee,  said at a PSG Think Big webinar on Tuesday, 12 July. 

Naidoo said SARB’s thinking on cryptocurrencies had evolved, and that it now viewed it as a type of asset that should be regulated. SARB’s role, he said, is not aimed at helping users to mitigate market risks, or to “pick winners and losers”. The ups and downs of the market fell outside the concerns of the regulatory framework in a free market, and investors were free to choose which assets to invest in.

Legislation and controls

Instead, Naidoo said, the SARB was primarily concerned with implementing a regulatory framework that ensured anti-money laundering legislation and exchange controls were adhered to, just as they are for investment and trading in other financial assets.

He said that during lockdown, he had wanted to attend a two-day online course to learn how to pickle. “I had to pay R930 and I had to do an EFT. It took me 10 days and about five pages of paperwork — and this was dealing with rands. Similarly, if you want to change or trade across borders using crypto assets, there should be a similar regulatory environment. You can do it. We are not saying it’s not allowed, but there has to be a sense of reporting,” he said.

Criminality

Naidoo said the use of crypto for money laundering and other illicit activities was a source of concern: “Ninety percent of transactions involving cryptocurrency in the US is for the purchase of opioids or gambling tokens. 

“Another unfortunate reality is that crypto is being used by cyber criminals to demand ransoms and to fund cross-border kidnappings and cyber attacks. Criminals think it gives them a degree of anonymity and is harder to trace, which is what we are trying to address. I think we have a responsibility to the public to enforce rules,” Naidoo said. 

The SARB and the Intergovernmental Fintech Working Group were actively considering taking two immediate steps to reduce the risk of cryptocurrencies being used to evade existing regulations.

  • The first would be to bring crypto into the regulatory regime under the auspices of the Financial Sector Conduct Authority, and for the Financial Intelligence Centre to list it as part of a schedule under the Financial Intelligence Centre (FIC) Act.
  • Second, a regulatory framework needed to be developed for exchanges and platforms that includes Know Your Customer (KYC) protocols, as well as exchange control and the applicable taxation laws. In addition, cryptocurrencies should come with a “health warning”, indicating that the potential to lose money should be taken seriously and that owning a cryptocurrency is not the same as making a bank deposit. Importantly, crypto exchanges will have to comply with all exchange control laws.

This approach has already been widely welcomed by the industry, with many players indicating that greater crypto regulation will help to legitimise the use of the technology.

Illicit crypto transactions

Eva Crouwel, head of financial crime at cryptocurrency platform Luno, said 2.1% of all crypto transactions globally were categorised as illicit in 2019, but this had dropped to 0.34% of all global cryptocurrency transactions in 2020, translating to about $10-billion worldwide.

According to Crouwel, there is a perfect storm of three main reasons for the rise in financial crimes in South Africa. 

“First, financial education levels tend to be lower in South Africa and, combined with financial hardship caused by Covid-19, people are seeking good returns. 

“Second, crypto is a new technology, so users are uncertain about how it works and how to protect themselves.

Finally, personal data in Africa has not been well protected compared with Asian and European markets, even though POPIA [the Protection of Personal Information Act] was recently introduced in South Africa. This makes it easy for people with bad intentions to get hold of personal information,” she said.

‘Get-rich-quick’ scams

Luno has nine million customers in 40 countries. In about 95% of its financial crime cases in January, customers had been scammed. This varied from traditional “get-rich-quick” scams to cases where customers were scammed into surrendering their log-in information to fraudsters, who sometimes pretend to be from Luno. 

Regulation, or the lack thereof, was a significant factor. “Luno fully supports the regulation of crypto and believes that it will help to combat fraud. But the reality is that even highly regulated sectors experience financial crime, especially scams,” Crouwel said.

She said crypto businesses have a significant role to play in teaching customers how to stay safe.

Luno uses external blockchain-monitoring companies and restricts crypto movements when the data indicates that customers are at risk.

“Interestingly, there is no specific demographic for victims, despite widely held perceptions that scammers target either the ignorant elderly, young mavericks looking to make a quick buck or previously disadvantaged users.”

Developments in respect of regulatory oversight are slow as the SARB awaits the amendment of Schedule 1 of the Financial Intelligence Centre Act by Finance Minister Enoch Godongwana. 

When it comes to a central bank digital currency, Naidoo said the Reserve Bank was intimately involved with Project Dunbar, an initiative that brings together the Reserve Bank of Australia, the Central Bank of Malaysia, the Monetary Authority of Singapore and the SARB for a cross-border central bank digital currency. BM/DM

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