Kuben Naidoo, deputy governor of the South African Reserve Bank (Sarb), said a few things in an interview for PSG on 12 July and the financial industry sat up with eyes wide. There were a few sighs of relief, a few gasps of horror, a little head-scratching, but mainly cautiously optimistic anticipation as everyone waits for the comments to translate to real regulations with consequences. 

I have written previously about the snarling dogs of global regulation coming after crypto, particularly after the deafening noise of the recent global crash in crypto which saw dominoes falling all over the place. When I wrote that piece, the Sarb had said very little — their thinking was a closely held secret.

Not any more.

It would be easy to proclaim that the Sarb is just another dysfunctional SOE and imagine that its decisions about crypto regulations are sure to be suffused with, well, the sort of ill-informed opinions and logic-free rationale we see elsewhere in the government’s regulatory regimes.

Read in Daily Maverick: “Battered Bitcoin devotees begin to contemplate a market bottom”

But it ain’t so. I know people from within the South Africa crypto community who interact with the Sarb and contribute to its thinking on this matter. The Sarb team looking at crypto is competent, smart, cautious and well informed.

Horrifying blooper

But first, let’s crush one horrifying blooper from the deputy governor. He said “my counterparts in the US” have told him that “90% of cryptocurrency transactions” are used for illicit purposes. He went further: “Most use cases for crypto globally have not been an honest one.”

This is claptrap. Poppycock. Balderdash. And feeds the worst of misinformation that ends up in news headlines and does immeasurable damage to an important new industry.

The real stats are continuously assembled and reported by numerous data analytics companies. The largest and most prestigious of them is Chainalysis, used by the FBI and forensic and oversight and regulatory agencies the world over.

The number of crypto transactions tied to illicit activity on the blockchain is .15%. POINT ONE FIVE PERCENT.

If anyone wants to check this, see here.

Furthermore, the number of transactions tied to illicit transactions in the real world of rands and dollars, where we live, is 5%. That’s 50 times higher than crypto (and those are the only ones we know about).

Why is this? Because the blockchain’s transactions are public. It is impossible to commit a silent crime. It is instantly visible and tracking the proceeds of crypto crime is simple for anyone.

In the world of what is called “fiat money” — the physical world in which most of us live — it is often easy to hide financial crime. Just look at what they keep uncovering in dodgy financial shelters like Panama. Crypto is simply not an easy place to steal and keep money.   

The deputy governor had been woefully misinformed on this matter, and he should have been more cautious.

Crypto regulation

But let’s return to the regulatory comment. He said the Sarb intends to regulate cryptocurrency as a “financial asset”. Meaning it is being tossed into a basket with cash, stocks, bonds, mutual funds and bank deposits. He said that it will fall under the steely gaze of the FIC (the Financial Intelligence Centre). He said it would take 12 to 18 months for the government to do whatever needs to be done, which means understanding and approving requisite changes to appropriate acts (uh-huh).

This creates, at the very least, some early certainty. Which is a good thing. Institutions like banks can now start plotting and planning to enter this asset and service space (and believe me, they will). Tax issues become clearer. KYC and AML implications become clearer. Forex regulation goes from fuzzy to, er, not so fuzzy.

Larger problem looms

But not so fast. There is a much larger problem looming, for which the Sarb and others are going to have a more difficult time. And here is the reason.

When people think of “crypto”, they think of Bitcoin and perhaps some decide it is a financial asset. Perhaps there is some reasonable argument for that. But Bitcoin is only one token in a massive universe of cryptotokens. Cryptocurrencies, NFTs, loyalty tokens, governance tokens, staking tokens, utility tokens, non-transferable tokens. 

A veritable Babel of tokens. 

And only some are definitely not financial assets, even though they may accrue a market value, if only by agreement between two private parties.

Which leads me to this. What the Sarb (and every other regulator) is trying to do is to shoehorn crypto into existing regulations designed many decades ago for assets that are hundreds of years old — stocks, currencies, commodities, collectables and the like. It is not going to work. Entirely new classes of digital “things” need to be defined properly before the whole field can be rationally regulated.

A simple example will suffice. The world of blockchain and NFTs has recently collided with the world of video games. In some games, you can purchase and own an in-game weapon or other item, tethered to an NFT, and then sell it to another player in the video game (or even in another video game). Is the Sarb really going to try to regulate a digital Silver Power Sword in a video game played by 14-year-old kids?

If it does, its bucket will leak in so many places that it just won’t hold water. DM

Steven Boykey Sidley is a professor at JBS, University of Johannesburg and co-author of Beyond Bitcoin: Decentralised Finance and the End of Banks.