by admin | May 3, 2023 | Cryptocurrency, Cybercrime
What is the legal framework in South Africa for cryptocurrency?
Bitcoin, Litecoin, Ethereum, Monero…what do they all have in common? They are all cryptocurrencies. You’ve probably heard of Bitcoin. Many people think Bitcoin and cryptocurrency are the same thing, but in fact Bitcoin is just one type of cryptocurrency. Cryptocurrency is a digital payment system that works outside of the banking system. It’s a peer-to-peer payment system that allows anyone anywhere to send and receive payments. Cryptocurrency payments are digital entries on an online database. Cryptocurrency is stored in a digital wallet and when you make a cryptocurrency payment, the transaction is recorded in a public ledger. Bitcoin was introduced in 2009 by an anonymous developer and it has since become the most well-known cryptocurrency in the world. It has inspired the development of other cryptocurrencies, such as the ones named above.
As cryptocurrency gains popularity, it becomes harder and harder for countries to keep up from a regulatory perspective, particularly as the digital world knows no territorial or legislative boundaries. Because cryptocurrency operates outside of the traditional banking environment, and is highly encrypted (hence the name), it has become the favourite of cybercriminals. Ransomware attackers demand payment – often millions of dollars – in cryptocurrency. Cryptocurrency has a tainted reputation as a result, but there is nothing inherently illegal or bad about cryptocurrency. Therefore South Africa has fixed its sights on providing legal structuring mechanisms to make the grey areas of cryptocurrency regulation more black and white.
South African Reserve Bank
Recent investigations conducted by the South African Reserve Bank (SARB) have demonstrated how easily cryptocurrency can become decentralised. The investigation highlighted non-compliance with existing regulations, leading to tax evasion, money laundering and terrorist financing activities.
SARB’s solution is to regulate cryptocurrency not as a currency, but rather as a financial asset. Legitimising the industry in this way will enable the asset’s compliance with anti-money laundering legislation and exchange control regulations, among others.
Position paper on crypto assets
On 11 June 2021, the Intergovernmental Fintech Working Group (IFWG) confirmed that crypto assets will be brought into the SA regulatory review. The published position paper on crypto assets provided three pillars of regulation:
- Implementation of an anti-money laundering (AML) and counter-terrorism financing framework
- Framework for monitoring cross-border financial flows
- Application of financial sector laws
Regulatory framework
The regulation of cryptocurrency will follow a phased approach. The first phase began in October 2022. The South Africa Financial Sector Conduct Authority (FSCA) declared that, effective 19 October 2022, crypto assets are considered financial products.
This means that crypto assets are subject to FSCA regulation in terms of section 1(h) of the Financial Advisory and Intermediary Services Act (FAIS) Act. Individuals who provide advice or intermediary services related to crypto assets must be authorised as a financial services provider or as a representative of such a provider.
The Conduct of the Financial Institutions Act (COFI) Bill will now include certain crypto-asset services as a licensing activity and define them as “financial services” in the Financial Sector Regulation Act, 2017. Applications for a licence must be submitted before 30 November 2023.
Along with the latest declaration, an FSCA policy document was released containing explanatory notes, transitional details and plans for a crypto-asset regulatory and licensing framework.
The regulatory framework is continually evolving and the policy document was accompanied by a draft general exemption. Commentary is invited on the exemption, which is intended to help the transition of existing crypto-asset sector players to the new regime.
More regulations are expected which are likely to prohibit collective investment schemes and pension funds from exposure to crypto assets. Derivative instruments or other securities that reference crypto assets as the underlying assets should also be excluded from these long-term savings vehicles.
Taming the wild west
There is a lot of uncertainty regarding cryptocurrency regulation. However, the SARB aims to develop a regulatory framework for crypto exchanges that will allow for cryptocurrency listing. The SARB has confirmed that it will enforce know-your-customer (KYC) requirements and, where applicable, submission of Suspicious Transaction Reports to the FIC.
The cowboys who misuse cryptocurrency for illegal purposes must not be allowed to ruin the market for legitimate users. Cryptocurrency, originally a vehicle for investing, often speculatively, is now becoming an accepted form of payment. The businesses that accept crypto payments are still predominantly in the US, such as Microsoft, Paypal, Starbucks, AMC Theaters, and AT&T. But inevitably take-up of crypto will spread, just as alternative payment methods such as SnapScan and ApplePay have. Cryptocurrency has certain benefits that may make it particularly attractive to the South African environment, where there are still many unbanked people. Crypto is subject to fewer fees; you can make or receive payment wherever there is internet connectivity; and it is available to everyone, i.e. those who do not have access to financial services like banks and loans tend to have internet connections through mobile devices. Anyone with an internet connection can make and receive payments, borrow money, or access financial services wherever they are.
For more information
SD Law is a firm of experienced attorneys based in Cape Town, with offices in Johannesburg and Durban. If you want to know more about cryptocurrency, or need assistance with other digital concerns, including compliance with POPIA, cyberbullying and cybercrime, call Simon on 086 099 5146 or email sdippenaar@sdlaw.co.za.
Further reading:
This entry was posted in Crypto currency, Cybercrime and tagged in Cape Town Lawyer, Johannesburg lawyer.
by admin | May 2, 2023 | Cryptocurrency, Cybercrime, Online Stores
An introduction to cryptocurrency
Cryptocurrency, or “crypto” hit the headlines in 2009, when Bitcoin launched, but its origins can be traced back to the 1980s, when it was called cyber currency. An American cryptographer called David Chaum invented digital cash, which relied on cryptography to secure and verify transactions, but the requisite protocols and software that would facilitate a true digital currency did not begin to be developed until the 1990s. So what is cryptocurrency?
Cryptocurrency as we know it now is a digital currency in which transactions are verified and records maintained by a decentralised system using cryptography, rather than by a centralised authority such as a bank. The digital money is created from code which is monitored by a peer-to-peer internet protocol. It can be digitally traded and functions as a medium of exchange. In other words, it is an encrypted string of data, encoded to signify one unit of currency which has the same value all over the world, i.e., no conversion/exchange is necessary.
Investing in crypto
When it was first launched, Bitcoin was intended to be used for daily transactions, from low-value commodities like a cup of coffee to assets such as a computer. High-value items like real estate were even deemed to be suitable for purchase by Bitcoin. However, the reality was a bit different. Crypto was considered…and used as…an investment medium. Bitcoin was on an upward trajectory and investors piled in, but the bubble may have burst. One Bitcoin is now worth around $17,000. It was worth c. $69,000 in November 2021. Some analysts think it is unlikely to recover to 2021 levels. Bitcoin and other cryptocurrencies, like non-digital assets, have been affected by macroeconomic pressures, including the war in Ukraine, inflation and the cost-of-living crisis, and uncertainty around rising interest rates in the US and UK. Crypto has also been impacted by forces related to its digital nature: China has made cryptocurrency transactions illegal and FTX, the largest global cryptocurrency exchange, has collapsed.
However, a long-term investment portfolio could benefit from holding cryptocurrency. Market experts believe that Bitcoin could rally, although that might not be in the near future. Crypto could help to diversify a portfolio and provide returns when other investments are underperforming. But it’s important to understand that crypto is unstable and volatile and carries risk.
Legal tender
Cryptocurrencies do not have widespread status as legal tender, but they are regarded as assets in South Africa and can be tendered to a creditor as a valid and legal offer of payment, if you can find a vendor who accepts crypto. The number of institutions accepting cryptocurrencies is growing, but they are mostly in the US for the time being. There, it is possible to buy a wide variety of products from e-commerce websites using crypto. Examples include technology and e-commerce sites such as AT&T and Microsoft. Some luxury goods retailers accept crypto as a form of payment, as do some car dealers, from mass-market brands to high-end luxury marques. In the US, it is possible to spend cryptocurrency at a retailer that doesn’t accept it directly by using a cryptocurrency debit card, such as BitPay. This feature does not yet exist in South Africa.
Cryptocurrency is neither issued nor governed by any jurisdiction and exists purely within the community of users of the currency. We’ll look at the regulatory framework for cryptocurrency in South Africa in a future article
Examples of cryptocurrency
Bitcoin is the most recognised cryptocurrency, as it was the first onto the scene. Others include Ethereum, Litecoin, Ripple, Tether and Binance Coin.
BITCOIN
Since there is no centralised third party involved, Bitcoin was created as a peer-to-peer value transmission system based on encryption. A useful tool for conducting business between two or more parties, the Bitcoin blockchain is immutable, meaning it cannot be altered in any manner. There are only 21 million Bitcoin that will ever be created.
ETHEREUM
Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency, called Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin. Ethereum is a system that allows users to create decentralised apps and organisations, keep assets, execute transactions, and communicate. Users retain control over their own data and what is shared, so personal information is kept confidential.
LITECOIN
Litecoin is similar to Bitcoin but has been more innovative, developing systems for faster payments and processes to allow more transactions.
RIPPLE
Ripple is a distributed ledger system that was founded in 2012 by a company that has worked with various banks and financial institutions. Ripple can be used to track different kinds of transactions, not just cryptocurrency.
TETHER
Tether is a stablecoin, which means it is backed by fiat currencies like the US dollar or euro and maintains a value roughly equal to one of those denominations. Theoretically, Tether’s value should be more stable than other cryptocurrencies, and investors who are concerned about volatility tend to prefer it.
BINANCE COIN
One of the biggest cryptocurrency exchanges in the world, Binance, accepts payments in the form of Binance Coin (BNB). Binance Coin has grown since it was introduced in 2017, and it does more than just enable transactions on Binance’s exchange platform. It can be used for trading and processing payments. Additionally, it can be traded or converted into other cryptocurrencies like Ethereum or Bitcoin.
As a matter of interest, non-Bitcoin cryptocurrencies are collectively known as “altcoins” to distinguish them from the original.
Cryptocurrency risks
Cryptocurrency is inherently risky. The same features that make it attractive contribute to its risk. Those who value the peer-to-peer concept and want to avoid “big finance” also need to understand that the lack of coordination and clarity on regulatory, financial, tax and legal treatment means crypto does not have the protection afforded other financial assets. Cryptocurrency investments are subject to far less regulatory protection than traditional financial products like stocks, bonds, and mutual funds. And, unlike government-backed money, the value of virtual currencies is driven entirely by supply and demand. This contributes to the extreme volatility seen in the crypto market and can result in both significant gains and big losses.
Cryptocurrency is favoured by cybercriminals making ransom demands because assets are hidden and untraceable. There are also scams directly related to cryptocurrency, and this type of crime is on the increase. These include: fake websites which feature bogus testimonials and promise attractive, guaranteed returns for continued investment; virtual Ponzi schemes where cryptocurrency criminals promote non-existent opportunities to invest in digital currencies and purport to pay huge returns by paying off old investors with new investors’ money; and “celebrity” endorsements, in which scammers impersonate well-known names and promise to increase the victim’s investment in the cryptocurrency but instead steal the funds sent to purchase the crypto. One of the saddest scams takes advantage of those looking for love online. Con artists (usually men) persuade people (usually women) they match with on dating apps to invest in cryptocurrency.
Lastly, crypto, like any online activity, is subject to hacking, where cybercriminals break into digital wallets and steal the cryptocurrency. The blockchain technology that underpins cryptocurrency is secure, and crypto is not easy to hack into. But it is not unhackable. It is also not immune from human error. Password amnesia can mean the loss of all one’s cryptocurrency.
Benefits of cryptocurrency
Despite the risk, there are benefits to cryptocurrency. It is easy to move and store. It is internationally available. It is governed, or rather ungoverned, by multiple jurisdictions. Brokers are unregulated, making it more accessible. However, this last point is being addressed by the South African Reserve Bank at present. The biggest benefit in the African context is that it is available to anyone with an internet connection, which potentially makes it a useful tool for the half a billion unbanked in sub-Saharan Africa. (Data from the World Bank shows that around 45% of people living in sub-Saharan Africa don’t have access to a bank account, which equates to almost half a billion people excluded from financial services.) However, crypto needs to be purchased initially and loaded into a digital wallet with tangible funds, usually a debit card or electronic fund transfer (EFT). A credit card may also be used but crypto purchases with credit cards are considered risky. Some exchanges and some credit card providers don’t support them. This hurdle needs to be overcome and some of the risks mitigated before cryptocurrency can be considered a viable solution for the unbanked.
For more information
SD Law is a firm of experienced attorneys based in Cape Town, with offices in Johannesburg and Durban. If you want to know more about cryptocurrency, or need assistance with other digital concerns, including compliance with POPIA, cyberbullying and cybercrime, call Simon on 086 099 5146 or email sdippenaar@sdlaw.co.za.
Further reading:
This entry was posted in Crypto currency and tagged in bitcoin, Cape Town Lawyer, Johannesburg lawyer.
