South Africa risks falling behind in harnessing the economic benefits of digital assets. It’s not alone: too many regulators across the world think of digital assets as a nagging puzzle or a problem to solve when, actually, the opposite is true. Digital assets can become a solution to significant economic problems. And this is especially true in South Africa’s case.
It is now 17 years since bitcoin came into being. Yet, in many circles, cryptocurrencies are still viewed with scepticism. Arguably, the sceptics are increasingly in the minority.
Following a raft of approvals for crypto exchange-traded funds in the US and other First World economies over the past few years, the US is now taking significant strategic steps to normalise digital assets.
Donald Trump recently issued an executive order clarifying regulations for digital assets. He has also appointed a “crypto czar” – South African-born David Sacks – to oversee the sector. Bitcoin has been recognised as a strategic reserve, alongside traditional assets like gold and petroleum.
Also, the US office of the comptroller of the currency has authorised US banks and savings associations to hold digital assets on behalf of clients and engage with blockchain or distributed ledger networks for payment processing.
Digital assets are being fully integrated into the traditional financial system in the world’s largest economy, which will surely unlock wider potential. Countries that dither, we believe, are going to lose out.
Moving forwards
South Africa was once at the forefront of crypto. It is home to Luno, one of the oldest crypto exchanges in the world, and regulators seemed to embrace digital assets, culminating in a forward-looking position paper on digital assets by the intergovernmental fintech working group (IFWG) in 2021.
But things have slowed down significantly since, as evidenced in the recent update to that position paper issued by the IFWG, in which critical recommendations have still not been implemented.
On the one hand, you can understand the enormous pressure that National Treasury and the Reserve Bank are under, not least given this year’s fraught budget impasse. Understandably, spending serious time on crypto regulations isn’t high on the emergency priority list. But we’d argue that crypto can help solve some of our country’s economic problems, so it’s worth taking the time to get our regulations right and avoid falling behind.
The first step forward would be a robust listing framework on what constitutes a reasonable digital currency. Through providing this, government would protect consumers from unscrupulous operators without restricting financial freedom. A clear framework for deciding which digital coins are worth holding and investing in is essential.
The next step is correct asset designation. Currently, digital currencies are not designated as either offshore or onshore assets, making it very difficult for institutional investors to allocate capital or invest in assets such as bitcoin. It also complicates efforts to report cross-border transactions to the Reserve Bank. Uncertainty about the status of digital assets – whether they’re onshore or offshore assets – is holding back growth in the sector.
If cryptocurrencies are classified as an offshore asset, it severely limits how much can be held by asset managers and collective investment schemes, effectively restricting both retail and institutional investors from enjoying significant potential returns.
Bitcoin, for instance, is by far the best-performing asset of the past decade. If you had invested R1,000 in bitcoin in 2015, it would be worth about R350,000 today. Institutional investment in assets like bitcoin should be facilitated in a responsible way.
If government were to designate digital assets as onshore assets when held on local licensed platforms, it would, at no cost to the fiscus, see domestic crypto investments boom. The returns generated by these assets could be reinvested in South Africa, which may increase tax revenue.
It is also completely possible to connect crypto exchange systems to the South African Revenue Service so that users’ profits from digital assets can be automatically reported. This would be similar to how banks report taxpayers’ interest earnings from savings accounts and how investment platforms report equity sales profits. So crypto can, in very real ways, assist in adding to the fiscus.
Correct classification will also help exchange reporting to the Reserve Bank. And this could help solve another of our country’s economic problems – that of being on the Financial Action Task Force (FATF) greylist.
Regulatory balance
Luno, which operates in 40 countries, has worked closely with other governments in the regulatory space, most recently alongside the Malaysian Securities Commission as part of that country’s FATF mutual evaluation. (South Africa’s last FATF mutual evaluation in 2021 is what resulted in our greylisting in 2023.)
The Malaysian example is an important one because it illustrates the fine regulatory balancing act that is needed. The cautionary tale is Nigeria, where regulators overreached with draconian measures. The result was a massive boom in unregulated peer-to-peer crypto transactions, which made it basically impossible for the government to track suspicious transactions.
We believe that clear regulation on digital assets would almost immediately help South Africa with two pressing issues: revenue collection and exiting the FATF greylist. Enabling regulation will also contribute to a more stable and accessible investment environment, allowing people to grow their savings and build wealth through the appreciation of digital assets.
It will also pave the way for new financial products and services based on cryptocurrencies, offering potentially higher-yield investment opportunities. These benefits aren’t hypothetical – they have already been realised in developed and emerging economies around the world.
The underlying promise of cryptocurrency remains potent. South Africa must avoid at all costs a scenario where – a few years from now – we realise the crypto tide came in, but had no boat ready.
Reitz is general manager for Africa and Europe at Luno.
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