Legal Status of Cryptocurrency in South Africa

Cryptocurrency is not recognized as legal tender in South Africa, as the country’s Reserve Bank has yet to issue any official digital currency. However, the legal status of cryptocurrencies is not explicitly prohibited either. The South African Revenue Service (SARS) has classified cryptocurrencies as intangible assets, subjecting them to income tax, capital gains tax, and value-added tax (VAT). This classification acknowledges the economic value of cryptocurrencies while aligning with the existing tax structure.

The regulation of cryptocurrency exchanges is an ongoing process in South Africa. In 2021, the Intergovernmental Fintech Working Group (IFWG) released a “Position Paper” suggesting a comprehensive regulatory framework for cryptocurrencies. The proposed regulations aim to protect consumers, prevent financial crime, and create a conducive environment for innovation.

The Position Paper was drafted and prepared by the IFWG’s Crypto Assets Regulatory Working Group (the “CAR WG”) whose membership comprises of the South African Reserve Bank, the Financial Sector Conduct Authority, The South African Revenue Service and the Financial Intelligence Centre. In its Position Paper, the CAR WG defined “crypto assets” as:

“A crypto asset is a digital representation of value that is not issued by a central bank, but is traded, transferred and stored electronically by natural and legal persons for the purpose of payment, investment and other forms of utility, and applies cryptographic techniques and uses distributed ledger technology”

Despite the IFWG’s stating that crypto assets are not legal tender, they do acknowledge that crypto assets do perform similar functions of money in that it has value.

Exchange Control Regulations

South Africa has a stringent exchange control regime aimed at regulating the movement of funds across its borders. Cryptocurrency transactions fall under these regulations, and residents are required to adhere to reporting requirements when engaging in cross-border crypto transactions. Failure to comply with these regulations can result in legal consequences.

In October 2022, the FSCA declared that crypto assets are financial products in terms of the FAIS Act. The Financial Surveillance Department of the South African Reserve Bank (FinSurv) had issued guidance on its website indicating that persons were not allowed to export capital through crypto assets, as this would constitute an unlawful export of capital under regulation 10(1)(c) of the Exchange Control Regulations. However, more recently FinSurv has since issued a number of circulars, which for the first time expressly gave permission for certain transactions in relation to crypto assets. Most significantly, it was expressly stated that South African individuals could make use of their annual single discretionary allowance (R1 million) and their annual foreign capital allowance (R10m) to acquire crypto assets abroad.

The dangers of cryptocurrency

Throughout the world, the term cryptocurrency has become synonymous with scams over the past few years. Most notably is the ongoing case of FTX and Sam Bankman-Fried. FTX was one of the largest digital currency exchange platforms for buying and selling cryptocurrencies, founded by Bankman-Fried. As more people invested in cryptocurrencies, they turned to these platforms because they provided a digital wallet to store cryptocurrencies directly in a personal account.

However, in November 2022 CoinDesk published an article stating that Alameda Research (also founded by Bankman-Fried) was heavily dependent on FTX’s digital token “FTT”, with assets valued at $5 billion. FTX’s balance sheet was leaked and showed there was a lack of diversification and the two companies were tied too closely together. The balance sheet listed $9 billion USD in liabilities and $900 million USD in assets, with poorly labeled entries showing a negative $8 billion USD balance. Alameda borrowed as much capital as it needed from FTX and it was later found that this funding was mostly from customer deposits, and the trading firm would borrow money routinely from FTX customer assets.

FTX and its sister companies failed to produce balance sheets showing assets and liabilities, which is standard financial reporting procedures. FTX’s balance sheets were never audited due to it being a private company. Without these audits, there was no record of cash flow or assets to show the company could cover liabilities or customer assets. FTX balance sheets showed assets were far less than Bankman-Fried had stated.

Consumer Protection and Risk Awareness

As the cryptocurrency market is known for its volatility, investors and consumers must exercise caution and understand the risks associated with investing in digital assets. Regulatory bodies in South Africa, such as the Financial Sector Conduct Authority (FSCA), have issued warnings about the speculative nature of cryptocurrencies and the potential for financial loss.

Initial Coin Offerings (ICOs) and token sales have been a subject of concern globally due to their potential for fraudulent activities and lack of investor protection. “Pump and Dump” schemes have become rampant amongst crypto traders, often under the influence of celebrities and self-proclaimed crypto experts. A pump-and-dump scam is a sort of fraud in which the perpetrators amass a commodity over time, inflate its price artificially by disseminating false information (pumping) and then sell what they have accumulated to unwary buyers at a higher price (dumping). Once the perpetrators have fraudulently inflated the price, it usually declines, leaving purchasers who made their decision based on misleading information at a loss. 

With cryptocurrencies being so susceptible to misuse for illegal activities due to their pseudonymous nature, South Africa has taken steps to include cryptocurrency-related services providers under the Financial Intelligence Centre Act (FICA). This requires cryptocurrency exchanges and wallet providers to implement Know Your Customer (KYC) measures, thereby promoting transparency and accountability in the sector, but with so much of cryptocurrency trading taking place on a global scale, it is important for consumers to be extremely cautious when considering investing and trading in cryptocurrencies. 

The legal landscape surrounding cryptocurrencies in South Africa is dynamic and evolving. While cryptocurrencies are not yet fully considered legal tender, they are subject to tax and financial regulations. Regulatory efforts are underway to provide a secure and transparent environment for cryptocurrency activities, including exchanges and token offerings. As the cryptocurrency market continues to develop, it is crucial for both businesses and individuals to remain informed about the legal ramifications to ensure compliance and mitigate risks. Seeking legal advice and staying updated with regulatory changes will be essential in navigating the complexities of this emerging financial ecosystem.

The content does not constitute legal advice, are not intended to be a substitute for legal advice and should not be relied upon as such. Kindly contact us on info@cklaw.co.za or 021 556 9864 to speak to one of our attorneys.