South Africa is a vibrant and diverse nation at the southern tip of the African continent. With a robust, dynamic economy, the country is emerging as a critical player in cryptocurrency adoption in Africa.
In this blog post, we will explore South Africa’s monetary policy background, examine the trends in cryptocurrency adoption, delve into the current regulatory framework, and discuss possible future actions around cryptocurrency regulation in the country.
Cryptocurrency Adoption: Trends in South Africa
South Africa views cryptocurrency as a financial product, subject to regulation as such. Cryptocurrencies are classified as an investment and taxable asset, not as legal tender. Even so, Pick n Pay, a South African retailer, now accepts bitcoin payments in over 2000 stores as of February 2023.
South Africa is seeing a significant surge in cryptocurrency adoption due to several factors, including an educated, tech-savvy population, high mobile phone penetration rates, and a growing interest in alternative investment opportunities.
Cryptocurrencies also provide a lifeline for individuals who are unbanked or underbanked, allowing them to participate in the digital economy and access financial services that were previously out of reach.
According to Chainalysis, Nigeria and Kenya lead crypto adoption rates, while South Africa leads in the overall value of crypto received in Africa.
Bitcoin is the most popular cryptocurrency. Rather than investing for speculative purposes, most South Africans see bitcoin as a store of value and a means of remittance, aka money, enabling faster and cheaper cross-border transactions compared to traditional banking channels.
South African crypto users tend to be younger and well-educated, with 34% holding a university degree. However, as the chart below shows, crypto is most popular with people in lower-income groups with an income range equivalent of less than USD 7800 per year to USD 15,700 per year.
This combination of young, educated, yet low-income crypto holders could indicate an opportunity gap in South Africa’s economy. The decentralized nature of cryptocurrencies appeals to South Africans seeking to protect their wealth from market volatility.
South Africa’s Central Bank Digital Currency (CBDC)
The South African Reserve Bank (SARB) is the central bank of South Africa. It was established in 1921 to address the chaotic monetary and financial conditions after World War I.
In collaboration with several participating banks, SARB launched Project Khokha in 2018, an initiative to explore the potential use of blockchain technology for interbank settlement and payment systems. It was an experimental project to test the feasibility, scalability, and resilience of using a distributed ledger technology (DLT) system in a real-world financial environment.
The primary objective of Project Khokha was to assess whether a DLT system could meet the requirements of a high-value payment system. The project ran on JP Morgan’s Quorum blockchain platform, now owned by Consensys. The experiment sought to evaluate the efficiency, speed, and security of transactions processed on the blockchain compared to existing systems.
The insights gained from Project Khokha 1 informed the SARB’s ongoing exploration of central bank digital currencies (CBDCs) and the potential application of DLT in the country’s financial infrastructure.
In Project Khokha 2, the SARB is experimenting with a wholesale CBDC for interbank transfers between financial institutions. South Africa is also participating in a cross-border pilot with the central banks of Australia, Malaysia, and Singapore. The SARB provides detailed downloadable resources about Project Khokha on its website.
Crypto’s Regulatory Journey in South Africa
Similar to other countries, crypto regulation in South Africa involves securities, tax, and anti-money laundering (AML) regulatory agencies. South Africa has established a regulatory framework for crypto developed and overseen by various agencies to ensure a safe and transparent environment for users and investors.
Intergovernmental Fintech Working Group (IFWG)
While not a regulatory agency per se, the IFWG is a collaborative platform for various regulatory bodies, including the SARB, FIC, and SARS, to address emerging fintech and cryptocurrency-related challenges. It aims to foster an enabling environment for innovation while ensuring consumer protection and financial stability. The IFWG publications offer guidance for developing financial regulations and laws.
The Prudential Authority (PA)
The PA regulates banks, insurers, cooperative financial institutions, financial conglomerates, and certain market infrastructures.
The Financial Sector Conduct Authority (FSCA)
The FSCA regulates market conduct of financial institutions that provide financial products and financial services, as well as those licensed in a financial sector law, including banks, insurers, retirement funds and administrators, and market infrastructures.
In October 2021, the Paris-based inter-governmental organization Financial Action Task Force (FATF)’s cited South Africa’s lack of crypto-asset regulation as a critical deficiency in the context of anti-money laundering and counter-financing terrorism. To protect its international reputation and the growing user base of citizens purchasing and using cryptocurrency, the FSCA brought crypto assets under its mandate.
The FSCA declared in October 2022 that crypto assets are a financial product subject to FSCA regulation under section 1(h) of the Financial Advisory and Intermediary Services Act (FAIS) Act. In a nod to the evolving non-securities ecosystem of crypto assets, the draft includes exemptions for crypto miners and NFTs.
Financial Intelligence Centre (FIC)
The FIC is responsible for combating money laundering and the financing of terrorism. It requires cryptocurrency exchanges and other relevant entities to register as accountable institutions and implement measures to ensure compliance with anti-money laundering and counter-terrorism financing regulations.
The 2020 IFWG Position Paper on Crypto Assets stipulates that crypto service providers must register and adhere to all relevant provisions of the FIC Act, including requirements aimed at AML/CFT.
In addition, the paper says that all Crypto-Asset Service Providers (CASP) must adhere to the “travel rule” as defined by the FATF. The travel rule attempts to expose money laundering and illicit financing by requiring crypto companies to screen, record and communicate sender and recipient information for crypto transactions that exceed ZAR 25,000, or approximately USD 1400.
South African Revenue Service (SARS)
SARS is South Africa’s tax agency. It treats cryptocurrencies as intangible assets for tax purposes. Individuals and businesses must declare their cryptocurrency holdings, gains, and losses.
Moving Ahead
As an African nation, South Africa is part of a vast continent at the forefront of grassroots cryptocurrency adoption. By carefully balancing the need for financial innovation, consumer safety, and monetary stability, the country can mitigate risks while harnessing the transformative potential of digital currencies.
As cryptocurrency goes global, investors trading across borders must remain informed about local regulations and tax implications. If you have crypto assets, ZenLedger can help you aggregate transactions across exchanges, compute your capital gain or loss, and auto-fill the IRS forms you need yearly. You can even use our tax loss harvesting tool to identify ways to save throughout the year.
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Cryptocurrency businesses and stakeholders should regularly consult with legal and compliance experts in the countries and states where they operate to ensure they comply with all applicable regulations.
The above is for general information and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.
