Last May, in Standard Bank of South Africa v South African Reserve Bank in the Pretoria high court, judge Mandlenkosi Motha held that cryptocurrency is not legal tender in South Africa and, for the purposes of the case, does not fall within the concepts of “money” or “capital” in the old exchange control regulations.
Motha held that trying to squeeze crypto into the definition of money was “strained and impractical”. The judge described cryptocurrency as essentially code on a decentralised ledger with a global character, rather than money in the ordinary legal sense contemplated by the regulations.
A big part of the reasoning was interpretive: these regulations can trigger forfeiture and criminal consequences, so the court said they must be read restrictively, not expanded creatively to catch new things by implication. Webber Wentzel’s summary of the judgment notes that Motha applied the principle that if a penalty provision is uncertain, the uncertainty should be resolved in favour of liberty, and that the regulations contained a regulatory lacuna because they simply said nothing about crypto assets.
The Treasury has now issued regulations to close that lacuna, in a way that is absolutely typical. The regulations are stultifying, draconian and misguided. Apart from being an assault on transactional freedom, the Treasury’s action will really hurt local industry.
But it’s easy to miss the mark here. The global crypto industry should play its part in preventing money laundering and financial crime, so a level of careful regulation is desirable — and by the way, this is not opposed by the industry. When crypto was a kind of fun investment plaything, regulators could turn a blind eye. But now the total value of the industry is about $2.6-trillion. Once you get to that size, knowing your clients becomes necessary and rational.
But the slightly dubious subtext to crypto regulation involves the banking industry trying to protect its margins. Regulators generally don’t know the first thing about crypto, and you can actually see that in the regulations. So they take the advice of the banks, which argue, not entirely unfairly, that regulations that apply to them should also apply to the industry. And the recently published proposed regulation on crypto and foreign exchange demonstrates that in spades.
Yes, that is correct, these regulations were first passed almost a century ago, and they continue to exist as if nothing has really changed since 1933
Let me explain. The intention of the Treasury is to bring crypto assets such as bitcoin formally into the exchange control system. How? First, it is not using legislation; it is taking a shortcut. It is just changing the capital flow management regulations in terms of the Currency & Exchanges Act, 1933. Which is in itself a bit dodge, right. And, yes, that is correct, these regulations were first passed almost a century ago, and they continue to exist as if nothing has really changed since 1933.
But things have changed. The way exchange controls were enforced in the past is quite simple: the state just made the banks do the heavy lifting. And banks had no choice but to implement these restrictive, senseless laws or they would lose their licences. Also … they slap on a fee. The new regulations assume the crypto repositories are, well, just quasi-banks. And so the new regulations talk repeatedly about “authorised dealers”.
But crypto platforms are not banks. Banks do not allow you to transfer assets to parties outside their platform, for the simple reason that they like to get paid. And what they get paid is not peanuts. On rare occasions, it can be 20% of the capital if the transfer is between customers of two African banks in different countries. Generally, it’s highway robbery. But crypto is not designed that way; two holders of crypto can conduct a transfer without a bank in sight. It’s called self-custody.
The regulations effectively ban self-custody by setting a threshold beyond which transfers must be conducted by the now famous “authorised dealer”. The pointlessness and stupidity of that apparently doesn’t occur to the Treasury.
By trying to lasso all crypto owned by South Africans into a quasi-banking system, it destroys precisely the thing that makes crypto useful and cheaper for intercountry cash transfer. That is why some local crypto advocates are reacting so strongly: they read the draft as turning licensed intermediaries into the default legal chokepoints, which means people aren’t going to transfer through them, which will hurt their business. In the past, people transferring assets didn’t have an option, but now they do; they can just do it themselves — or through one of the 10-gazillion crypto platforms outside the country.
The other big fear of regulators, which demonstrates how little they know about crypto, is money laundering. There are weaknesses, but generally money laundering via crypto is no more difficult to combat than that via bank transfer, largely because of the distributed ledger. Every transaction is recorded totally openly. Finding out who is behind the transaction can be tricky, but it’s in some ways easier than through the normal banking system.
Crypto platforms are worried because the proposal appears to replace bitcoin’s informal freedom with a system of permission, reporting, authorised intermediaries, possible seizure and possible forced conversion into rand. This is all in an effort to maintain archaic exchange controls that continue to exist only as a form-filling, delaying irritation to exporters and importers. Instead of trying to extend exchange controls, the Treasury could have embraced modernity, as so many other countries have.
Instead, it has stamped the word “troglodyte” on its forehead, and on ours.
