Following our series of African countries with the highest adoption rates of digital assets, we find South Africa – the third African country to embrace crypto the most.
While South Africa may share similarities in the growing mainstream adoption to its sibling countries Nigeria and Kenya, it has several distinct differences. The most important one? Its financial sector.
South Africa’s financial sector
South Africa has the most sophisticated financial sector on the entire continent. Composed of four main sub-sectors – banking, insurance, asset management, and the stock exchange – it distances itself from the whole continent. Even though it still has room for improvement in financial inclusivity – a factor being addressed by its rising Fintech market- it expects to stimulate demand for credit through an economic plan of policy rate cuts. Its insurance penetration reached 17% in 2018 according to PwC, followed by Namibia (6.7%) and Lesotho (4.76%) – Kenya only reached a mere 2.83% in the same period. Its asset management subsector is characterized by numerous offerings of both domestic and international suppliers. Lastly, the Johannesburg-based SE Exchange is seen as one of the best destinations for reliable quotations and deep organic liquidity, compared to its regional competitors .
The case for the adoption of digital assets in South Africa is an interesting one. Recent research carried out by global exchange Luno estimates that over 15 percent of South Africans own cryptocurrency. Still, at least a quarter of that figure owns between R100 and R1,000, a low amount. This could infer that digital asset holders may very well be scratching the surface, but the underlying reasons will be revealed soon enough .
Adoption in South Africa can be further fuelled by cryptocurrency applications for cross-border payments. The South African Reserve Bank has entered into a partnership with the Central Banks of Australia, Malaysia, and Singapore to develop a shared platform for cross-border transactions. This innovative platform would eliminate the need for intermediaries, and significantly reduce time and trading costs .
Regulatory framework of digital assets in South Africa
Not surprisingly, South African laws on digital assets have been following the slow and reluctant worldwide trend – no specific laws or regulations governing digital assets, their holding, or treatment.
The South African policy on digital assets is neither hostile nor friendly, and regulators seek to remain neutral with a responsive position – that is, to maintain a non-pioneer stance, but one that can discriminate and act on responsible innovation while ensuring a level playing field for all players. In the South African context, “legal tender (i.e. money) is limited to banknotes and coins issued by the SARB. From a legal perspective, crypto assets are therefore not recognised or viewed as money” .
Last November, a draft regulation by the Financial Conduct Authority (FSCA) proposed cryptocurrencies to be considered and treated as financial products under the Financial Advisory and Intermediary Services (FAIS). Cryptocurrency intermediaries, advisors, and other actors would therefore be required to comply with the requirements of the FAIS act .
However, a ‘Crypto Assets Regulatory Working Group’ was recently created by South Africa’s Intergovernmental Fintech Working Group (IFWG). Its aim is to review the country’s position on digital assets. This group will propose a framework for establishing Know-Your-Customer (KYC) protocols, as well as some surveillance mechanisms to prevent money laundering. After the framework is set, investor-protection guidelines will be designed to manage capital risk effectively .
Regulating digital assets in South Africa
In June 2021, the group presented a staged approach to regulating both digital assets and service providers. Over 20 recommendations broken down into three categories were laid out for “a revised South African policy, legal and regulatory position on crypto assets and related activities” .
- Implementation of AML/CFT framework. Crypto Asset Service Providers (CASPs) would be added to the list of accountable institutions. Once completed, they must comply with AML/CFT provisions, register with the Financial Intelligence Centre (FIC), conduct customer due diligence and report suspicious cash transactions over 25,000 rands.
- Framework for monitoring cross-border financial flows. It was recommended that the Financial Surveillance Department (FinSurv) supervise and regulate the cross-border flow of crypto assets. It was also recommended to amend certain parts of the exchange control regulations to allow crypto-asset trading platforms (CATPs) to source or buy crypto assets offshore to sell to the local market, subject to specified limits to be determined by Finsurv.
- Application of financial sector laws. The working group recommended that crypto assets be defined as financial products. This required CASPs to become licensed intermediaries, thereby facilitating regulatory oversight and reducing the risk of unscrupulous entities taking advantage of investors .
The South African Revenue Service (SARS) released new guidelines that clarify the correct treatment of taxable crypto events in August, further exacerbating the uncertain climate. Digital asset gains will now be treated as capital gains under the Capital Gains Tax (CGT) paradigm and must be reported, under the threat of criminal offense. Notwithstanding, the lack of details made public might ultimately result in taxpayers falling on the wrong side of the law even when following the guidance provided by SARS .
This article concludes the African continent overview and country revision on the status of digital asset adoption and regulation. Stay tuned as we explore new markets and potential opportunities for digital assets and cryptocurrency exchanges.
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 Crypto Assets Regulatory Working Group (2021). Frequently asked questions about crypto assets. Available at http://www.treasury.gov.za/comm_media/press/2021/IFWG_CAR%20WG_Crypto%20assets%20FAQs_Final.pdf.
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