File image: An illustration of bitcoin. (IOL).
Marius Reitz
As Treasury officials juggle an increasingly constrained budget, there are some quick wins they can achieve which will help stimulate economic growth without adding pressure to the fiscus. One such win? Unlocking South Africa's digital asset sector, whose growth potential is being hindered by a lack of regulatory certainty in some key areas.
South Africa has long been a pioneer in digital assets. It is home to Luno, one of the world’s oldest cryptocurrency exchanges, which, having been in existence for 13 years, has managed to survive and thrive as the sector has evolved. Critically, through careful management and high probity standards and choosing not to borrow against user funds it has avoided some of the pitfalls of other players in the sector.
Globally, attitudes toward digital assets are evolving. The Intergovernmental Fintech Working Group (IFWG) has moved away from using the term “cryptocurrency” and now refers to “crypto assets,” as the sector is so much more than currencies like Bitcoin but includes the underlying blockchain technology—a decentralised ledger enabling financial products and payments with fewer intermediaries and lower costs. Exchange traded funds (ETFs) tracking cryptocurrencies are now on offer in many countries including the UK, Australia and the US as digital assets become globally accepted financial instruments.
South Africa, too, has much to celebrate. Luno, our homegrown digital asset exchange, now serves customers in 40 countries, solidifying its global footprint at a time when nations are increasingly considering Bitcoin as a strategic reserve asset.
The US, under a new administration has made a 180 degree turn in their view of digital assets and are working to support cryptocurrencies and the resultant economic growth with many countries expected to follow suit. The US central bank is also exploring holding Bitcoin as a reserve currency alongside traditional stores of value like gold and the dollar. Meanwhile, South African regulators and Treasury officials must also grapple with the reality that consumers will continue buying and selling digital assets but could choose to do it openly or on anonymous peer-to-peer networks.
Keeping cryptocurrency trading above board and transparent so the country can benefit requires appropriate and sensible regulation. In Nigeria as the government in 2021 clamped down on the use of cryptocurrencies, users moved from primarily using Luno and other centralised platforms – to anonymous peer- to peer networks out of sight of regulators, law enforcement and the taxman.
A central regulatory question that must be answered first in South Africa is: Should crypto in South Africa be considered as an onshore asset or exclusively a foreign asset?
If cryptocurrency is classified as a foreign asset, it severely limits how much can be held by asset fund managers and mutual investment funds—effectively restricting ordinary South Africans and corporate investors from benefiting from its growth.
Another major concern is, if digital assets are classified as offshore assets, then cryptocurrency transactions will be treated as offshore payments in South Africa, even where a South African resident invests and holds crypto on South African platforms, like Luno. If so, it would significantly stifle adoption and limit capital inflows to South Africa.
Using blockchain technology and crypto currencies allow South African companies to repatriate funds from countries in Africa with strict exchange controls. Luno has been approached to offer this service to firms struggling to bring money into South Africa and such a service would only benefit the country by allowing more money to reach it. Yet a lack of regulation stops this from happening – even as it would support money for the fiscus.
Regulators cannot simply ignore cryptocurrencies. The South African Revenue Service (Sars) has already recognised digital assets as taxable, requiring individuals to pay capital gains tax on profits from digital asset sales, just as they would for company shares or other financial instruments. The Treasury must now decide how to classify these assets – preferably as onshore assets.
Years ago, digital assets were seen as speculative and risky. But the world evolves. Shells were once used as money before being replaced by coins. Financial systems change. Digital assets have found their place alongside traditional finance- with ETFs tracking cryptocurrencies at the world's largest asset manager Black Rock exceeding the value of ETFs tracking that of gold, a long standing store of value.
If digital asset investors had a wish list for the February 19 budget speech, it would be simple: Finance Minister Enoch Godongwana would indicate that he is open to engaging with the digital asset industry and commit National Treasury to regulating the sector in a way that fosters trust, protects consumers and allows innovation to flourish.
South Africa has already taken steps in the right direction. Crypto assets are recognised as taxable and institutions facilitating crypto transactions require a licence from the Financial Sector Conduct Authority (FSCA). However, some gaps remain that the Minister can help address.
For one, it would help if there was a clear regulatory framework for deciding which digital coins are worth holding and investing in. By way of example, the Johannesburg Stock Exchange does not decide which companies are permitted to list—it simply sets the standards a publicly traded company must meet. The same principle should apply to digital assets.
There are over 20 000 cryptocurrencies, but Luno takes pride in its industry-leading digital asset listing process, which ensures the 31 digital assets listed on Luno are properly and thoroughly scrutinised and meet strict minimum regulatory, compliance and security standards.
A robust listing framework on what constitutes a reasonable digital currency would protect consumers from unscrupulous operators without restricting financial freedom and drive revenue for the country by allowing more assets to be bought and sold and taxes paid on the profits.
In short, the future is digital. South Africa has a choice: continue to lead in innovation or risk lag behind in outdated regulation. The opportunity is there for the taking.
Marius Reitz is Luno General Manager Africa and Europe
BUSINESS REPORT