How crypto impacts exchange control regulations in South Africa
Cryptocurrency has emerged as a transformative force in global finance, challenging traditional monetary systems and regulatory frameworks. In South Africa, the rise of digital currencies is prompting policymakers to reassess the existing framework for exchange control regulations.
Xago CEO Jurgen Kuhnel recently attended Bitcoin Events’ Blockchain Africa Conference where he provided some insight into “How cryptocurrency impacts exchange control regulations in South Africa”.
Here are some key points Jurgen discussed during the conference Q&A:
Why do we have exchange control regulations in the first place?
Exchange controls were originally introduced because of the large outflow of money from South Africa. Exchange controls have also been implemented in many African countries for the same reason.
When you buy or sell any asset or currency and there’s a lot of sell pressure, the price goes down. In the instance where there’s a lot of money flowing out of South Africa – that is, people are selling rands for dollars or euros, for example – the sell pressure is causing the rand to weaken.
So that was really the reason for exchange controls: to curb the weakening of the rand.
When it comes to the externalisation of funds, there are two licensed entities that can do that for you: 1. Authorised dealers such as banks and 2. ADLAs (Authorised Dealers in foreign exchange with limited authority) such as remittance companies.
Every individual and business has a certain allowance they can send abroad every year, and these transactions must be reported directly to the South African Reserve Bank (SARB).
Currently, there is no way for banks or ADLAs to report cryptocurrency transactions to the SARB because crypto is not included into the ADLA Manual yet – so the framework is not in place yet.
Why did Xago participate in the IFWG, and what were the key takeaways?
When we founded our business, we wanted to work as closely as possible to the regulators, because we believe regulation will ultimately take precedence over everything. And we can see that today with, for example, the CASP regulation and the implementation of the Travel Rule.
We always engaged with the SARB, and I believe they thought we had an interesting use case using crypto for cross-border transfers. So we were part of the IFWG (Intergovernmental Fintech Working Group) Sandbox and we tested the reporting of crypto transactions. Maybe the key takeaway is at that point, crypto wasn’t classified as a crypto asset yet as they viewed crypto as a foreign currency. And the reporting of a foreign currency is quite different.
If I send funds to a local bank today to buy foreign currency, such as USD, it is a reportable transaction and it impacts my single discretionary allowance (SDA). But I haven’t externalised the funds yet; I just have USD in my possession. Then there’s also the event where I send the funds offshore; for example, I send the USD to a corresponding bank in the US. That is a reportable transaction – the externalisation event. So there are actually two legs to a foreign transaction report.
However, if it’s a crypto asset or seen as a financial instrument, the reporting looks slightly different because buying the financial instrument locally doesn’t actually affect your allowance. Only when you externalise that financial asset does it affect your allowance. So now there’s only one report versus two.
What’s the difference between a CASP and an authorised CASP?
To answer that question, it’s important to note that there are three main regulators in South Africa: the FIC, FSCA and FinServ.
First, the Financial Intelligence Centre (FIC) makes you an accountable institution (for anti-money laundering, scams, etc.) to make sure you have everything in place.
Second, there’s the Financial Sector Conduct Authority (FSCA) where you become a financial services provider (FSP). How do you conduct your business, and so on? And this is where we are now.
Then the third leg will be the authorised CASP – where a crypto asset service provider (CASP) has the ability to report the externalisation event of crypto to the SARB.
At what point is crypto considered externalised?
Until the framework exists in the public domain, I can only comment from my understanding and interaction with the SARB.
When we were in the Sandbox, the externalisation event was when you go into crypto; that is, at the moment when you buy the crypto asset. When you go to a local exchange and buy Bitcoin, at that moment you externalise your funds.
They have now changed this. Buying and selling your crypto is now a non-event, not an externalisation event. Only when you send the crypto off a locally registered CASP to a foreign CASP does it become a reportable transaction.
Are there particular licences that would allow that CASP to do that?
There will only be a few authorised CASPs that will be licensed to externalise a customer’s crypto because not all CASPs will require this service. For example, a custodian such as Xago, Luno or AltCoinTrader would naturally become the authorised CASPs. And that would require additional scrutiny and applications.
What is the value that comes off your discretionary allowance? Is it the amount I paid for the crypto or the amount at the time of the externalisation event?
It’s the value of the crypto at the moment of externalisation. Consider it the way you would when buying Kruger rands. Buying Kruger rands is not an externalisation event and you can buy as many as you like. But when you travel overseas and take your Kruger rands with you, that is an externalisation event. So, I’d need to declare that I’ve taken those Kruger rands over the border. And it’s the value of the Kruger rands at that point that impacts your discretionary allowance.
Are rand-based stablecoins exempt from exchange control?
It would be the same as buying crypto and sending it to a local CASP – so there would be no externalisation event.
I think the SARB is also trying to do that for local payment systems such as Money Badger that need to receive crypto payments at Pick n Pay – the funds stay within the local ecosystem.
Can you explain the Travel Rule and its importance for South Africa?
The sender exchange would have to validate all the KYC information and the source of the funds. The receiver exchange would have to be able to receive that information, but not validate it.
For example, if a user sends funds from Coinbase to Xago, Xago would somehow need to receive the information from Coinbase but would not need to validate it.
In conclusion, the framework for South Africa’s exchange control regulations will be updated soon to incorporate the reporting of every crypto externalisation event. The updated framework will hopefully strike a balance between fostering innovation in the crypto industry and maintaining sufficient controls to protect our country’s economy.
Disclaimer: We encourage you to always do your own extensive research before investing in or using cryptocurrency to facilitate a money transfer. It is important to have a good understanding of the risks and benefits associated with this alternative to traditional banking.