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South African exchanges welcome the new ‘crypto is financial asset’ ruling

July 14, 2022 Coin Telegraph

Coin Telegraph

Major South African exchanges have welcomed the central bank’s plans to regulate cryptocurrencies as financial assets.

South Africa’s Reserve Bank is set to begin regulating cryptocurrencies as financial assets in the next 18 months, with exchanges expecting the move to drive adoption in the country.

The move to classify cryptocurrencies as financial assets and not currency, has been talked about for some time by the South African Reserve Bank (SARB). Deputy governor Kuben Chetty confirmed that the new regulations would take effect over the next year, speaking in an online dialogue on July 11.

The cryptocurrency space has been left to develop organically in South Africa, with no clear-cut regulations issued by the SARB until recently. The country has become a leader in cryptocurrency adoption, with more than 6 million South Africans estimated to own some cryptocurrency.

Now that the SARB has finally taken a stance toward the ecosystem, exchanges, traders, and investors can begin to take stock of the ramifications. Cointelegraph reached out to prominent exchanges operating in the country to gauge the perception of the SARB’s regulatory attitude.

Marius Reitz, general manager for Africa at global cryptocurrency exchange Luno, has been a proponent of clear regulatory parameters for the cryptocurrency industry. In correspondence with Cointelegraph, Reitz welcomed the regulatory move and believes it will create a safer environment for users in the country:

“It will require crypto asset service providers (CASPs) to obtain FSP licenses and will be easier for the public to identify a trusted and licensed platform. It will create a barrier to entry for those platforms with no regard for the security of customer funds and customer information.”

Reitz said that Luno was in a fortunate position to preempt regulatory changes in South Africa, given that the company operates in a variety of markets globally that already have strict regulatory guidelines like Malaysia and Singapore.

The Luno GM for Africa said complying with new regulatory parameters would not require a step-change in its processes aside from country-specific nuances. Luno already carries out KYC checks, sanctions screenings as well as anti-money laundering (AML) and counter-terrorism financing (CTF) measures.

Reitz also suggested that more exchanges could make use of proof of reserves verification. Although not required as a law, Luno undertook an audit of its crypto holdings to confirm custody of customers' assets to provide an added level of trust to customers.

It’s also business as usual for VALR, another South African cryptocurrency exchange which has quickly grown into a trusted platform for local crypto traders and users. CEO Farzam Ehsani told Cointelegraph that the company is already conducting itself as a regulated entity, adopting KYC checks and a risk management and compliance program.

VALR also has AML and CTF policies in place and has worked with authorities to combat the illicit movement of funds. Ehsani was confident that developing regulations for the space would not lead to stifling controls, with the industry set to fall under the purview of the Financial Intelligence Centre:

“VALR is already registered with the Financial Intelligence Centre and we have been working with the FIC for many years so any official regulatory framework in this regard will just formalize what VALR already has in place.”

The SARB continues to explore the possible use of a central bank digital currency (CBDC) through its Project Khokha initiative. A number of prominent players from the traditional banking sector in South Africa have been actively involved in testing a proof-of-concept for the proposed CBDC settlement system.

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South Africa’s Reserve Bank will regulate cryptocurrencies as financial assets, and new laws are expected over the next 12 months.

The South African Reserve Bank is set to introduce regulations next year that will see cryptocurrencies classed and treated as financial assets to balance investor protection and innovation.

Cryptocurrency use in South Africa is in a healthy space, with around 13% of the population estimated to own some form of cryptocurrency, according to research from global exchange Luno. With more than six million people in the country having cryptocurrency exposure, regulation of the space has long been a talking point.

Companies or individuals looking to provide advice or intermediary services involving cryptocurrencies are currently required to be recognized as financial services providers. This involves meeting a number of checkboxes to comply with global guidelines set out by the Financial Action Task Force.

South Africa’s National Treasury budget review published in February 2022 formally introduced the move to declare cryptocurrencies as financial products. The state also plans to enhance the monitoring and reporting of cryptocurrency transactions to comply with exchange regulations in the country.

South African Reserve Bank deputy governor Kuben Chetty has now confirmed that new legislation will be introduced in the next 12 months, speaking in an online series hosted by local investment firm PSG on Tuesday. This will see cryptocurrencies fall under the scope of the Financial Intelligence Centre Act (FICA).

This is significant, as it will allow the sector to be monitored for money laundering, tax evasion and terrorism financing, which has been a heavily debated byproduct of the decentralized nature of cryptocurrencies and blockchains.

Chetty highlighted the road that the SARB will take over the next 12 months to introduce this new regulatory environment. Firstly, it will declare cryptocurrencies as a financial product which allows their listing as a schedule under the Financial Intelligence Centre act.

Following that, a regulatory framework will be developed for exchanges which will include certain Know Your Customer (KYC) requirements as well as the need to meet tax and exchange control laws. Exchanges will also be expected to issue a ‘health warning’ to highlight the risk of losing money.

Chetty noted that the SARB's attitude toward the sector has changed significantly over the past decade. Some five years ago the institution thought there was no need for any regulatory oversight, but a gradual shift in perception to define cryptocurrencies as financial assets has changed that stance:

“By all definitions, it’s [cryptocurrencies] not a currency, it’s an asset. It’s something that is tradable, it’s something that is created. Some have backing, others do not. Some may have a genuine underpinning, real economic activity.”

The deputy governor insisted that the SARB did not regard cryptocurrencies as a form of currency, given the perceived inability for everyday retail use and the associated volatility.

Chetty agreed that continued interest in the space creates a need to regulate the sector and facilitate its merge with mainstream finance “in a way that balances the excitement and hype with the investor protection required.”

The SARB also continues to explore the possible introduction of a central bank digital currency (CBDC), having recently completed a technical proof-of-concept in April 2022. The second stage of Project Khokha involved using a blockchain-based system for clearing, trading and settlement with a handful of banks that form part of the Intergovernmental Fintech Working Group (IFWG).

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CBDC

The South African Reserve Bank stated further work would be undertaken to study the findings from the project and used to inform policy and regulatory responses to DLT and CBDCs.

South Africa has taken another step closer to implementing its central bank digital currency (CBDC) as the South African Reserve Bank (SARB) concludes a technical proof-of-concept for the project.

The project, titled Project Khokha 2 (PK2), is the second phase of SARB’s Project Khokha (PK1), launched in 2018. It experimented with distributed ledger technology (DLT) for interbank payments' settlement, successfully replicating the banks’ “SAMOS” real-time gross settlement system.

This second phase, PK2 was launched in February 2021 and tested DLT with clearing, trading and settlement within the proof-of-concept environment with industry participants Absa, FirstRand, JSE Limited, Nedbank and Standard Bank who form the Intergovernmental Fintech Working Group (IFWG).

Using the technology, SARB tested the issuance of debt instruments and enabled two payment options for settlement, a wholesale central bank digital currency (wCBDC) and a wholesale settlement token (wToken), a commercial bank issued form of private money.

The proof-of-concept developed two DLT platforms, one which served as a decentralized trading platform and the other which managed the CBDC.

A bidirectional bridge similar to those used in DeFi when sending cryptocurrencies across different blockchains was also built, allowing portability of the CBDC between the two platforms.

The results of the project highlighted the regulatory, business, and operational implications that DLT would have in the market. A statement by SARB summarized that the technology would streamline functions carried out by separate infrastructures onto a single platform, potentially reducing cost and complexity.

In the report, SARB does point out that the new DLT platforms will need to be integrated with legacy systems, with the costs of implementing the new platform placed on the banks.

New standards, updated best practices and new support systems would need to be established for the DLT infrastructure, according to SARB. The reserve bank mentioned that legacy and DLT systems might always have to run side-by-side, stating:

“A transition to a DLT-based system requires careful planning and execution and may involve running a DLT-based system in parallel to the existing system for a while, perhaps indefinitely.”

Technical risks related to the reliability and security of the software bridge between platforms were also noted, and the use of the CBDC on networks outside of the two used in the proof-of-concept was also flagged as topics for further consideration.

SARB says further work will be undertaken to study the findings from this phase of the project and the legal status of the wCBDC, which will be used to inform policy and regulatory responses to DLT and CBDCs in the financial markets.

It also hinted that another phase of Project Khokha may be started to “build on the work of PK2, performing live transactions in a sandbox environment in a different use case”.

Since May 2021, South Africa has also been engaged in a preliminary study on a retail CBDC focused on its “desirability and appropriateness” no exact date is set for the conclusion of the study, but SARB says it will be sometime in 2022.

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CBDC

The South African Reserve Bank has begun exploratory studies on central bank digital currencies.

South Africa is the latest country to begin exploring the possibility of creating its own sovereign digital currency.

According to a release issued on Tuesday, the South African Reserve Bank has begun preliminary feasibility studies about the “desirability and appropriateness” of a retail central bank digital currency.

As part of its announcement, the SARB defined a retail CBDC as a cash-complimentary sovereign digital currency issued by the central bank suitable for electronic payments.

“The objective of the feasibility study is to consider how the issuance of a general-purpose CBDC will feed into the SARB’s policy position and mandate,” South Africa’s central bank stated in its announcement.

According to the SARB, the preliminary study will focus on issues surrounding a potential CBDC issuance for retail use in South Africa:

“The feasibility study will include practical experimentation across different emerging technology platforms, taking into account a variety of factors, including policy, regulatory, security and risk management implications.”

South Africa’s CBDC study is expected to last until 2022 and will potentially align with the existing institutional digital payments pilot under the aegis of “Project Khokha.”

Like other central banks currently studying CBDCs, the SARB also stated that its current exploratory studies were in no way an indication of plans to issue a digital rand in the future.

Back in June 2018, the SARB launched a pilot test for Project Khokha — the country’s tokenized fiat interbank payment system. As previously reported by Cointelegraph, the project utilizes the Ethereum-based Quorum infrastructure to test digital clearing and settlements for interbank payments.

The global CBDC field continues to expand with China seen as the de facto leader, at least among the major economies. In South Korea, the country’s central bank recently announced plans to partner with a technology firm to build a sovereign digital currency for its testing protocols scheduled to begin in August.

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