The South African Reserve Bank (SARB) released a consultation paper in January, wherein it discussed “cryptocurrency regulation”.
This refers to the regulation of digital assets or virtual currencies, such as Bitcoin, which are used to trade online through secure transactions, called Blockchain.
Today, there are over 1,600 cryptocurrencies worldwide. This includes obscure currencies, such as Vertcoin and Cardano, and famous currencies, such as Bitcoin.
In March last year, a single Bitcoin reached a high of $11,558 (R158,217) and today its value stands at around $3,425 (R46,884). Within a year, it was reduced to a quarter of its worth.
With general fluctuations in the value of cryptocurrencies, as well as the growing number of them, Justmoney spoke with industry leaders to get their thoughts on it being regulated.
Regulation could clean up industry
“The failure to regulate cryptocurrencies creates conditions that can be exploited by unscrupulous people,” says Angus Brown, CEO of Centbee, a local organisation offering Bitcoin wallets.
“However, highly regulated is not the same as safe, and over-regulation is a real problem for an industry that is still in its early stages,” he explains.
Brown is predominantly concerned about consumers who are being taken advantage of in get-rich-quick schemes and those who are using cryptocurrencies to avoid paying taxes.
He believes the true challenge lies in obtaining customer information without placing an onerous burden on the customer and keeping simple, easy-to-use processes.
Farzam Ehsani, CEO of local cryptocurrency trading platform VALR, points out that it’s important to distinguish between the regulation of cryptocurrencies themselves and the regulation of the businesses that offer cryptocurrency services.
He explains that regulating a cryptocurrency determining who can and can’t use it is tremendously difficult.
“Cryptocurrencies are protocols and protocols are languages. Therefore, to regulate a cryptocurrency is like trying to regulate a language. Imagine trying to tell people what language they can and can’t use. In private settings you’ll never be able to control this,” says Ehsani.
He believes that regulating the businesses that offer cryptocurrencies will purge the industry of some of the businesses that have been lax in their measures to protect their customers.
Contradiction with original vision
Bitcoin, which was the first cryptocurrency, was presented online in 2008 by Satoshi Nakamoto in a whitepaper titled Bitcoin: a peer-to-peer electronic cash system.
Llew Morkel, chief technology officer at DreamBlock, a company that aims to make real estate investments available through cryptocurrency, believes that Nakamoto's vision was to create a purely peer-to-peer version of electronic cash that is jurisdictionally and fiscally agnostic.
“Involvement and interference from third-party intermediaries go against the crypto-industry mantra of decentralisation,” says Morkel.
He explains that decentralisation means that a system is managed by a distributed community rather than a single participant.
‘Nakamoto wanted to make it possible for people to pay each other without the barriers of borders, exchange controls, and potential government sanctions. Many cryptocurrency purists argue that regulation thwarts this ideal,” says Morkel.
On the other hand, he believes that society thrives under controlled environments. For example, the countries where law and order reigns supreme often boast the most successful economies.
According to Morkel, the world is slowly transforming into a global decentralised economy. But he adds that it will take time to reach that point, and that regulation is a sensible decision in the meantime.
The difficulty in regulating cryptocurrencies
According to Christopher Renwick and Darren Britz, who are both senior attorneys at Tax Consulting SA, the issue is not the feasibility of regulation, but rather the ability to enforce such regulation.
They believe that the South African Revenue Service (SARS) and SARB have a mammoth task ahead of them since cryptocurrency traders make thousands of transactions daily.
They are disenchanted by the idea of regulating cryptocurrencies for the following reasons:
- The anonymity factor in cryptocurrencies is what makes them appealing. People wish to remain anonymous and will always find ways to do so.
- Regulating cryptocurrencies will inevitably lead to rebels who disagree with the system. Currency is regulated and printed in accordance with strict measures – and still counterfeit bills find their way into circulation. The same will happen with cryptocurrencies and, because people will operate under the same trust principles as we do with cash, many will feel the effects of counterfeit cryptocurrencies and suffer major losses.
- A blanket cryptocurrency regulation will need to be updated daily, given that it’s technology-based. Any nuances or alterations to its processes, creation, transfer, trade, and storage will require a new update. Given that blockchain is software driven, the changes will be numerous and frequent, and the legislature is unlikely to keep up.
Matt Kriel, director of Crypto Technologies, which is focused on cryptocurrency mining, is equally sceptical about the success of cryptocurrency regulation.
“The talk in the crypto-world is that if cryptocurrencies get regulated the popularity of the coin will diminish and take the price down with it,” says Kriel.
He believes that the biggest challenge is that cryptocurrencies are anonymous. The only way for the government to know how much you have is by requesting you to open your wallet.
This comes with its own set of complications, since people can have multiple wallet addresses and can move the currency around.
The impact on the currency's value
According to Daniel Kibel, director of CM Trading, in the absence of regulation there is a real battle against both money laundering and fraud in the financial markets.
This necessitates regulation. Kibel explains that the value of cryptocurrencies will be impacted in the following ways:
- Those who use cryptocurrencies for money laundering will be in trouble, as they will no longer be able to freely transfer funds around the world. This could cut the value of the underlying cryptocurrency as demand will decline.
- Once cryptocurrency is regulated it will become a real investment, where people will be protected from scams. This will encourage new investors to enter the market, which will increase its value.
“Although I am sure that cryptocurrencies are the future, I’m not so sure whether the currencies we see today are the ones we will see in 10 years’ time,” says Kibel.
“Once the market is regulated, it will become more attractive to me. I like to trade with confidence and, as such, I will certainly look for investment opportunities in the future,” he adds.
Cryptocurrencies must be declared to SARS
Marius Reitz, country manager of Luno, a global cryptocurrency company with a regional hub in Cape Town, is optimistic about regulating cryptocurrency businesses.
“Since day one we’ve taken the proactive approach of following and implementing existing regulation that is of relevance to similar institutions in the financial industry, such as banks and payment platforms,” explains Reitz.
He believes that regulators should not try to reinvent the wheel. Instead, he envisions cryptocurrency regulation within existing regulatory frameworks. He points out that the alternative may stifle innovation and slow down the growth of the industry.
In April 2018, SARS instructed taxpayers in a press release to declare all cryptocurrency-related taxable income during the year it was received or accrued.
“This provides much-needed clarification that taxpayers have a legal obligation to declare all gains or losses on disposal of cryptocurrency, be it as a capital gain or income,” says Reitz.
He points out that the Australian Taxation Office is classifying Bitcoin transactions as a “barter”. Therefore, they are subject to related taxation laws.
“I believe the world is undergoing another major shift in the evolution of money – only this time it is happening right in front of our eyes,” says Reitz.