Your Cryptocurrency & Exchange Control
We all know about South African exchange control regulations. There are not many countries which operate a similar system like it anywhere in the world. South Africans sending funds abroad, or non-residents holding funds in South Africa have likely become well aware of the many regulations imposed by the South African Reserve Bank ("SARB") which seeks to control the flowing of capital into and out of South Africa.
For example, a South African exchange control resident may not remit funds abroad without the approval of the SARB, which may be applied for via an authorised dealer of the SARB. With the latest innovations in technology allowing for virtual currencies, such as Bitcoin or Ethereum, to be remitted to various crypto-exchanges through simply the click of a button, questions arise as to the legality of such transfers, from a South African perspective.
The Position Paper
In 2014, the SARB published a position paper concerning the treatment of cryptocurrencies, wherein it is stated that the SARB does not regard virtual currencies as "legal tender" and therefore transactions concerning virtual currencies do not fall under its legislative powers. If the SARB does not regard virtual currencies as legal tender, nor does it oversee transactions concerning virtual currencies, the question that arises from this is whether sending virtual currencies to an offshore crypto-exchange would require prior SARB approval?
Exchange Control Regulation 10(1)(c) states: “No person shall, except with permission granted by the Treasury and in accordance with such conditions as the Treasury may impose - enter into any transaction whereby capital or any right to capital is directly or indirectly exported from the Republic.”
As virtual currencies are not capital in itself (as it is not regarded as legal tender), it can however be regarded as the "right to capital" in that the virtual currencies hold value. If such value is remitted outside of South Africa (for example, to a foreign crypto-exchange) then it can be regarded as either the direct or indirect export of the "right to capital".
As such, any transactions involving the remittance of virtual currencies outside of South Africa, or deemed to be outside of South Africa, will require prior approval from the SARB by way of an application. An individual may apply to make use of their single discretionary allowance of R1million or their foreign investment allowance of up to R10million (provided a tax clearance certificate is obtained) in order to send virtual currencies outside of South Africa, which application must be made via an authorised dealer of the SARB.
The Intergovernmental Fintech Working Group ("IFWG") released a consultation paper this year on the proposed regulation of cryptocurrencies. It was proposed that cryptocurrencies continue not being recognised as legal tender, and should not be regarded as electronic money. Furthermore, three phases of regulation were proposed, namely the registration of crypto-asset service providers (for example, crypto-trading platforms, those who trade in crypto on behalf of clients locally) with the appropriate regulators, phase 2 being the review of the existing frameworks and implementation of new regulations, and phase 3 being the assessing the effectiveness of the regulations implemented.
Virtual currencies may be purchased locally and transferred locally, without being affected by SARB regulations (note- tax compliance and compliance with any other regulations must be complied with). However, once virtual currencies are to be sent abroad, or remitted abroad to a foreign crypto-exchange, then prior SARB would be required.
This article has been written for information purposes and may contain errors and/or omissions, and should not be regarded as legal advice. The legislation may also change from time to time- always seek advice from your own legal advisor. Spence Attorneys will not be held liable for any person acting and/or omitting to act on any content in this article or on our website.