How is Crypto Currency Regulated?

How is Crypto Currency Regulated?

In our previous article we looked – in depth – at the various definitions of crypto currency to get a better understanding of what it is.

So far, we have come to the conclusion that crypto currency, like Bitcoin is not legal tender and therefore cannot be regarded as money. This is supported by local authorities and economists world-wide.

But that has left us a little flummoxed because the purpose of these articles is to truly grasp what crypto currency is.

We understand that crypto currency is a type of currency-equivalent – better defined as an “alternative investment vehicle”. We also understand that is holds value (although not in physical substance) and is a digital representation of value (which is not issued by a central bank).

But have we really defined what crypto currency is?

Well, first step is SARS. They set out the following –

“According to the Explanatory Memorandum on the Taxation Laws Amendment Bill as issued on 20 January 2021 the word “cryptocurrency” was replaced with “crypto asset” in line with the proposed adoption of a uniform definition of crypto assets within the South African regulatory framework”.

And that sort of sets us on a very specific path.

Perhaps crypto currencies are assets?

If that’s the case, and again according to SARS, the traditional definition of an asset is as follows -

“(a) property of whatever nature, whether movable or immovable, corporeal, or incorporeal, excluding any currency, but including any coin made mainly from gold or platinum; and

(b) a right or interest of whatever nature to or in such property;

The definition of an ‘asset’ is of importance, as CGT is, with few exceptions, not triggered until an asset is disposed of. A wide definition has been ascribed to the term, which includes all forms of property and all rights or interests in such property. The exclusion of currency is dealt with below.

A few examples of assets are listed below:

• Land and buildings, for example, a factory building, a person’s home, or holiday home;
• Shares;
• A participatory interest in a collective investment scheme;
• An endowment policy;
• Collectables, for example, jewellery or an artwork;
• Personal-use assets, for example, a boat;
• Contractual rights;
• Goodwill;
• A trade mark;
• A loan;
• A bank account;
• Trading stock. In a going concern a disposal of trading stock will usually not give rise to a capital gain or loss because double deductions and double taxation are prevented in determining base cost and proceeds”.

But crypto currency is not mentioned at all in the above definition. What’s the deal? Ok, we admit that the definition by SARS doesn’t provide real insight into what crypto assets are (as they are now referred). But if we refer to GAAP (as set out by U.S. BDO) -

“cryptocurrencies are generally accounted for as indefinite-lived intangible assets. Intangible assets under U.S. GAAP are “assets (not including financial assets) that lack physical substance.” Further, financial assets are cash, evidence of an ownership interest in an entity, or a contract that conveys to one entity a right to receive cash or another financial instrument, or a right to exchange other financial instruments on potentially favourable terms. Cryptocurrencies are not financial assets. They also lack physical substance. Therefore, they meet the definition of an intangible asset and would be recorded at acquisition cost (i.e. price paid, or consideration given)”.

This is supported by SAIPA in their paper on Accounting for Cryptocurrency where they set out that –

“An ‘intangible asset’ [IAS 38] is an identifiable non-monetary asset without physical substance/form. So, cryptocurrencies appear to meet the definition of an intangible asset, as they are identifiable, can be sold, exchanged, or transferred individually, are not cash, a non-monetary asset and have no physical form.

Intangible assets have traditionally been assets held for use in the production process, such as patents, trademarks, copyrights, and other intellectual property. An intangible asset’s primary objective is to generate revenue from the company’s ordinary course of business. Cryptocurrencies are used to pay/exchange for goods or services, to incentivise or promote, and for investment purposes. An intangible asset feels very different from the use of cryptocurrencies.

It is generally accepted that fair value measurement is the most relevant measurement basis for a cryptocurrency because it’s being used as a currency-equivalent or alternative investment vehicle. An intangible asset can be measured at fair value, but only if there is an active market. Fair value movements must be recognised in ‘Other Comprehensive Income’”.

So, if we assume the accounting principal that crypto currency is actually an intangible asset, the jump from currency to asset makes sense.

SARS’ definition of crypto currency supports this assumption –

“A crypto asset is a digital representation of value that is not issued by a central bank, but is traded, transferred and stored electronically by natural and legal persons for the purpose of payment, investment and other forms of utility, and applies cryptography techniques in the underlying technology”.

Great stuff.

So, we now know that crypto currency is – in fact – an asset. An intangible one.

To find out more information on crypto assets, specifically how they will be taxed, we recommended reading Crypto Assets: How you are taxed

And now the next obvious question is this –

How are crypto assets regulated in South Africa?

For a number of years and if you happen to Google or Bing crypt regulations in South Africa, you are most likely to come across info along the lines of “crypto assets are not regulated in South Africa”. Well, contrary to what’s currently available online there have been several recent developments to the contrary. Crypto assets in South Africa are now being regulated. What lead to their regulation is set out below -

1. The Intergovernmental Fintech Working Group (IFWG) on 11 June 2021 published a position paper on crypto assets. “The paper confirms that crypto assets will be brought into the South African regulatory purview in a phased and structured manner”.
2. The South African Reserve Bank (SARB) on 23^rd of February 2022, SARB released a statement which set out that “resident individuals may utilise the investment portion of their single discretionary allowance and/or foreign capital allowance to participate in online foreign exchange trading activities. These online trading activities generally include one or a combination of options, such as trading global currencies against each other, trading a contract for difference, trading in foreign stocks, trading commodities including crypto currencies and trading foreign indices using the online trading platform of the broker concerned. Residents should note that they may not fund their international trading accounts at registered brokers using South African credit, debit and virtual cards, but such trading accounts should be funded in terms of the single discretionary and/or foreign capital allowance, i.e. the Authorised Dealer concerned must convert the Rand into foreign currency and transfer such funds via the banking system as an Electronic Funds Transfer to a foreign bank account or the funds can be deposited in a foreign currency account at an Authorised Dealer”.
3. In the Budget Review 2022, the South African Government proposed that regulatory bodies need to be established to safeguard the crypto owner. This includes – as per BusinessTech - including crypto asset service providers as accountable institutions within the Financial Intelligence Centre Act, Protecting consumers by considering the declaration of crypto assets as a financial product under the Financial Advisory and Intermediary Services Act (2002) and Enhancing monitoring and reporting of crypto asset transaction to comply with the Exchange Control Regulations of 1961.
4. On the 20^th of October 2022 the Financial Sector Conduct Authority (FSCA) published the declaration of “Crypto Assets as a financial product under the FAIS Act, which was gazetted on 19 October 2022. The declaration brings providers of financial services in relation to crypto assets within the FSCA’s regulatory jurisdiction”. Such a move requires crypto assets to be regulated by the FSCA from the date of publication of the declaration – so from October 2022. According to Reuters, further to the recognition of crypto assets under the FAIS Act, local authorities would also seek to “include applying foreign exchange controls and licensing crypto trading companies”.

While countries around the world struggle with how to regulate new digital currencies and tokens, South Africa has managed to bring crypto assets under regulated control. Sure, crypto traders may see this as an act by the Government to control how they trade in crypto currencies but this move by the FSCA is simply to prevent “theft, money laundering and undermining of monetary policy because an ubiquitous cryptocurrency could weaken the authority of the central bank” (Reuters).

Furthermore, this move by the FSCA is a solid step in the right direction, one that is being closely followed by Europe’s crypto regulation that’s being formalised through the Markets in Crypto Assets (MICA) licencing law of the European Union.

Seemingly, as the world changes its views on money, assets and currency embracing a virtual value, the laws that regulate these types of currencies (and their associative transactions) will need to change, evolve, and adapt in order to keep up.

If you have any questions on the information we have set out above or have a personal issue which you want to discuss with us, please don’t hesitate to contact us at NVDB Attorneys.

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