STUDENT NAME : NGONGO LUNDIKAZI

STUDENT NUMBER : 201813006

COURSE CODE : LIP 311E

MODULE : INSTRUMENTS OF PAYMENTS

LECTURE : DR SHELTON TAPIWA MAKORE

SUBMISSION DATE : 20 SEPTEMBER 2020

INTRODUCTION

1
‘’Cryptocurrencies are currently being experiment with in multiple commercial
disciplines and being used for trading to alternative payment methods. The question
many governments face this point is how legally classify these digital currencies
within their economy…….’’1.

The initial public statement on cryptocurrencies2 was issued by National Treasury

(NT) in 2014 as a joint initiative with the South African Reserve Bank (SARB) 3, the
Financial Services Board (now the Financial Sector Conduct Authority (FSCA) 4, the
South African Revenue Service (SARS) and the Financial Intelligence Centre (FIC) 5.
Cryptocurrency also referred to as a digital currency, virtual currency, crypto tokens
and more recently, as adopted by South African Reserve Bank, is a digital currency
in which encryption techniques are used to regulate the generation of units of
currency and verify the transfer of funds, operating independently of a central bank 6.
They are created over the internet by using open source software on a peer to peer
network. This enables direct transaction from one person to another so eliminating
the need for intermediaries such as a financial institution or a central bank 7. In light of
the above submission, this essay will provide a lucid discussion on South Africa’s
position regarding the regulation of cryptocurrecncy also known as digital currency,
using relevant definitions, examples, recommendations etc.

South Africa’s position regarding the regulation of Cryptocurrency

In South Africa there is currently no financial technology (fintech) which refers to the
use of technology in financial applications, specific regulation for cypytocurrency, but
cypytocurrency are also not prohibited8. The use of cryptocurrecncy is legal; the
South African Reserve Bank issued a whitepaper in 2014 outlining its position on
what is called virtual currencies (VCs) and Decentralized Convertible Virtual
Currencies (DCVCs). According to the SARB’s definition cryptocurrencies are not
legal tender, section 3.23 of the white paper stipulates that legal tender is simply the
notes and coins that are officially issued by a bank. 9 Whitepaper authorizes that
DCVC’s (cryptocurrencies) can be used for the purposes of trading and in
exchanges meaning South Africa is free to trade and exchange bitcoin and other
cryptocurrencies, since SARB does not have any objection to it. 10 Persons who

1
Tanya language commenting on virtual currency submits.
2
At the time this statement was issued, the term ‘virtual currencies’ was used to refer to crypto assets.
3
On 1 April 2018, the Financial Services Board was replaced by the Financial Sector Conduct Authority (FSCA) as a result of
the Twin Peaks reforms. The FSCA is responsible for market conduct supervision.
4
See user alert: http://www.treasury.gov.za/comm_media/press/2014/2014091801%20- %20User%20Alert%20Virtual
%20currencies.pdf
5
See the Position Paper: Position Paper Virtual Currencies 02of2014.pdf
6
Hereafter ‘the SARB’
7
See section V (a) of this article for more information
8
Chishti & Barberis, The FinTech Book: The Financial Technology Handbook for Investors,Entrepreneurs and Visionaries
(Wiley 2016) 12
9
Read section 3.2.3 of the whitepaper
10
Sec 2.1 of the whitepaper

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transact with cryptocurrencies do so at their own risk with no recourse to the SARB.
DCVCs are recognized as a store at value by sec 3.1.1 of whitepaper, meaning that
Bitcoin could be converted to legal tender, just in the same way we use tokens or gift
vouchers, but not as a legal from payment. 11 South Africa is also home to three
cryptocurrency automated teller machines (‘ATMs’) 12 and its very own
cryptocurrency, Number 4213.

The Reserve Bank has previously warned the public against cryptocurrency (it was
mainly Bitcoin then) stating that such DCs have neither a legal status nor a
regulatory framework. As such, transactions that involve them could pose several
risks to the user including a lack of security guarantees and challenges of
convertibility.14 The central bank in 2017 issued a statement to the effect that it would
conduct research about the feasibility of cryptocurrency technology in South Africa 15.
More interestingly, it stated that it is possible for it to develop a digital currency, using
Distributed Ledger Technology (DLT) or Blockchain technology.

In 2019, five years after the initial position paper and user alert on cryptocurrencies
issued by the SARB and the National Treasury, respectively, the intergovernmental
FinTech working group (‘IFWG’) unit in the SARB released the Consultation Paper
on Policy Proposals for Cryptocurrencies. The consultation paper work cites
consumer protection, terrorist financing, circumvention of exchange controls, and the
increase of undetected illicit financial flows, tax evasion, and market integrity as the
emergent risks of cryptocurrencies16. The paper proposes the implementation of a
three phase regulatory framework for cryptocurrencies in the near future 17,
comprising of the following:

1. Registration process for cryptocurrency service providers.

2. Review of existing regulatory frameworks followed by new regulatory requirements

or amendments to existing regulations.

3. Assessment of regulatory actions implemented18

The consultation paper grants an opportunity for industry participants and

stakeholders to provide input to formulating a revised policy on Cryptocurrencies; it
also represents a policy position at a specific point in time, in a rapidly evolving field.
The regulatory authorities considered these comments carefully in drafting the
position paper.

RECOMMENDATIONS
11
Sec 3.1.1 of the white paper
12
The first bitcoin ATM was placed in Kyalami, Midrand
13
For more information on this cryptocurrency, visit the website at https://www.sagteware.net/Number42/Info.
14
See: https://www.golegal.co.za/cryptocurrency-regulation-south-africa/
15
The white paper 2014
16
SARB, ‘Consultation Paper on Policy Proposals for Crypto Assets’ (2019) 6.
17
See https://www.fsb.org/2019/02/fsb-report-assesses-fintech-developments-and-potential-financialstability-implications/.
18
SARB, (2019) 6

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There should be a clear understanding of what constitutes a service provider
regarding the registration and licensing of cryptocurrency service providers. For
example, it must be clearly established if money business services, remittance
services and wallet service providers fall under a service provider or not, as well as
start-ups such as Initial Coin Offerings (‘ICOs’).

The Cryptocurrencies Regulatory Working Group granted these recommendations

stipulating the descriptive characterisation of cryptocurrencies and related activities.
This was achieved through the issuance of a consultation paper to the industry at the
start of 2019. It has been noted that, due to the evolving nature of cryptocurrencies,
continuous analysis is required to identify and investigate other developing
cryptocurrencies activities. A monitoring programme should be implemented by the
regulatory authorities for cryptocurrencies.19

A possible solution is to adjust the supply of cryptocurrencies (bitcoin particular,

given its fixed-supply rule) to set monetary policy without the use of a central bank 20.
While this would on some level, stabilise the price of bitcoin, it will also violate one of
the main tenets of the Bitcoin Protocol 21. More importantly, unanimous agreement
would have to be reached by all users on the network in order for any changes or
modifications to be made to the Bitcoin Protocol22. Such a modification would
therefore also require lobbying or support from the Bitcoin Foundation. The justice
system should be persuaded to look at cases involving theft of cryptocurrency in the
same way other digital assets are viewed. Or consider for instance that someone
steals a casino token/chip from you before you cash it out the courts would handle
that. Likewise, if someone else is culpable for the loss of your Bitcoin, then you
should be able to seek legal recourse.23

THE MERITS (ADVANTAGES) AND DEMERITS (DISADVANTAGES) OF

RECOGNISING CRYPTOCURRENCY AS LEGAL TENDER IN SOUTH AFRICA

Cryptocurrencies are becoming popular these days because they are easy to use
and trade; also cryptocurrencies are bringing evolutionary changes in the payment
system, although they not yet regulated in South Africa, they are legal.
Cryptocurrencies are more secure, fast and decentralised but have their own good
and bad side means just look at some merits and demerits of recognising
cryptocurrencies as legal tender in South Africa.

MERITS OF CRYPTOCURRENCIES

19
This includes companies such as Altcoin Trader, Bitcoin.com, Chainex, CoinBR, CoinDirect, Edcoin, Ice3X, Luno,
ProjectUbu, ProsperiProp and VALR.
20
Caginalp & Caginalp, ‘Valuation, liquidity price, and stability of cryptocurrencies’(2018) 115(6) Proceedings of the National
Academy of Sciences of the United States of America(PNAS) 1131 at 1131.
21
Caginalp & Caginalp, (2018) 115(6) Proceedings of the National Academy of Sciences of the United States of America
(PNAS) 1131 at 1134
22
Iwamura et al, ‘Can We Stabilize the Price of a Cryptocurrency?: Understanding the Design of Bitcoin and Its Potential to
Compete with Central Bank Money’ Hitotsubashi University, Institute of Economics Research, Discussion Paper Series A No.
617, (2014)
23
See: https://www.golegal.co.za/cryptocurrency-regulation-south-africa/

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Decentralization

Most, cryptocurrencies have no central authority to control, the network is distributed

to all participants, each computer mining nodes is a member of this system, meaning
that the central authority has no power to dictate rules for owners of coins and even
if some part of the network goes offline, the payment system will continue to operate
stably24.

Easy to Use

The procedure for opening a simple bank account requires more information and
several documents, if there are any mistakes in documents then they refuse to open
an account, also accessing your funds in different geographical location is difficult.
In the case of cryptocurrency one just need a device that able access the internet
with the help of the device, one can create your wallet and use where ever there is a
necessity.

DEMERITS OF CRYPTOCURRENCIES

Large Risks of Investing in Cryptocurrency

Crypto investments are involved high risk because of its volatile nature and terrorist
and other illegal activity financings, lack of a central issuer, which means that there is
no legal formal entity to guaranty in case of any bankruptcy25

Lack of Knowledge

Most people are not aware of the use of cryptocurrency and hence open themselves
to the hacker. The digital currency technology is complex and therefore it’s a
necessity to be mindful of it before investing.

There are always merits and demerits to everything. Cryptocurrencies make

transactions easy now as time passes technology usage also getting a wide range
as well as more and more merits and demits added to the technology26.

CONCLUSION

South Africa’s positions regarding the regulation of cryptocurrency also known as

digital currency is to a larger extent legalise it, although cryptocurrency is
unregulated and is also not prohibited. However the governments are increasingly
looking into ways of establishing some regulations regarding its use, since the rise of
Cryptocurrencies is one of the many innovations of the technological revolution that
consumers are experiencing. It is therefore imperative that the impact of
cryptocurrency in South Africa is effective and appropriate in terms of its regulation
as it is a recognised legal tender.
24
The first bitcoin ATM was placed in Kyalami, Midrand
25
SARB, (2019) 6
26
See: https://ccoingossip.com/advantages-and-disadvantages-of-cryptocurrency/