What upcoming crypto regulations mean for your investment

The South African Reserve Bank’s plans to declare crypto a financial product has taken many by surprise. upnup’s Justin Asher unpacks what recent changes mean for investors, and how it will benefit regulation of the currency.

It was inevitable that, at some point, South African authorities would start regulating cryptocurrencies. While the South African Revenue Service (SARS) has long treated earnings from cryptocurrencies as income tax, the government has made it clear that it believes more interventions are needed.

In its 2022 budget review, it proposed regulatory bodies aimed at safeguarding crypto owners and the South African fiscus. In turn, these regulatory bodies will follow the interventions suggested by the Intergovernmental Fintech Working Group (IFWG) and treat crypto asset providers as accountable institutions, declare crypto assets as a financial product, and enhance the monitoring and reporting of crypto asset transactions.

There is, at this stage, no set date when these regulations need to be implemented but it’s intended that they’re in place before the end of the year.

While the intent behind these regulations should undoubtedly be applauded, it’s worth asking what they mean for ordinary investors.

Reducing risk 

The first two of those moves should, at least, be welcomed by investors. By including crypto asset service providers as accountable institutions within the Financial Intelligence Centre Act (FICA) (2001), the government hopes to address concerns about crypto assets being used for money laundering and terror risk financing.

And by requiring crypto products to be declared a financial product, any person providing advice or intermediary services in the space has to adhere to the Financial Advisory and Intermediary Services Act (2002).

Both measures should benefit both consumers and legitimate cryptocurrency companies, given that they’re specifically aimed at bad actors who claim they’re trading clients’ crypto assets only to disappear with the money. Combined with a little education, these measures should make ordinary investors feel more comfortable investing in crypto assets and lend additional credibility to the honest actors in the space.

The third measure is a little more complicated. Enhancing the monitoring and reporting of crypto asset transactions will bring them within the Exchange Control Regulations of 1961.

In essence, it’s meant to bring oversight to companies and individuals that send crypto assets to international exchanges or that use South African cryptocurrency exchanges for the purposes of arbitrage. The former happens for a variety of reasons, arbitrage involves buying cryptocurrencies on overseas exchanges and selling them in South Africa at a higher price.

While both of these activities will remain permissible under the new regulations, they will be placed under greater scrutiny. Additionally, people sending more than R1 million a year in either cash or crypto assets will be required to notify the South African Reserve Bank (SARB).

Given that the vast majority of individual South African crypto investors hold less than R10 000 in cryptocurrency assets, that’s unlikely to be a significant issue at this stage.

Opportunity in formalisation of crypto

While some crypto diehards will view any attempt to regulate the space as anathema to the philosophy of cryptocurrencies, it was inevitable that regulations would come at some point. Rather than viewing them as something to be resented, legitimate players in the crypto space should view them as an opportunity.

Regulation could, for instance, make it easier for crypto companies to collaborate with traditional banks, leading to even greater adoption. Additionally, should the majority of players in the space adhere to these regulations, it could further open the space in the future.

For instance, pension funds currently remain barred from investing in cryptocurrencies. If regulations can help address some of the concerns around volatility and bad actors in the space, that can only be a good thing.

A more secure investment 

Ultimately, unless you’re a major trader yourself, the upcoming regulations probably won’t have any discernible impact on your cryptocurrency investments. If they’re implemented correctly, however, it may open up the space to more people through added legitimacy, weed out a large proportion of the hucksters in the crypto space, and open up new, future avenues for investors.

Of course, there are those that prefer the high-risk/high-reward nature of deregulated crypto markets, but for most people, sensible regulation aimed at preventing money laundering and theft should be extremely welcomed.

• Justin Asher is the head of strategy and marketing at upnup, a South African fintech platform.
  

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