In South Africa, the government has just released a consultation paper focusing on cryptocurrency regulations. According to the South African Reserve Bank (SARB), there are both risks and benefits that are tied in with cryptocurrencies.
In the paper, cryptocurrency is defined with a focus on its digital nature:
“Crypto assets are digital representations or tokens that are accessed, verified, transacted, and traded electronically by a community of users. Crypto assets are issued electronically by decentralised entities and have no legal tender status, and consequently are not considered as electronic money either. It, therefore, does not have statutory compensation arrangements. Crypto assets have the ability to be used for payments (exchange of such value) and for investment purposes by crypto asset users. Crypto assets have the ability to function as a medium of exchange, and/or unit of account and/or store of value within a community of crypto asset users”.
The risks of Bitcoin and cryptocurrency
The consultation paper outlines the risks of use cases such as buying and selling cryptocurrencies, offering that it poses a “threat to central banks’ historical exclusive right to issue money and control the money supply” which the bank says would “lead to the creation of a parallel – and ultimately fragmented – monetary system.” The paper points to Bitcoin as an example of a cryptocurrency, saying that widespread adoption of the decentralized token would lead to a less effective system owing to transaction and mining times.
SARB states that cryptocurrency could also lead to a risk of financial stability, noting that “an important psychological level which, once breached, may prompt greater regulatory scrutiny and subsequent action by policymakers and regulators globally“.
The third risk to fiat tender presented is that cryptocurrency is directly linked to widespread adoption of digital tokens. Should this happen, SARB states that cryptocurrencies “will essentially be competing directly with the national payment system, but without the same level of regulatory oversight”.
SARB further stated that there are use-case risks attached to cryptocurrency too, such as the potential for scamming and the lack of protection that users have owing to the decentralized and unregulated approach that the blockchain based tender takes.
Benefits of Bitcoin and cryptocurrency
Although there are the risks indicated in the paper, SARB also highlights several benefits that cryptocurrencies offer. One of the benefits outlined is that investors can diversify their portfolios without facing risks related to a country’s economy. SARB also stated that the anonymity of Bitcoin “is appealing to some users who wish not to be identified“. SARB offered that another benefit:
“The holders of crypto assets are able to participate in an alternative market offering (e.g. specialised products/services where the provider only accepts crypto assets), that is. accepting crypto assets as a medium of exchange”.
How the South African Reserve Bank will regulate cryptocurrencies
Owing to the risks, SARB has declared that it will move from the current “level 2” (where cryptocurrencies are recommended) to a “level 4” (where cryptocurrencies are regulated).
SARB has said that it will increase regulatory pressure “[in order to achieve anti-money laundering/combating the financing of terrorism (AML/CFT) requirements, more specific requirements will be necessary in line with the recent amendments to the Financial Action Task Force (FATF) Recommendations.“