Blockchain and Cryptocurrencies are establishing themselves as a lucrative industry around the world. Countries like Malta have embraced the technology and are now reaping the benefits as trading and crypto asset ownership continues to be on the rise. On the other hand, some countries like China have taken a tough stance against cryptocurrencies, in particular, having outright outlawed their use.
Cryptocurrencies are slowly but surely gaining traction in the continent of Africa. South Africa being one of the larger economies of the continent has the potential to lead the way in terms of adoption and development of the revolutionary technology. Taking a step back and looking at the bigger picture reveals some interesting details as an effort is put in to drive innovation and acceptance of the industry.
The use of Cryptocurrencies is legal in South Africa and although the South African Reserve Bank (SARB) is monitoring the situation no laws have been drafted yet to govern the sector.
The Reserve Bank of South Africa does not recognize any cryptocurrency as legal tender yet, though they outlined their views on Cryptocurrencies in a white paper outline way back in 2014. The Reserve Bank has the sole right to issue and manage money in the form of banknotes and coins in South Africa. The keywords here are ‘bank notes’ and ‘coins’ and as such, cryptocurrencies fall outside the jurisdiction of the Reserve Bank
The bottom line is that the Reserve Bank doesn’t recognize cryptocurrencies as legitimate currencies, let alone as a substitutable alternative to fiat currency. In fact, the SARB went as far to say that cryptocurrencies won’t pose any threat to the South African Rand, or financial institutions in the same article: “Given the current landscape and information currently available, the Bank contends that VCs pose no significant risk to financial stability, price stability or the National Payment System.”
Bitcoin and a number of altcoins shot to extremely high values in the latter half of 2017 causing a spiraling bull run that saw investors rushing in to get a piece of the pie that made many of those overnight millionaires. Cryptocurrency exchanges across the world were inundated with new users looking to open up accounts and get their hands on the increasingly valuable digital tokens. This unsurprisingly caught the attention of the tax man.
The South African Revenue Services (SARS) made it clear to registered taxpayers that they would be liable to pay tax on cryptocurrency gains. “The key thing is identifying people who are trading because it’s easy to say cryptocurrency gains must be deductible, but there are also those who lose. That’s why it’s important to identify the trader.” said acting Commissioner Mark Kingon while speaking at the Institute of Internal Auditors SA conference in Johannesburg recently. “The onus is on taxpayers to declare all cryptocurrency-related taxable income in the tax year in which it is received or accrued. Failure to do so could result in interest and penalties.”
Classification of Cryptocurrencies
Cryptocurrencies themselves are not taxable in South Africa owing to the word ‘currency’ not being defined in the Income Tax Act, as pointed out by SARS. “Cryptocurrencies are neither official South African tender nor widely used and accepted in South Africa as a medium of payment or exchange. As such, cryptocurrencies are not regarded by SARS as a currency for income tax purposes or Capital Gains Tax (CGT). Instead, cryptocurrencies are regarded by SARS as assets of an intangible nature.”
This technicality doesn’t mean that South Africans are off the hook, all Africans actively trading cryptocurrency will be liable to pay tax on any income made from it as the value of a given amount of cryptocurrency can be valued in South African rands, and any income received or accrued from cryptocurrency trading can be taxed under the laws of gross income.
SARB Task Force
The SARB isn’t going to turn a blind eye on Cryptocurrencies though as the institution has launched a Fintech task group to handle cryptocurrency and fintech developments in the country. The self-regulatory body was set up with a focus on investor protection, will be allowed to set up its own rules and directives, while looking to balance crypto and blockchain development in the country with risk prevention.
The SARB director of banking practice, Bridget King, explained that a major hurdle has to do with timelines and the dangers of imposing regulations that could stifle the growth of the sector in the initial announcement in April 2018, “Regulating cryptocurrencies prematurely could have the negative consequence of throttling the growth and innovation of the industry. In addition, if laws are drafted based on existing technology, which is still in its growth phase, there is a risk that the technology may have moved so much by the time the legislation is enacted, that the legislation is obsolete or requires updating almost immediately to align with the latest technology.”
This Fintech task group was established as the organization refused to accept Cryptocurrencies as money owing to terminologies. Groepe said the bank wants to make sure that cryptocurrencies, and their trade, are still adhering to South African laws, “We want to ensure or establish whether there is still compliance with the relevant financial surveillance or exchange-control regulations.”
SARB has also introduced a proof of concept for a blockchain-based payment system christened project Khokha. The system was built using JPMorgan’s Quorum platform, and provides participating parties actual experience using blockchain technology in a safe, test environment with transactions that remain absolutely confidential and would be settled.
Showcasing the ability of blockchain technology in helping streamline payments systems was the main aim of the SARB.
“One objective of Project Khokha is to provide a better understanding of how South African Multiple Option Settlement (SAMOS) system would integrate with a DLT system. The intention is not to consider changing the approach with the SAMOS replacement, but to provide input to that project.”
A Waiting Game
The South African economy has struggled for a major part of the year so far. The rand (the country’s) fiat currency hit a six-month low in June, amid massive selloffs in the emerging markets. As a result, many South Africans are eying cryptocurrencies, with a particular interest in Bitcoin. A slow and cautious approach to cryptocurrency regulation is definitely important for South Africa as regulations can both promote and stifle its advent. While proper legislation and regulation will still take time, and the fact that the SARB is making an effort to research the possibilities of blockchain technology is encouraging.
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