Fortunes are being made – and lost – in the financial Wild West that is digital currencies. Do investors in South Africa need government protection? And are cryptos a systemic risk? Gaurav Joshi, Financial Technology Consultant at Elenjical Solutions, explains why regulators’ powers are limited.
The FSCA looks set to unveil a new regulatory framework that covers crypto currencies, thereby ending speculation as to how the authorities will determine how digital currencies should interact with traditional financial products. South Africa will be the latest country to try to tame what is proving to be the most volatile financial frenzy for generations. Some, such as El Salvador, have embraced the products, adopting Bitcoin (somewhat turbulently) as legal tender. Others have taken the polar opposite view, such as China, who first banned coin offerings, then banned all cryptocurrency transactions and mining of coins. Somewhere in-between is the US, where much talk of federal regulation being introduced has come to naught, and the purchase and exchange of cryptocurrencies remains legal across the country.
So how should South Africa respond?
Before we answer that question let’s take a step back. Particularly popular with Generation Z first-time investors, South Africans are investing some $150 million in cryptocurrencies a day – and that figure is rising rapidly.
Loved by get-rich-quick investors and speculative banks like Goldman Sachs alike, digital currencies are nonetheless unnerving financial regulators. Often the go-to exchange for cyber ransom demands and other illegal activities, cryptos feature wild exchange rate volatility, and many have underlying infrastructure that is vulnerable. However, cryptos are not all bad. They are portable, resistant to inflation and the blockchains upon which they are built are transparent.
Huge fortunes are being made, for sure, but savings lost too for the unwary. While some – Bitcoin – are legitimate, others, such as the recent short-lived Squid Game coin, are frauds plain-and-simple, preying on unsophisticated investors hoping to make a quick buck. Literally anyone can launch a cryptocurrency, and with more than 100 new coins entering the market every day this lack of regulation means it is hard for consumers to differentiate the good from the bad.
Given the iconoclastic nature of cryptos, its reactionary fanbase sees any form of regulation as merely governments trying to claw back control. And true, national revenue agencies do fear they are losing out on substantial unpaid capital gains taxation and/or income tax. But it is clear that at some point the Wild West that is cryptocurrency trading will need to be tamed by regulation. But what is being regulated is not consistent – are cryptos currency, asset or security?
Making regulations is the easy bit. Nigeria and Kenya have banned cryptocurrency trading outright, but the practice goes on much as before, because it is notoriously difficult to enforce. Herein lies the problem. While most transactions are currently traded via exchanges – which can be regulated – cryptos are also traded peer-to-peer, which is anonymous and invisible – and because of this impossible to enforce.
As the world’s major economies wrestle with the issue of how to tame the cryptocurrency monster South African regulators have been largely pragmatic and taken a wait-and-see approach. What is clear is that they don’t regard digital currencies as currencies at all, in a regulatory sense, but rather assets.
According to a recent press report, Unathi Kamlana, a commissioner with the FSCA, stated that the body did not see cryptocurrencies as a systemic risk to the financial system. In the interview he appears to advocate a regulatory light-touch approach: “What we want is to be able to intervene when we think that what is being provided to customers are products that they don’t understand and are potentially highly risky,” he is quoted as saying. “We must be very careful to not just legitimize them.”
Until an enforceable set of regulations is unveiled Kamlana suggests the old maxim of Caveat Emptor be applied – let the buyer beware. He urged investors in South Africa to shun privately issued and created digital currencies, and prefer instead better known and trusted brands, and ‘stable coins’ issued by or linked to central banks.
But it is already clear that while today’s volatile market in digital currencies may eventually be tamed, cryptos are here to stay. Just as the dotcom boom started with wild volatility, ecommerce is now a dominant force. So too could digital currencies shift from being the preserve of a subversive minority to a major force in the global financial system. Regulation will have an important part to play in that process, but in the absence of a global consensus on how to control digital currencies, for the time being at least, a practical and effective way forward for South Africa seems elusive.