I recall some years ago in the UK seeing people tap their bank cards at coffee shops to pay - that was quite mind-blowing at the time. Today, I do the same to buy some plugs for my office. The world is different in how we are able to operate, and digital currency is changing the game even more and will soon become the norm. For some, it already is.
With a recent Luno survey quoting a staggering 74% of South African respondents saying they’d like the option to pay for goods with cryptocurrency, the days of an entirely unregulated system are numbered.
There will, no doubt, be a unanimous favourability towards bringing in regulation. It will allow for cryptocurrencies to be used in the financial system properly, and fairly. This is in strong contrast to the current scenario, where there is no guarantee as to the origin of funds, and the situation is a gift for anyone who wants to transact without attracting the attention of the authorities. These are normally not bona fide investors, so legislation will hopefully discourage those buying illegal or secret goods, and the like.
The first phase of the proposals - to get everyone on the book and registered if offering crypto-asset services - is a good start, and I believe new regulations will align very well with the current overhaul by the Financial Services Conduct Authority that is reshaping how financial services will be going forward. Crypto-assets should have a place in the future portfolio asset mix.
Could crypto lose its shine?
Regulation is highly unlikely to impact the value of cryptocurrencies. With the value of an instrument based on supply and demand, as well as the intrinsic value given by an investor, I believe the regulations could have a stabilising effect on the volatile cryptocurrency market. The vast majority of individuals will not be put off by regulations coming in.
In terms of taxation, there is no doubt the crypto space will fall under the watch of the South African Revenue Service (Sars) eventually. The reality is that all countries, with a few exceptions, are struggling to find money for their fiscus. There is already a lot of upset over cross-border taxation, with multi-national companies moving profits into countries that are low-tax jurisdictions. Understandably global tax authorities are looking to clamp down on this practice, to make sure that companies pay their fair portion of tax. It is therefore again almost certain that cryptocurrencies will be taxed in the future. There is simply no way a government can afford to lose a potentially significant taxable flow avoiding the fiscus.
It is likely that if you transact in a cryptocurrency in South Africa, you will be taxed locally but you will have to transact in a regulated, or authorised, currency. If you transact in an unauthorised cryptocurrency, you could be going against current Sars rules, but it remains to be seen how the taxation process and proposed regulations will play out.
When cryptocurrencies are regulated, they will be seen the same as any other asset, and in the case of divorce or death, for example, would be a mess to sort out without some legal framework in place, so regulation can only improve things.
I agree with the phased approach motivated by the regulator to applying regulation to cryptocurrencies, keeping an eye on how other jurisdictions are dealing with the process. There will be challenges, and although it will take time, it’s clear that cryptocurrencies will be regulated sooner or later. It will be interesting to see, once the comments have been considered, how the regulator determines the best way forward locally.
Richard Rattue is the managing director of Compli-Serve, provider of compliance services to the investment industry.