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Using crypto assets for international payments in South Africa

With the upsurge of interest in crypto assets in recent years, previously non-existent issues now require serious consideration, input, and action from key financial role-players. International payments using crypto assets are one such example. With cross-border trade a major driver of the South African economy, which entity wouldn’t welcome a global economy where transactions can occur without currency conversion issues, high fees, or a banking middleman?

We will describe the current legal and taxation status of crypto assets in South Africa, and then look at where things are headed.

What are crypto assets?

The word “crypto asset” replaced “cryptocurrency” (SARS Explanatory Memorandum on the Taxation Laws Amendment Bill, issued on 20 January 2021).

Crypto assets are a digital representation of value. They exist solely in the virtual world. Importantly, they are not issued by a central bank, hence oversight is affected. People electronically trade, transfer, and store these assets, on the whole, to make payments or invest. There is growing support for their use as an alternative currency.

What is the current status of crypto assets in South Africa?

Crypto assets are not regulated, supervised, or guaranteed by the South African Reserve Bank (SARB). They function independently, hence the risk of value fluctuations.

Furthermore, no dedicated laws or regulations exist to govern the use of crypto assets in South Africa. There are thus also no regulatory compliance requirements for domestic trade. Although general common law principles can be applied, there is essentially no investor protection and recourse at present.

Even though South African residents are allowed to buy crypto assets, on local or foreign exchanges, crypto assets are not official tender in South Africa. A merchant can therefore refuse to accept them as a means of payment.

Individuals may buy cryptocurrency from abroad, within the following limitations set by the SARB: using an individual’s single discretionary allowance (R1 million) and/or individual foreign investment allowance (R10 million with a Tax Clearance Certificate), per calendar year.  SARB does not permit a local business to invest in offshore crypto assets by using the foreign direct investment dispensation.

Due to the nature of crypto assets and the fact that their transactions are not reportable on the SARB’s Financial Surveillance (FinSurv) Reporting System (i.e. no evidence that foreign currency/Rand was brought into the country), the repatriation of value to South Africa through crypto assets (e.g. on sale or conversion to fiat currency) is not allowed.

Concerning exporting crypto assets, for example, to be used as an international payment, the Exchange Control Regulations do not allow capital, or the right to capital, to be directly or indirectly exported from South Africa without permission from the National Treasury. It is a criminal offense to violate these regulations.

For all goods imported or exported through South Africa, SARB matches the international money flows with the customs clearances. Thus keeping tight control of money flow for traded goods.

Although there is no explicit legislation in South Africa regulating crypto-assets, a range of statutes impose legal obligations on the holders. Examples include the Income Tax Act of 1962 and the Exchange Control Regulations of 1961, which reference the Currency and Exchanges Act of 1933.

The South African Revenue Service (SARS) explains that normal income tax rules apply to crypto assets. It is the taxpayer’s responsibility to declare all crypto-currency-related taxable income in the tax year it is received or accrued. Failure to do so could result in penalties and interest.

What is the future of crypto assets in South Africa?

In light of the regulatory and consumer protection concerns, as well as growing global interest in crypto assets, it is unsurprising that key players have taken an active role in guiding the thinking and future planning around crypto assets in South Africa.

South Africa’s Intergovernmental Fintech Working Group (IFWG) was created in 2016 with members from the SARB, the National Treasury, the Financial Intelligence Centre, and the FSCA (Financial Sector Conduct Authority). They aim to keep regulators and policymakers abreast of fintech (financial technology) developments and implications.

The Crypto Assets Regulatory Working Group, comprising the IFWG and SARS, was then formed in 2018 particularly to examine the South African position on crypto assets.

Most recently, the SARB is considering the introduction of a local, or state-backed crypto asset, also known as “central bank digital currency (CBDC). The process, in association with BIS (Bank for International Settlements) Innovation Hub and central banks of Australia, Malaysia, Singapore, and South Africa, is well underway with the completion of the so-called ‘Project Dunbar’ in 2022. This experimental project aimed to streamline cross-border payments, specifically by looking at the possibility of using multiple CBDCs from various countries on a shared platform for international settlement.

In conclusion

Globally, the interest in and use of crypto assets has grown. Significant barriers to their safe and effective use, both domestically and internationally, still exist at present.

It remains illegal for holders of crypto assets to make cross-border payments.

However, there is the possibility in the future for the acceptance of a CBDC in South Africa and other countries which would allow for easier and more secure cross-border payments.

The issue of making international payments using cryptocurrency is not yet a reality but is certainly not as far-flung an idea as it might’ve seemed before.

Should you have any questions not covered in this blog, please contact one of our consultants on 087 550 1038. We would be happy to help you.