Regulation of Bitcoin

Author: Ernest Marais

Service: Andersen Tax


South Africans may be attracted to the concept of an asset not subject to government regulation; however, this sentiment only holds partly true and careful consideration should be given to the exchange control regulations of South Africa.

The rise of Bitcoin entails stories of an unknown founder, futuristic technology, unintelligible jargon, the rise of untold riches, youthful optimism and a hint of anarchy. Critics of Bitcoin (or any crypto asset) will argue that there is no underlying value to crypto assets and its merely a speculative bubble. Advocates of Bitcoin will fiercely disagree with this sentiment highlighting that like gold or fiat currencies, its value is derived from people perceiving it to have value. One of the key drivers behind the value of bitcoin is the perception that it is not subject to government regulation.

The Bitcoin.org website carries a passage by anarchist Sterlin Lujan dated 2016 stating that “Bitcoin is the catalyst for peaceful anarchy and freedom. It was built as a reaction against corrupt government and financial institutions. It was not solely created for the sake of improving financial technology. But some people adulterate this truth. In reality, Bitcoin was meant to function as a monetary weapon, as a cryptocurrency poised to undermine authority.

South Africans may be attracted to the concept of an asset not subject to government regulation and the idea of circumventing the state coffers; however, this sentiment only holds partly true and care should be given to the exchange control regulations of South Africa.

The South African Reserve Bank (“SARB”) does not oversee, supervise or regulate crypto assets as a legal tender in South Africa and any merchant or beneficiary can refuse crypto assets as a means of payment. Crypto assets operate independently from the central bank and as a result, they are not backed or guaranteed by SARB. To date, there are no dedicated laws or regulations that specifically govern the use of crypto assets in South Africa.

Exchange Control Regulations

Currently, the Exchange Control Regulations, as provided for in the various Currency and Exchange Manuals and the Currency and Exchanges Act 9 of the 1933 (collectively referred to as “the Regulations”) do not make provision for cross-border/foreign exchange transfers for the explicit purpose of purchasing crypto assets. Moreover, even though there are no crypto asset specific regulations in place, investors engaging in any form of cross-border crypto trading must comply with the exchange control restrictions applicable to South Africans.

It should be noted that residents can purchase crypto assets from abroad through the utilisation of their single discretionary allowance (“SDA”) of R1 million per person over the age of 18, per calendar year and/or an individual foreign capital allowance (“FCA”) of R10 million per person over the age of 18, per calendar year, provided that a tax clearance certificate is obtained from the South African Revenue Service (“SARS”). These allowances cannot be transferred as each South African resident is only entitled to use his/her own allowance for a given calendar year for foreign investment purposes. It is therefore prohibited for a resident to directly or indirectly use the allowances of another resident and unused allowances cannot be rolled over to subsequent years.

Regulation 10(1)(c) prohibits persons from entering into a transaction whereby capital or the right to capital is directly or indirectly exported from the Republic without permission granted by Treasury and in accordance with the conditions that Treasury may impose, such an individual is deemed to be in contravention of the Regulations. This include the purchase of a crypto asset in South Africa and the sale thereof abroad. Moreover, a contravention of Excon Reg 10(1)(c) is a criminal offence in terms of Regulations.

It is worth noting that the repatriation to South Africa of value through crypto assets is not recognised as repatriation of an individual's SDA and/or individual FCA mainly due to the nature of crypto assets and because such transactions are not reportable to the FinSurv Reporting system. This also means that non-residents who sell crypto assets locally and want to transfer the sale of the proceeds will not be able to do so.

Individuals should therefore tread carefully when expatriating crypto assets from South Africa and ensure that it is done with the scope of the Regulations. As with any act of anarchy, the consequences may be criminal in nature.