Crypto regulation — the SA Reserve Bank comes out to…


Kuben Naidoo, deputy governor of the South African Reserve Bank (Sarb), had a few things to say in an interview for PSG on July 12 and the financial industry’s eyes widened. There were some sighs of relief, some gasps of horror, a bit of head scratching, but mostly cautiously optimistic anticipation as everyone hopes the comments translate into real regulations with consequences.

I have written previously about the growling dogs of global regulation coming after crypto, particularly after the deafening noise of the recent global crypto crash that saw dominoes fall everywhere. When I wrote that article, the Sarb had said very little: her way of thinking was a closely guarded secret.

Not anymore.

It would be easy to proclaim that Sarb is just another dysfunctional SOE and imagine that its decisions on crypto regulations are bound to be steeped in, well, the kind of ill-informed opinion and logic-less logic we see elsewhere in government regulation. regimens.

But it’s not like that. I know people within the South African crypto community who interact with Sarb and contribute to his thinking on this matter. The Sarb team that analyzes cryptocurrencies is competent, smart, cautious, and knowledgeable.

horrible mistake

But first, let’s squash a horrible mistake by the lieutenant governor. He said that “my counterparts in the US.” he has been told that “90% of cryptocurrency transactions” are used for illicit purposes. He went further: “Most of the crypto use cases globally have not been honest.”

This is a bullshit. Nonsense. Nonsense. And it fuels the worst of the misinformation that ends up in news headlines and causes immeasurable damage to a major new industry.

Numerous data analytics companies continually collect and report the actual statistics. The largest and most prestigious of these is Chainalysis, used by the FBI and forensic, oversight, and regulatory agencies around the world.

The number of crypto transactions linked to illicit activities on the blockchain is 0.15%. POINT ONE FIVE PER CENT.

If someone want to check this, see here.

In addition, the number of transactions linked to illicit transactions in the real world of rands and dollars, where we live, is 5%. That’s 50 times higher than crypto (and those are the only ones we know of).

Why is this? Because blockchain transactions are public. It is impossible to commit a silent crime. It is instantly visible and tracking crypto crime profits is simple for anyone.

In the world of what is called “fiat money”, the physical world in which most of us live, it is often easy to hide financial crimes. Just look at what they keep discovering in dodgy financial havens like Panama. Crypto is simply not an easy place to steal and store money.

The lieutenant governor had been woefully misinformed on this matter, and should have been more cautious.

Crypto regulation

But back to the regulatory comment. He said that Sarb intends to regulate cryptocurrency as a “financial asset.” Which means it is thrown into a basket with cash, stocks, bonds, mutual funds, and bank deposits. He said that he will fall under the steely gaze of the FIC (Financial Intelligence Center). He said it would take 12-18 months for the government to do what is necessary, which means understanding and approving the necessary changes to the relevant laws (uh huh).

This creates, at a minimum, some early certainty. Which is a good thing. Institutions like banks can now start mapping out and planning to enter this asset and services space (and trust me, they will). Tax issues become clearer. The implications of KYC and AML become clearer. Forex regulation goes from confusing to, er, not that confusing.

Bigger Trouble Coming

But not so fast. There is a much bigger problem looming, for which Sarb and others will have a harder time. And here is the reason.

When people think of “crypto”, they think of Bitcoin and some may decide that it is a financial asset. Perhaps there is some reasonable argument for that. But Bitcoin is just one token in a massive universe of cryptocurrencies. Cryptocurrencies, NFTs, Loyalty Tokens, Government Tokens, Staking Tokens, Utility Tokens, Non-Transferable Tokens.

A true Babel of tokens.

And only some are definitely not financial assets, although they can accumulate a market value, if only by agreement between two private parties.

Which brings me to this. What Sarb (and every other regulator) is trying to do is fit cryptocurrencies into existing regulations designed many decades ago for assets that are hundreds of years old: stocks, currencies, commodities, collectibles, and the like. This is not going to work. Entirely new classes of digital “things” need to be properly defined before the entire field can be rationally regulated.

A simple example will suffice. The world of blockchain and NFTs has recently collided with the world of video games. In some games, you can buy and own a weapon or other item in the game, connected to an NFT, and then sell it to another player in the game (or even another game). Will Sarb really try to regulate a digital Silver Power Sword in a video game played by 14 year olds?

If you do, your bucket will leak in so many places that it just won’t hold water. MD

Steven Boykey Sidley is Professor at JBS, University of Johannesburg and co-author of Beyond Bitcoin: Decentralized Finance and the End of Banks.