Mitigating the associated risks in the unregulated use of crypto-currencies in South Africa through an effective legal framework

Abstract

Crypto-currencies are decentralised convertible virtual currencies that use blockchain technology to process peer-to-peer electronic payments. The first successful crypto-currency was established in 2009, and it is known as Bitcoin. Owing to globalisation and the wide reach of the Internet, crypto-currencies have made their way onto South African shores. These currencies do not fall under the definition of legal tender and as such they are not regulated within the South African legal spectrum, this problem was thus investigated by this study. The objectives of the study were to understand the concept of crypto-currencies, their relevance in the financial sector and the risks associated with these virtual currencies. The other objective was to establish whether there is a compelling need for regulatory intervention as far as the operation of crypto-currency is concerned. To conduct this study, the researcher used a desktop-research methodology. The nature of the research was analytical, explorative and comparative. Complex concepts of crypto-currency were analysed and explored. The researcher then used the comparative method to contrast the legal and regulatory frameworks of Canada, the US and the EU with the legal position of crypto-currencies in South Africa. The study illustrated that crypto-currencies are decentralised convertible virtual currencies that are based on cryptographic algorithms. Crypto-currencies are not monitored by a central authority. It was also found that there are risks that emerge from using crypto-currencies, some risks were found to be current and other risks could be detrimental owing to the wide adopting of crypto-currencies. Some of these risks were found to be money laundering, financial stability and consumer protection caused by factors such as high volatility. Regarding regulation of these currencies, it was established that Canada, US and EU have started to formulate legal frameworks to mitigate some of the mentioned risks. It was found that there is no legal framework that regulates crypto-currencies in South Africa, however the SARB and National Treasury released position papers that cautions consumers about the risks of these currencies. It was therefore concluded that there is a compelling need for regulatory intervention in South Africa. Based on this need, the author made recommendations such as integrating crypto-currencies into relevant legislation i.e. Consumer Protection Act 68 of 2008. Intervention should be succeeded by regulation.