The Regulation of Cryptocurrencies in South Africa

Abstract

Society is always moving forward and a large part of that is the advent of new technologies, such as cryptocurrencies. Cryptocurrencies are in use in almost every country in the world and has posed many regulatory issues for authorities, especially with the increased used thereof in recent years, despite extreme volatility in the market. Cryptocurrencies can be referred to as virtual currencies, crypto assets or digital currencies. These cryptocurrencies can be centralised or decentralised, meaning that there is either a central issuing authority or not. Furthermore, they can be convertible or non-convertible, thus having the ability to be exchanged for legal tender or not. This innovation is based on blockchain technology, which makes use of a distributed ledger system. In layman’s terms, it entails that every transaction is recorded on the blockchain by miners, using complex algorithms known as cryptography. Anyone can choose to be a miner and when a transaction is recorded on the blockchain, the miner is awarded with a small amount of cryptocurrency. Miners can also introduce new cryptocurrency “coins” into the system. The inherent characteristics of this technology, accordingly, include anonymity of users, cross border operation and the lack of a central authority regulating it. These characteristics pose numerous risks to users and in future may even pose systemic risks such as disrupting the national payment system and necessary economic interventions. South African authorities have recognised the need to regulate cryptocurrencies to mitigate these risks. South Africa’s regulatory response is risk- based, and the approach has been neutral toward cryptocurrencies, monitoring the situation and intervening only where necessary. This dissertation seeks to clarify how cryptocurrencies operate, what risks they pose, the South African response and how it compares to other countries’ responses, the appropriateness of the regulations and how they may be improved in the future. It is trite that regulation is indeed needed if we are to suitably incorporate cryptocurrencies in our financial systems and the question this dissertation seeks to answer is the best way it can be done.