Last week, South Africa’s High Court ruled that cryptocurrencies are not subject to the country’s exchange control regulations. The International Monetary Fund (IMF) has long warned that individuals in emerging markets often use crypto to bypass capital controls due to its peer-to-peer transferability. The IMF fears this could destabilize such economies through capital flight. However, in this case, the court determined that under South African law, cryptocurrency does not meet the legal definitions of either “money” or “capital.”
The case originated when Standard Bank sued the South African Reserve Bank (SARB) and others after the central bank seized R16.4 million (approximately $1 million) from a Standard Bank account. The account belonged to Leo Cash and Carry, a client that had become insolvent. Standard Bank held a lien over the funds, but the SARB claimed forfeiture because Leo Cash and Carry had purchased R556 million ($37 million) worth of Bitcoin in 2019 and transferred it offshore.
Standard Bank, a secured creditor of LLC, argued, amongst other things, that the forfeiture was not justified as cryptocurrency should not be regarded as a form of capital for the purposes of the exchange control regime.
SARB lost the case. The judge ruled that the country’s exchange control laws must be interpreted narrowly due to the central bank’s broad powers of forfeiture.
Cryptocurrency is not currencyCentral banks frequently emphasize that, despite the name, cryptocurrencies are not actual currencies. Ironically, this distinction worked against SARB in this instance.
South Africa’s Financial Regulator, FSCA, Declares Crypto Assets as a Financial Product
A crypto asset is used as an investment vehicle… and it resembles a financial product – you invest in it, you get returns from it.” – FSCAhttps://t.co/FOAe4pMmy3
— BitKE (@BitcoinKE) October 21, 2022
There were two clauses under which cryptocurrency could potentially fall:
One restricting the export of “currency, gold, securities, etc.,” and
Another limiting the export of “capital.”
“The answer lies in one’s interpretation of the word ‘currency’,” the judge wrote.
“Cryptocurrency is not money.” He referenced an article provided by SARB stating that cryptocurrencies are “nothing more than codes on a digital ledger,” and therefore have a borderless, global nature.
The court ultimately found that cryptocurrencies do not fall within the definitions of “money” or “capital” as contemplated in the Regulations.
In this regard, Judge Motha, J held as follows:
“To me, on any construction, much less on a restrictive interpretation, cryptocurrency falls outside the ambit of capital under Reg 10(1)(c). I agree with the counsel for the applicant that a regulatory framework addressing cryptocurrency is long overdue.
In the same way, intellectual property rights had a niche carved for them in Excon, cryptocurrencies need some legislative attention” (own emphasis).
As for the clause concerning capital, previous South African legal cases had debated whether intellectual property qualified as capital. The courts had ruled it did not – until lawmakers later amended the legislation to explicitly include it. The judge concluded that cryptocurrency similarly does not currently fall under the legal definition of capital, and that any desire to include it must be addressed through legislative change.
“Cryptocurrency has been in existence for over 15 years – one cannot say SARB has been caught napping,” the judge noted.
As a result, the SARB’s forfeiture of the relevant funds was set aside.
Immediate implications of the ruling
The ruling sends a clear signal to central banks: exchange control laws must be updated if they are to cover cryptocurrencies.
In the meantime, the judgment is expected to trigger increased cryptocurrency activity in South Africa until new legislation is enacted. Since South Africa regulates local crypto exchanges, this could create a short-term premium on Bitcoin prices domestically if demand surges.
Ironically, while Standard Bank won the case, the victory could come at a cost. A potential rush to buy crypto and move money offshore may significantly erode bank deposits – potentially outweighing the R16.4 million the bank managed to recover.
This decision serves as welcome guidance for South African residents on the current status of cryptocurrencies in the context of Regulation 10(1)(c). However, it’s possible that amendments to the Regulations may follow. Therefore, it is important to consider the direction of crypto asset regulation.
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