Virtual Currency in South Africa: Risks, Scope, and Future Concerns

This report provides a comprehensive analysis of virtual currency in South Africa, examining its evolution, advantages, and disadvantages. It delves into the South African Reserve Bank's stance, highlighting potential risks like security breaches and fraudulent practices. The report explores the scope of virtual currencies, particularly Bitcoin, and their impact on the banking sector, emphasizing the role of blockchain technology. It addresses future concerns, including market volatility, regulatory challenges, and the impact of cybercrime. The report also covers taxation and insurance laws related to virtual currencies, offering insights into the evolving landscape of digital finance in South Africa. Finally, it examines the challenges of balancing consumer understanding, security, and regulatory compliance in the context of virtual currencies.

VIRTUAL CURRENCY IN SOUTH AFRICA
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Future challenges Facing Virtual Currencies
Global trade dissemination and technology implementation along with innovative
research and development leads to the formation of Virtual Currency. The national
treasury of South Africa under its User Alerts for 2014 defined virtual currencies as
a unit of account created and stored digitally and electronically. INTERNATIONAL
MONETARY FUND (IMF) has also noted the use of virtual currency for formation
and performance of transaction between mutually agreed parties electronically. Due
to its limited reach and availability, this virtual currency is in use by private
developers and they also determine the unit of the account to be held by the holder.
These private developers have their stake in basically all the fundamentals of this
virtual currency like the determination of the unit of account and its fractions to be
sold is also defined by private developers1.
Virtual currencies are a type of digital currency and terms are used often
interchangeably. Therefore these virtual currencies can resort under the definition of
digital currency that is defined as a value represented digitally with the ability to
perform all the basic functions of Fiat money or recognized electronic money. The
basic functions are value storage, unit of account and medium of exchange. The only
difference lies in the ambit of legality. These virtual currencies are not legal tender so
a mutual agreement is necessary for the performance of transaction whereas e-
money is a legal tender and are obligated to be used as a method of a transaction
with jurisdictional acceptance2.
Advantages of Virtual currency- Major advantages of virtual currencies can be
mentioned as3-
 They make transactions more efficient with a reduced cost of transactions.
 In terms of risk assessment, transactions done with these currencies are not
reversible and the risk potential to the user is usually minor.
1(Learning.ufs.ac.za, 2019)
2(RUSI, 2019)
3(Europarl.europa.eu, 2019)

 They can also help in the promotion of financial inclusion as these are
borderless and can be beneficial at the regional level due to efficient and low
cost of transactions.
 These virtual currencies specifically “Bitcoin” is not that much abundant so
affordability is limited that can help controlling inflation level to the desired
ranges.
Concerns of Virtual Currencies- For the safety and security of money of the people
of southern Africa from the concerns of virtual currencies, the South African Reserve
Bank has identified several potential risks due to virtual currencies which are
mentioned as following4-
 Concerns of breach of security can cause loss and theft.
 Fraudulent practices and unauthorized use of virtual currencies.
 No provision can insure users against these concerns of virtual currencies.
 User-based errors or technical glitches can also be a major concern.
 Errors while processing transactions using virtual currencies.
 Non-transparent mechanism of these wallet operators in case of various fees
and charges.
Apart from the above-mentioned risks, incorporation of virtual currencies along
with legal Fiat currencies can be a potential threat to the financial stability of the
countries concerned5.
Scope of Virtual currencies in South Africa6- Widespread technical
dissemination has been increasingly affecting all the aspects of human life. The
banking sector is not untouched by this. Also, the digital transaction using digital
money is widely accepted and practiced by economies. Transactions using
digital infrastructure comes to be hazardous sometimes as various countries
have variations in their digital security regimes. Virtual currencies with their extra
4(Office, 2019)
5(Learning.ufs.ac.za, 2019)
6(Resbank.co.za, 2019)

layer of securities and transparency in transactions proved to be the answer to
all these concerns of digital money. Private developers specifically Bitcoin has
an innovative technical record of Blockchain technology that cleared the skies of
the non-transparent transaction and made everything visible to everyone. South
African Reserve bank also issued a virtual currency position paper in 2014 to
distinguish it from electronic money. This paper clarified the attitude of the South
African government towards virtual currencies and declared them as illegal
tender in the country. The paper also cautioned the public to avoid any
transaction or settlement using virtual currency in any manner that defines it as
a legal tender equivalent to currency prevalent. It also distinguished clear
distinctions between electronic money that can be used to the transaction and
convert into physical currency and can be used as deposits in banks in
comparison to virtual currency that can only tradable digitally. The South African
Reserve Bank does not supervise or oversee the virtual currency system and its
effectiveness. Thus, it declared any transaction using virtual currency should be
performed at the end-users risk and is not enforceable by the South African
Reserve Bank7.
South African Reserve Bank also constitutes a Fintech Unit to review the
avenues to regulate the virtual currencies. The Fintech Unit also started Project
Khokha to implement distributes ledger technology in the trial of interbank
wholesale settlement. The review report of Project Khokha8 mentioned that all
the transaction done under a daily volume of South African system can be done
within two hours with augmented security and confidentiality using distributed
Ledger Technology9.
Future concerns of virtual currencies- Advent of Bitcoin make a virtual
concept to reality in 2009. Virtual currency was an academic concept which
became a real practice with the rise of Bitcoin10. It acquired a market value of
7(Walt et al., 2019)
8(Resbank.co.za, 2019)
9(Anwar and Anwar, 2019)
10(Rick Barlin, 2019)

over $2 Billion at its peak and 50% of that value plunges shortly that sparked
rage regarding the future of cryptocurrencies in general. There was widespread
speculation whether these currencies can prove to be alternate to widely
accepted Fiat currencies or became that much obique as other currencies11.
The future of these virtual currencies is the topic of much debate. Professor of
Harvard University in Economics and Public Policy Kenneth Rog off
recommended that the "overwhelming sentiment" among crypto advocates is
that the total "market capitalization of cryptocurrencies could explode over the
next five years, rising to $5-10 [trillion]."
It has been argued by Rogoff that the use of virtual currency is vulnerable to
bubble like collapse. Also, its verification process is highly energy-intensive and
less efficient as compared to systems that rely on well established central
banking systems12.
Some of the potential drawbacks faced by virtual currencies that digital future of
individual can be traced or lost by a single crash in their systems. These virtual
wallets are also vulnerable to hacks by unethical hackers. One of the major
concern on the future of virtual currencies is that greater they became ubique,
more they get subject to regulations and as the regulations increase, the basic
character of these currencies get eroded13.
With the increase in merchants dealing in virtual currencies, there must be an
increase in consumers accepting virtual currencies. Leaving the most
technologically adept people aside, the complexity of virtual currency ad
compared to conventional currency deter the majority of consumers from using
it. A cryptocurrency that has the desire to become part of the mainstream
financial system may have to satisfy widely divergent criteria. It would need to
be mathematically complex (to avoid fraud and hacker attacks) but easy for
consumers to understand. Decentralized with required consumer safeguards
and protection; and protecting user anonymity without being a conduit for tax
evasion, money laundering, and other banned practices. Since these are
11(Learning.ufs.ac.za, 2019)
12(Standard Bank v Neugarten 1987 3 SA 695 W:703C-D., 2019)
13(Rogoff, 2019)

adequate criteria to satisfy, is it possible that the most popular cryptocurrency in
a few years could have attributes that fall in between heavily-regulated fiat
currencies and today's cryptocurrencies? While that possibility looks remote,
there is little doubt that as the leading cryptocurrency at present, Bitcoin’s
success in dealing with the challenges it faces may determine the fortunes of
other cryptocurrencies in the years ahead.
CyberCrime and virtual currencies14- There has been the highest recorded
cybercrime in the business of South Africa as compared to other countries in the
world. Due to the advent of virtual currencies, these cybercrime incidents are
likely to rise shortly. This will remain intact if the south African regime does not
look towards it and draft cybercrime legislation. Like other countries, South
Africa also has legislation for the frauds already established by law but cyber
frauds have not recognized and authorities facing a gap in resolving these
frauds. A 2018 report by McAfee puts the global cost of cybercrime at an
approximate $600 billion – a figure that has jumped from the $500 billion
estimated in 2014.
Data security and the access of data are other factors that do not measure up to
their currently prevalent definitions in legislation. Also, there are dedicated
sections in South Africa’s Electronic Communications and Transactions
Act15. The government of South Africa also made a step forward in a hope to
respond to the growing influence of these virtual currencies. It introduced a
cybercrime and cybersecurity bill in 201516 under the guiding frameworks of
Budapest convention on Cybercrime of 200417. There was a provision of
establishing the cyber point of contact in the bill to discuss and resolve any
cyber fraudulent activities. It seeks to help the investigating agencies to
investigate and consumer in their grievance redressal. It also provides exposure
to investigators to the global nature of cybercrime and other activities. There
14(Security Intelligence, 2019)
15(Gov.za, 2019)
16(Justice.gov.za, 2019)
17(En.wikipedia.org, 2019)

must be provisions of training for the investigating officers with adequate
relevance to the global environment of cybercrimes. The training should cultivate
a culture of technical expertise for digital forensics. The African legislature is
trying to make an equitable balance between the local and global cyber
environment by drafting various bills and easing the process of cross border
data sharing and relevant extraditions. The latest African legislation criminalizes
hacking, unlawful breach, interception, cyber forgery, ransom threat and cyber
extortion with penal provisions of fine or imprisonment of 15 years.
Taxation laws and virtual currencies in South Africa-
The South African reserve bank issued a white paper in the year 2014 which is
known as virtual currencies(VC) and decentralized convertible virtual
currencies(DCVC)because at that time the cryptocurrency landscape was very
unregulated.
The provisions of taxation laws and its principles apply to all incomes under the
south African revenue system. Similarly, all bitcoin transactions are subject to
the applicability of taxation and the General public is always advised to take
guidance from the registered tax professional so that the person remains the tax
compliant18.
In order to be taxed one have to put all the transactions involving virtual
currency including the income by way of trading of virtual
currency( cryptocurrency) is subject to taxation under the taxation law of the
country and hence taxed at a particular rate. While trading cryptocurrency or
virtual currency it attracts the capital gain tax on the transactions like when you
buys a virtual currency for an investment and then sell at s gain it attracts the
tax, it depends on the many factors like duration of the asset held or how it is
financed to decide whether the transaction involve income tax or the capital gain
tax19.
18(Learning.ufs.ac.za, 2019)
19(MVA, 2019)

However the term securities does not include virtual currencies or the
cryptocurrencies as per the Finacial Market Act, 2012. The South African
approach in accordance with the approach adopted by the United states. This
statement can be taken as proof that the regulations in South African legislation
have the Comparative standards as compared to that implemented in the United
State. It has been stated by National Treasury in 2014 that South African
revenue service’s likely to avoid interpretation of existing legislation and various
case laws in its legislative mechanisms.
Insurance laws and virtual currencies in South Africa-
The south African reserve bank guide about all the risk associated with the
transaction of the virtual currencies such as issues relating to payment system
and the service providers, fluctuations in the prices of the currency, money
laundering and consumer risk20. For all these risks the South African Reserve
Bank stated that no legal protection is provided to any person involving in the
transaction of virtual currencies i.e its users, traders, and intermediaries. In
context of already mentioned concerns, the South African Reserve bank has
already declared that legal protection will be absent to users of virtual currency
and other such relevant activities has to be performed on the risk of end-users.
There are concerns regarding regulating the participants of the market that
induce investors and traders. The existing regulations have already covered
these participants in South Africa this innovative form of regulatory mechanism
have the most benefits for South African authorities while considering the
inclusion of virtual currencies. The Country law has also covered resident and
non-resident In case of discrepancies due to incorporation of Virtual Currencies.
There are certain social norms and relevant market mechanism which can
regulate the relationship between the parties under transaction using Virtual
currencies. These market mechanisms usually provide the self-regulation of
virtual currency in relevance with the transaction performed using virtual
currency. These regulations include self-regulation, regulating market participant
and complete prohibition.
20(Resbank.co.za, 2019)

ESTATE LAWS AND VIRTUAL CURRENCIES
Provision of estate laws seems to be highly beneficial for the wealthier owner of
crypto currency asset and implementation of these estate planning techniques to
avoid the values of those virtual currency assets from their state will be
beneficial. One such mechanism that can be used in the implementation of
estate planning techniques is the formation of limited liability companies and
funding them with virtual currency assets and handling over them to a family
trust21. To avoid estate laws various owners gift the most economic values of
their virtual currency assets to the family trust. Concerning the provision of
limited liability companies, if the companies created with well defined interest of
voting and non- voting members and a transfer of only the interest of non- voting
members to the family trust can cause discount for gift and state tax purposes22.
All future speculation on the amount of limited liability company bill accrues
beyond the taxable estate of the owner. There are also concerns that investors
in this virtual currency are at risk of losing their entire virtual currency dominated
asset at their death so adequate planning for the management of this virtual
currency asset is expected. Various factors help to ensure that these assets can
get transferred to the higher of the owner of virtual currency asset after the
death of the owner. Also, there are concerns regarding the questions if virtual
currencies can be used as money or alternate method of transaction. Various
definitions provide that there must be description of the name and unit of
account in the definition provided by the estate laws. The provision of floating
capital and fixed capital is determined by the taxpayer regime usually fixed
assets such as investments can be held as fixed capital whereas trading stocks
is viewed as floating capital and the intention behind these capitals is to gain
profit by selling them. It is suggested that virtual currency can be taxed similar to
these capitals due to its resemblance with them retaining of virtual currencies in
the form of capital assets or getting profit from its disposal can also be used as a
compensation for the miner of Virtual Currencies.
21(Carlton Fields, 2019)
22(Learning.ufs.ac.za, 2019)

CONCLUSION
Even if virtual currencies have not been legalized as a valid method of the
transaction still authorities must strive to utilize the potential benefits of these
virtual currencies. In specific reference of National treasury, it has been stated
that merchant can accept virtual currency at their own risk the implication of this
stamen is that the transaction with virtual currency is not void. Furthermore, the
wide spread dissemination of these virtual currencies and there increasing
popularity has recommended various regulatory authority to draft regulation for
them. The South African legal authorities can also incorporate regulations in
existing legislation such as electronic communication and transaction act that
can supervise and regulate the concerns of users of this virtual currency. It
should be mentioned that these virtual currencies acceptance lies in the opinion
of merchant or consumers. Regulation of virtual currency can also be supported
by various legislation in financial sector and their inclusion in Income tax return
and it has been suggested that South Africa revenue service’s uses accountable
institution to utilise the reporting requirement23.The speedy and regular growth of
technological advancement around the world provide the evidences regarding
regulations that can ensure the inclusion of virtual currency in income tax
regime. The South African laws have various gaps that can be utilised as
opportunities. These gaps serve as opportunity to cultivate environment of co-
operation within various south African authorities and acts as motivation to work
together and draft legislation regarding regulation of virtual currencies in South
Africa. In the relevance of the study and various findings it can be explained that
regulation of virtual currencies can only be performed only if the core
characteristic of the state is its decentralised nature because these virtual
currencies are widely dispersed and decentralised24. The relevant bodies
responsible for regulating these virtual currencies will also promote technological
innovation and financial inclusion in society. In this regard the regulation virtual
currency in South Africa can be comparable to those in first world countries.
23(Learning.ufs.ac.za, 2019)
24(Myheritage.com, 2019)

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