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When cryptocurrency regulations kick in locally, it's likely that some exchanges will likely drop out of the race, writes Wiehann Olivier.
Towards the end of last year the news broke that Binance, the world’s largest international cryptocurrency exchange by volume, had withdrawn their application for a licence to operate a crypto exchange in Singapore due to regulatory issues.
While the news may have fallen on deaf ears in many other jurisdictions, it provides stakeholders in every crypto industry around the world with something to think about.
Various jurisdictions had taken different approaches on how to regulate their crypto industry. Firstly, by imposing a total outright ban on cryptocurrencies and related trade; or secondly by implementing extremely strict and cumbersome regulations from the get-go without a thorough understanding.
Lastly, certain jurisdictions have avoided regulating the industry at all – with an aim to slowly implement regulations once they obtain an understanding of the technology and its impact on fiscal, economic, and regulatory environments.
To regulate or not to regulate?
Whether to regulate the crypto industry or not is an ongoing debate, but most informed stakeholders believe we need a regulated environment to further grow the industry and provide protection and recourse to consumers.
From a growth perspective, a regulated crypto industry could increase overall adoption and give birth to a new sub-sector of publicly traded funds holding crypto as their underlying assets - as we have seen internationally with the hype around exchange traded funds.
That said, it is paramount that these regulations do not stifle innovation.
Crypto regulations in SA
Currently we have no idea what local crypto industry regulations will look like. But there have been rumours of what regulators are planning to impose and that they will do so in the second or third quarter of 2022.
The big question is whether virtual asset service providers (VASPs) - such as cryptocurrency exchanges - are agile enough to organise themselves operationally to be able to adhere to these laws and regulations.
In South Africa, where the crypto industry currently remains unregulated, we are fortunate to have been able to observe other regulated jurisdictions and learn from their mistakes.
At the moment, South African VASP’s must adhere to general regulations including, but not limited to, the Companies Act, Statutory Audits, Tax Administration, VAT Act and Income Tax Act, and Exchange Control regulations. But, as soon as crypto-specific regulations are introduced they may also need to adhere to the Financial Intelligence Centre and Financial Advisory and Intermediary Services Act.
Pressure from banks
While "normal" financial service providers have already navigated this regulatory mine field for years, VASPs will need to catch up quickly.
In addition, VASPs will come under increasing compliancy pressure from commercial banks who are the lifeline for most of them; creating a bridge between fiat currencies and cryptocurrencies.
Over the last couple of years we have seen certain commercial banks in South Africa implementing blanket bans for servicing VASP’s. Others have followed an alternative strategy by ensuring that their risks are mitigated by demanding that their VASP clients are compliant from an overall regulatory standpoint and have the necessary Know Your Client (KYC) and Anti Money Laundering (AML) policies and procedures in place.
Hopefully we will also see amendments made to the Income Tax Act during February, possibly including crypto investment bundles as part of the collective scheme of investment, or further guidance from SARS as opposed to merely stating that "the ordinary rules apply".
Who will be left standing?
Since the introduction of Bitcoin in 2009, the biggest reason for cryptocurrency exchange failure internationally has been as a result of security hacks. Not far behind, however, has been their inability to adhere to the applicable laws and regulations.
When regulations kick in locally, and the industry is increasingly actively monitored from a compliance perspective by the FSCA and other watchdogs, some of these VASPs will likely drop out of the race due to compliance struggles – as we have seen internationally.
This illustrates the importance for stakeholders to understand their preferred VASPs stance on regulations and in doing so mitigate their risk of being affected.
To remain in the game it is imperative that VASPs proactively manage ongoing regulatory risk as opposed trying to play catch-up and eventually falling behind once regulations are imposed.
What remains to be seen is whether it will only be the larger VASPs left standing or if there is scope for smaller players in a regulated crypto industry.
Wiehann Olivier is digital asset lead and partner at Mazars South Africa. Views expressed are his own.
