For most people, one of the most fascinating aspects of cryptocurrency is the ability to bypass traditional financial intermediaries, such as banks, and directly control their funds. But what many people may not know is that cross-border crypto asset transactions require prior exchange control permission.
It is with great concern that I have noted lately that legal and/or financial advisors are incorrectly advising their clients, individuals, entities and even Crypto Asset Service Providers (CASPs) to enter into cross-border crypto asset transactions that are clearly in contravention of the Exchange Control Regulations.
Cross-border transactions
The mere fact that a Crypto Asset Service Provider (CASP) has been registered and authorised by the Financial Sector Conduct Authority (FSCA), does not mean that such CASP is permitted to enter into cross-border transactions that require prior exchange control permission in terms of the Exchange Control Regulations. It should be noted that prior exchange control permission needs to be obtained expressly and cannot be inferred.
Exchange Control Regulations 10(1)(c) provides that no person shall, except with permission and in accordance with such conditions as may be imposed, enter into any transaction whereby capital or the right to capital is directly or indirectly exported from the republic.
To provide funds to a CASP with the instruction to utilise the crypto asset mechanism to “transfer” the funds abroad for payment to a non-resident in foreign currency is a clear contravention of the provisions of Exchange Control Regulation 10(1)(c), since capital (Rand) is directly or indirectly exported from South Africa (into foreign currency to be paid to a non-resident), unless the necessary prior permission has been obtained from the Financial Surveillance Department of the South African Reserve Bank.
Exchange Control Regulation 3(1)(c), furthermore, provides that no person shall, without permission and in accordance with such conditions as may be imposed, make a payment to, or in favour, or on behalf of a person resident outside the republic, or place any sum to the credit of such person.
It is again clear that, unless the CASP or person concerned obtained prior permission from the Financial Surveillance Department to make a payment to a non-resident utilising the crypto asset mechanism, it would be a contravention of the provisions of Exchange Control Regulation 3(1)(c) as well.
The same concern is raised by me regarding incoming transfers utilising the crypto asset mechanism.
Declarations
Exchange Control Regulation 6(1) and 6(2) provide that every person resident in the republic, who becomes entitled to sell or to procure the sale of any foreign currency or of a foreign asset, shall within thirty (30) days from becoming so entitled, make or cause to be made, a declaration in writing of such foreign currency or foreign asset to the Financial Surveillance Department/Treasury.
Exchange Control Regulation 6(6), furthermore, provides that any foreign currency or any right in respect of which a declaration (as above) has been made, but which has not been purchased by the Financial Surveillance Department/Treasury, shall not be sold, transferred or otherwise disposed of without the permission of the Financial Surveillance Department/Treasury.
Accordingly, should an amount be payable to a South African Exchange Control Resident, including a CASP, by a non-resident, such foreign currency or foreign asset must first be declared and secondly may not be “transferred” to South Africa through the crypto asset mechanism without the prior permission of the Financial Surveillance Department. Any CASP should, therefore, ensure that, over and above any permission received from the FSCA, it also obtains the necessary prior permission from the Financial Surveillance Department to enter into cross-border Crypto Asset transactions.
The above-mentioned prior permission from the Financial Surveillance Department includes the opening of and maintaining of a crypto asset account held with an offshore crypto asset exchange by a CASP.
South African exchange control residents should obtain proper advice from an exchange control advisor/consultant in this regard.
Charles van Staden | Consultant | Exchange Control | Alant Gell & Martin (AGM) Inc | mail me |
