Wiehann Olivier | Lead | FinTech & Digital Asset | Partner | Mazars South Africa | mail me |

Cryptocurrency traders in South Africa are focused on understanding the tax implications of their transactions. These transactions are relative to the Income Tax Act. This has been challenging, as SARS has only stated that “the normal rules apply.” They have not provided authoritative guidance on cryptocurrency-related transactions or when profits are considered capital or income.

Exchange Control Regulations are equally important for cryptocurrency traders. This is especially true for those using foreign exchange platforms. The South African Reserve Bank (SARB) is now closely monitoring these activities.

Arbitrage opportunities and exchange control regulations

Some South African natural persons have leveraged cryptocurrency arbitrage opportunities using their R1 million SDA and R10 million FIA.

These opportunities arise because Exchange Control Regulations limit how much South African assets can be externalised annually. This creates price differences between local and international cryptocurrency markets. The SARB monitors these externalisation events, requiring natural persons to apply for their FIA through SARS e-filing.

Arbitrage traders use their SDA, FIA and ZAR to purchase foreign currencies like USD through brokers. They send the USD to foreign cryptocurrency exchanges to buy digital assets like Bitcoin (BTC) or USD-backed stablecoins. These digital assets are then returned to South Africa via the respective blockchains. Blockchains are not governed or controlled by any international intermediary. The assets are liquidated in the local market for profit.

Passive and bot trading

Apart from these arbitrage opportunities, many engage in passive trading between local and international exchanges, exploiting price differences in various cryptocurrency markets.

Investors also use techniques like high-frequency bot trading, where automated software executes high-volume trades based on predefined criteria, identifying opportunities and executing trades faster than humans.

Regulatory gaps and implications

The SARB’s oversight of blockchain-based digital assets has been limited. It does not oversee, supervise or regulate crypto assets. This is because cryptocurrency is not considered legal tender. Despite the Financial Sector Conduct Authority regulating Crypto Asset Service Providers, no laws specifically govern cryptocurrency use in South Africa.

Consequently, natural and non-natural persons can legally move digital assets from local to foreign exchanges or self-custody solutions. There are no restrictions, as local exchanges do not limit digital asset transfers to other sources. This allows them to externalise an unlimited value of digital assets beyond SARB’s restrictions. However, issues arise when investors buy foreign currency using these externalised digital assets.

Challenges in monitoring and compliance

Concerns arise when traders buy BTC locally using ZAR, send it to a foreign exchange, and purchase foreign currency. This triggers an externalisation event under Exchange Control Regulations. It explains why local exchanges do not facilitate liquidating digital assets into foreign currencies.

Possible contraventions occur when natural persons exceed their annual SDA and FIA allowances through arbitrage trading. This also happens when they trade between crypto and foreign currencies or purchase foreign currency on foreign cryptocurrency platforms without approval.

Traders can avoid triggering an externalisation event by swapping BTC for a USD-backed stablecoin. This only works if it does not affect trade profitability. Asset-backed cryptocurrencies fall under the definition of crypto assets, not foreign currency. This holds true even when linked to the value of a specific foreign currency.

Future considerations for SARB

The SARB faces challenges in accurately monitoring and restricting the “externalisation” of blockchain-based digital assets. It cannot easily request transactional data from foreign cryptocurrency exchanges. To address this, the SARB may mandate local exchanges to monitor and limit assets “externalised” to foreign platforms. These limits would be within the allowed thresholds for natural persons.

A critical issue is how the SARB will manage cryptocurrency returning to South Africa amid high-volume trades. In foreign currency, inflow and outflow movements cannot be netted against the allowed thresholds. If similar rules apply to digital assets, it could severely impact trading activities.

Additionally, the SARB must determine how to handle the transfer of cryptocurrencies from local exchanges to self-custody solutions. Devices like hardware wallets can be transported and used abroad, allowing digital assets to be exchanged for foreign currency without the SARB’s knowledge.

In conclusion

The SARB will likely consider the movement of digital assets to a self-custody solution as an externalisation of assets, necessitating stringent monitoring and regulation to prevent unauthorised externalisation events.

Finally, the ability to externalise assets within the allowed thresholds applies to natural persons only, raising the question of whether the SARB will disallow non-natural persons, such as trusts and companies, to purchase cryptocurrencies on local exchanges and move these assets to self-custody solutions or send these blockchain-based digital assets to a foreign source as means of payment.

Related FAQs: Cryptocurrency exchange control regulations

Q: What are the current exchange control regulations regarding the purchase of crypto assets in South Africa?

A: The current exchange control regulations require individuals to comply with the guidelines set by SARB’s Financial Surveillance Department. These guidelines include limits on the amount of foreign capital allowance and restrictions on dealing in foreign exchange. Individuals must ensure they are aware of the exchange control rules applicable to crypto assets.

Q: How do the exchange control rules affect crypto asset transactions?

A: Exchange control rules affect crypto asset transactions by imposing restrictions on the amount of capital that can be moved out of South Africa to purchase crypto assets abroad. Transactions must be reported and individuals may need to work with an authorised dealer in foreign exchange to ensure compliance.

Q: Is there a specific manual for exchanges regarding the regulation of crypto assets?

A: Yes, there is an exchanges manual for authorised dealers that provides guidelines on the regulation of crypto assets. This manual outlines the procedures that must be followed by exchanges operating within South Africa, ensuring compliance with tax and exchange control regulations.

Q: What role does the Intergovernmental Fintech Working Group play in the regulation of crypto assets?

A: The Intergovernmental Fintech Working Group plays a significant role in the regulation of crypto assets by facilitating discussions and developing frameworks that guide the legal and regulatory environment for crypto exchanges and assets in South Africa.

Q: How can one ensure tax compliance when dealing with crypto assets in South Africa?

A: To ensure tax compliance, individuals must report any income or gains derived from crypto asset transactions to the South African Revenue Service (SARS). It’s important to keep detailed records of all transactions and consult a tax professional to understand the implications of exchange control and tax regulations.

Q: Can I send funds abroad to purchase crypto assets under the foreign capital allowance?

A: Yes, individuals can send funds abroad to purchase crypto assets under the foreign capital allowance, but they must adhere to the limits set by the Financial Surveillance Department. It’s essential to comply with the exchange control rules to avoid penalties.

Q: What does it mean to deal in foreign exchange with limited authority in the context of crypto assets?

A: Dealing in foreign exchange with limited authority means that individuals or entities can only engage in specific transactions that are authorised by the Financial Surveillance Department. This can include certain crypto asset transactions, but they must operate within the confines of established regulations.

Q: Are there any restrictions on holding crypto assets abroad for South African residents?

A: Yes, there are restrictions on holding crypto assets abroad for South African residents. Such holdings must be declared and individuals must ensure they are in compliance with the exchange control rules and tax compliance requirements related to foreign assets.

Q: What should I consider before engaging with a crypto exchange in South Africa?

A: Before engaging with a crypto exchange in South Africa, consider the regulatory framework in place, the exchange’s compliance with the exchanges manual for authorised dealers and ensure they are registered and recognized by the relevant authorities, including adherence to tax and exchange control regulations.

Q: How does the regulation of crypto in South Africa compare to other countries?

A: The regulation of crypto in South Africa is evolving, with authorities actively developing frameworks to govern crypto assets. While some countries may have more established regulations, South Africa is working towards a balanced approach that considers both innovation and financial surveillance to protect consumers and the economy.