South Africa’s exchange control regulations aim to protect our capital and South Africa’s fiscal health. Legislation mandates the South African Reserve Bank (“SARB”) to oversee the movement of “capital” to protect the rand’s value and manage our balance of payments.
As the global economy continues to develop within the Fourth Industrial Revolution (“4IR”), new, or alternative, asset classes like cryptocurrency increasingly challenge the legal framework that has been designed without the 4IR or its predecessors in mind.
This has most recently been highlighted in the matter of Standard Bank v SARB
The Legal Landscape: Crypto and Exchange Control
Cryptocurrency is not recognised as legal tender, nor does SARB regulate it. In other words, there is currently no formal compliance framework that applies when moving crypto assets cross-border. This gap creates complexity within the context of exchange control, where SARB’s oversight traditionally hinges on the flow of “capital” or the right to capital.
This led to the question: does the movement of crypto assets across borders contravene exchange control regulations?
Standard Bank v SARB: What Did the Court Say?
In Standard Bank v SARB, the High Court of South Africa (Gauteng division, “the court”) had to consider whether the transfer of cryptocurrency to an offshore wallet amounted to a contravention of exchange control regulations. The court held that crypto assets are not currently subject to the same foreign investment and direct investment allowances that apply to conventional currency and / or assets. The implication is that, under current law, individuals may legally externalise crypto assets without being subject to the respective allowances.
What does this mean?
Practically crypto held in a local wallet like Luno may be transferred to an offshore wallet like MetaMask without being subject to SARB’s allowances. It is important to note that when the cryptocurrency is converted to a US-backed stable coin, for instance, or conventional investments like an investment portfolio or an endowment wrapper, it would trigger exchange control compliance per the usual allowances.
This case highlights a serious loophole in South Africa’s exchange control regime as the SARB cannot easily monitor the cross-border movement of crypto assets without a legal and regulatory framework in place.It is likely that this loophole will not remain open indefinitely. SARB has appealed the court a quo’s decision, and this case has most likely expedited regulatory reform either by legislation or revised policy frameworks (i.e. directives).
A cautious and well-documented approach to cross-border crypto transactions is advisable in the meantime. We will continue to monitor developments and keep our clients informed as the regulatory landscape relating to crypto assets develops.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)