South Africa’s crypto crackdown puts R2.2 billion on ice

Digital-asset companies operating in South Africa have halted billions of rand in deals over proposed regulatory changes.

These regulations would include cryptocurrencies under the country’s exchange-control regime and limit their use in cross-border transactions, people familiar with the matter said. 

At least three deals collectively valued at R2.2 billion have been put on hold directly due to the proposed changes, according to people who asked not to be identified as they aren’t authorised to speak publicly. 

The transactions include an investment from a private equity firm and others that would promote capital formation for small businesses and help with corporate treasury management, the people said.

The rules could push legitimate digital-asset transactions offshore or underground, they said. 

South Africa is the continent’s second-largest cryptoasset market, with firms using stablecoins to repatriate profits and receive dividends from subsidiaries across the region, in part to navigate hard-currency shortages in some of those markets. 

Tether’s USDT is the preferred stablecoin locally, with on-chain transactions across three of the country’s largest licensed cryptocurrency exchanges totalling nearly R27 billion in the year through April, central bank data show.

Stablecoins are a type of cryptocurrency typically pegged to traditional assets like the dollar, and have grown in popularity over the past year.

South Africa doesn’t consider cryptoassets as legal tender. Its central bank has previously called them an emerging risk to financial stability, and said it watches activity closely, given the growth in global stablecoin activity. 

The proposed rules come as the government seeks to update the nine-decade-old Currency and Exchanges Act to include cryptoassets in the nation’s capital-flow management regime.

This will strengthen the authorities’ ability to monitor cross-border transactions, minimise the risk of regulatory arbitrage and combat illicit financial flows. 

The government first published the proposals in April with a call for comment from interested parties.

While it released a detailed draft manual for cross-border transactions last month, it hasn’t yet incorporated input from interested parties due to the timing of the release and the volume of comments received.

Digital-asset companies are unhappy that the state didn’t consider their input, with some executives seeing the proposed rules as prejudicial to new technology that’s helping lower transaction fees, the people said.

If passed as is, the laws could weigh on billions of rand in government tax revenue and may prompt legal action by companies, they said.    

The draft rules remain subject to refinement as authorities consider public comments and engage with stakeholders, the central bank said in response to questions, adding that submissions can be made until Sept. 30.  

“These are draft requirements, and National Treasury and the SARB, in collaboration with other regulators, are still engaging on various aspects of cryptoassets, including the approach to stablecoins,” it said.

“In addition, local and global developments continue to be closely monitored to inform our approach and regulatory response.”