Inside South Africa’s Crypto Loophole

This matter arose from an application brought by the Standard Bank of South Africa Limited (“Standard Bank”), seeking inter alia, to have the court set aside a forfeiture order issued by the first respondent, the South African Reserve Bank (“SARB”). The forfeiture order was issued on the basis of a reasonable suspicion that Leo Cash and Carry (Pty) Ltd (“LCC”), a Standard Bank customer, had contravened certain exchange control regulations.

LCC obtained an overdraft facility from Standard Bank, secured by a pledge. Shortly thereafter, SARB requested that Standard Bank freeze all of LCC’s accounts on the basis that certain individuals and companies, including LCC, were under investigation for alleged violations of exchange control regulations.

One of the main points of contention was whether LCC contravened the following Exchange Control Regulations of 1961, published pursuant to the Currency and Exchanges Act 9 of 1933, (“Exchange Control Regulations”) by purchasing cryptocurrencies in South Africa and transferring them to foreign exchanges: 

1. Regulation 3(1)(c), which prohibits individuals and businesses from participating in any activities or transactions involving foreign currency without the permission of the Treasury; or
2. Regulation 10(1)(c) prohibits the export of capital from South Africa without permission of the Treasury.

In order for LCC to have contravened the Exchange Control Regulations, cryptocurrency would need to fall within the scope of the term ‘currency’ or be considered a legal tender under South African law. The High Court in Pretoria examined the meaning of ‘currency’ in the context of Regulation 3(1)(c) and found this not to be the case, on the basis that it cannot be deposited in the traditional banking sense and is, instead, treated as a digital asset which can be bought and sold. The court therefore concluded that LCC’s transfer of cryptocurrency to foreign exchanges did not fall within the ambit of the Exchange Control Regulations. As such, LCC was not legally required to obtain permission from, or notify, SARB when it transferred the cryptocurrencies outside South Africa.

Similarly, in relation to Regulation 10(1)(c), the court found that cryptocurrency does not fall within the scope of ‘capital’. It emphasised that a restrictive interpretation must be applied when assessing such matters, and that if the Exchange Control Regulations intended for cryptocurrency to be regarded as ‘capital’, ‘money’ or ‘legal tender’ it would have included a specific provision for it, similar to those governing intellectual property rights. As a result, and since the funds were not subject to the Exchange Control Regulations, the forfeiture order was set aside and Standard Bank was entitled to retain the funds held in its account.

In its concluding remarks, the court acknowledged the absence of a regulatory framework for cryptocurrency in South Africa. Consequently, parties to transactions involving cryptocurrency may face significant risk in the event of loss, as they are not afforded any substantial regulatory protection.

Cryptocurrency owners and users may find reassurance in the fact that transactions involving cryptocurrency do not require approval or facilitation by the South African Reserve Bank (SARB), however, with the rapid evolution of technology and digital currency, it is critical that a regulatory framework governing these digital assets be established. While the Financial Advisory and Intermediary Services Act provides partial regulation of cryptocurrency, the lack of a holistic and substantive framework creates confusion and allows opportunists to exploit the system.

It is worth noting that SARB has appealed the decision and the final position on the exchange control regulatory treatment of cryptocurrency remains unknown pending the outcome of the appeal.

Navigating Exchange Control Regulations and cryptocurrency in South Africa can be complex. We have experienced corporate, commercial, tax and exchange control teams to assist with your queries on cryptocurrency, exchange control and to provide general transactional support. Contact our team of experts for practical guidance tailored for your needs.