Cryptocurrency – hero or villain?

12 May 2022 ,  Luhann PrinslooMark le Riche 540
You may have heard the terms ‘crypto’ or ‘cryptocurrency’ and you may even have dabbled in acquiring some Bitcoin. That said, although many are aware of the existence of crypto, there is generally a great lack of knowledge of what it is and how it functions. And while it can be relatively simple to engage with the various crypto trading platforms, it remains an extremely difficult concept for most to comprehend and understand the risks and challenges relating thereto. So, where does this leave cryptocurrency: - hero or villain?

Cryptocurrency is a digital currency over which governments generally have little control. The value of cryptocurrency is determinable by the number of people using that specific cryptocurrency, so that the more people invest and/or trade in cryptocurrencies, the more valuable it becomes. Therefore, the higher the demand, the greater the value of the cryptocurrency.

The villain of cryptocurrency is it’s volatility. This is primarily due to the ease with which news, headlines, and the remarks of the rich and famous can influence the value of cryptocurrency.

Its hero qualities on the other hand, is linked to its ease of use and how it enables and simplifies cross-border transactions, provides transactional freedom, opens markets, and offers state-of-the-art security via encryption known as cryptography, aiding the elimination of counterfeiting and double-spending.

At present though, the cryptocurrency industry is one which generally lacks a regulatory framework that offers adequate protection for the parties therein involved. Even in South Africa, we have in a short space of time witnessed some of the biggest crypto scandals to date resulting in significant losses for the investors that partook in these investments.  

South Africa's financial sector functions in a highly controlled environment to ensure adequate safeguards, controls and mechanisms are in place for all parties concerned. Yet, the Financial Sector Conduct Authority (“FSCA”), finds itself in a very restricted position given the absence of crypto-asset/currency regulation providing powers to the FSCA to take regulatory action against transgressors.

Any topic (such as cryptocurrency) that gains mass appeal and popularity necessitates strict regulation. Given the massive expansion of the crypto environment, the Intergovernmental Fintech Working Group (“IFWG”) was established in South Africa in 2016, with the purpose to oversee any approach to regulating the crypto environment. On June 11, 2021, the IFWG published its final Position Paper on Crypto Assets (the “Paper”) wherein it is proposed that South African crypto assets (including e.g. cryptocurrency) must transition from an unregulated environment to one overseen by the National Treasury, FSCA, the South African Reserve Bank, and the Financial Intelligence Centre. Importantly though, the regulation anticipated in this Paper, only applies to 'crypto-assets' and 'crypto-asset service providers' as defined in the Paper. Until authorities accordingly, expand the scope of such definition, any functions and duties not covered by ‘crypto asset service providers’ , will remain unregulated and part of an uncontrolled sector. 

Given that at present, cryptocurrency and the crypto sector is still largely unregulated in South Africa, it should raise a red flag to be careful and tread with caution if you are operating in this environment. For the moment it is therefore probably fair to say, that until more extensively regulated, cryptocurrency can be both hero and villain. If you are planning to expand your business into the crypto space or make cryptocurrency part of your e-commerce options, contact us to have a chat about how you can minimize your risk when doing so.

Disclaimer: This blog is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy has been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s). 
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