(Unregulated) Crypto Assets – do your homework before joining the digital asset hype

• South Africa

• Crypto assets

01-09-2022

With all the recent hype surrounding crypto assets (and the rollercoaster ride that the value of cryptocurrencies has been on over the past few months), and the exorbitant amounts that people have been paying for non-fungible tokens (“NFTs”), we thought that it would be a good idea to raise awareness on some of the risks associated with crypto assets, and NFTs.

Firstly, and sorry for the technical jargon, crypto assets are digital assets in which value is created, ownership is verified, and the asset is protected, using public ledgers over the internet. NFTs are digital tokens with unique qualities and values that are attached either to a digital item, or physical item (but it is not the physical item itself), that are irreplicable and are usually recorded on a blockchain (which is an undisputed and shared ledger that records these assets, and all their associated transactions). The premise of an NFT is that it is a supposedly unique, digital asset that is capable of having only one owner at a time. The ownership of an NFT is recorded with a uniqueID through a smart contract within a blockchain. The popularity of crypto assets, such as Bitcoin, has led to an explosion in the market for NFT artwork, where people seek to be the unique owner of a ‘piece’ digital artwork. The most expensive NFT sold to date has been Pak’s ‘The Merge’, which was bought for the ridiculous price of $91.8m.

Crypto assets (even in the form of so-called crypto currencies) are digital assets, and, as they are not regulated, are not a form of currency under banking legislation, and are not generally accepted for payment for your daily expenses (although you may be able to use your cryptocurrency to purchase your next NFT artwork). As crypto assets are in digital form, and spread across multiple computers, there is no tangible asset that you can get your grubby paws on; just some 'asset' that exists electronically, over a peer-to-peer system, with nothing governing the system, and no government authority that can step in if things don’t go as planned.

In addition, as with most new innovations, there are people who seek to exploit the innovation for their own, illegal or unlawful gains, and consequently with the rise in popularity of crypto assets and NFTs there has been a corresponding rise in the number of scams involving this technology.

While there are various pieces of legislation which may be applied to the regulation of crypto assets, there is currently no specific or purposely drafted legislation, or any regulatory authority, in South Africa that protects people who wish to enter the world of crypto asset and NFT trading which makes it very easy for someone new to the digital market to be taken advantage of. This is not a situation which is unique to South Africa, and is something that various governments around the world have been struggling with for some time.

In South Africa though, the Financial Sector Conduct Authority, in collaboration with other regulatory bodies, has been working on the issue of crypto asset regulation since 2014, and recently the Director General of the South African Reserve Bank stated that South Africa can expect formal regulations regarding crypto assets by the end of 2023.

The current approach of the South African government is that existing legislation can be adapted to cater for the use of crypto assets within the South African economy, with the following measures, amongst others, being considered for the regulation of crypto assets:

• expanding the definition of an accountable institution under the Financial Intelligence Centre Act 38 of 2001 to include crypto asset service providers, which will mitigate the risks associated with terrorist and money laundering activities;
• expanding the definition of financial products under the Financial Advisory and Intermediary Services Act 37 of 2002 (“FAIS”) to include crypto assets which will deem any entity or individual that provides advice on crypto assets and related services to be a financial service provider, and therefore required to comply with FAIS requirements; and
• utilising the Exchange Control Regulations of 1961 to improve upon the monitoring and reporting of crypto asset trading.

Until formal regulations governing crypto assets are in force, neither the SARB, nor the South African government, will (or will be able) to intervene should anything go wrong. It is therefore up to you to ensure that you have done all your homework into the crypto asset and the crypto asset trading platform that you plan on using before you take the plunge and shell out your hard-earned (hard currency) on a digital asset that only exists, and has purported value, because it exists somewhere on a bunch of connected computers, over which you (and regulatory authorities) have no control.

If you have any questions, or any concerns or doubts, regarding a particular crypto asset that you have your eye on, please contact us, and we can assist you with doing your digital homework / due diligence on the asset / trading platform.