A distributed ledger is a digital asset base that records transactions and contracts, with changes reflected in all copies. A distributed ledger is maintained through cryptography, requiring a key and signatures to participate, i.e. the term ‘crypto asset’.

SARB Governor Lesetja Kganyago reportedly stated that practical exploration should lead to improved regulatory clarity for both innovators and regulators, and create a level playing field for all participants. This follows the recent release of the Intergovernmental Fintech Working Group (IFWG) Report on Project Khokha 2 in April 2022.

The Project Khokha 2 Report outlines the progress made towards the development of a Central Bank Digital Currency (CBDC), i.e., a cryptocurrency issued by a central authority such as SARB.

The South African CBDC Project

The Project Khokha 2 Report outlines the implications of a transition ‘to a financial services market that includes DLT-based tokens,’ stating that ‘standards will need to be developed, best practices established, and a supporting ecosystem will need to be put in place.’

The Report also distinguishes between CBDCs and private ‘money’, such as decentralised finance and stable coins. A South African CBDC would be issued by SARB and treated in a manner similar to money. Decentralised tokens are considered to be assets and pose risks that require a regulatory response.

Policy and Regulatory Implications

According to the IFWG Report, regulators may either view innovation through the lens of the existing legal dispensation, and / or issue clarification or guidance where the existing laws do not clearly apply, or develop new regulatory frameworks. However, in considering new regulation, a careful balance is needed between Government objectives and the need to keep up with technological developments.

The introduction of a CBDC would likely require the amendment of tax laws to accommodate digital tokens in financial markets. We should surely expect further changes from SARS and National Treasury in this regard. However, if CBDCs are essentially treated as tokenised ‘Rands’ and other crypto assets not as money, these amendments would not apply to both in the same way.

Crypto assets are defined as financial instruments in the Income Tax Act and are treated as assets, similar to a share or a loan, for example. A CBDC, however, would be treated more akin to money and therefore subject to more favourable tax treatment when exchanged.

Nevertheless, Government is certainly focused on vigilance and enforcement. The IFWG 2021 Position Paper on Crypto Assets outlines 25 recommendations on regulation in response to the adoption of crypto assets and DLT in South Africa. Recommendation 1 outlines 6 categories of service providers required to register with the SARB Financial Surveillance (FinSurv), the Financial Intelligence Centre (FIC), and / or the Financial Sector Conduct Authority (FSCA).

This will certainly have tax implications with crypto transactions regularly reported to the authorities as a regulatory requirement (or perhaps the ability to settle taxes in digital tokens). The contrary issue for authorities is keeping up with the demand in technological and auditing capabilities.

Compliance Implications for Crypto Investors

While investment in and exchange of crypto assets is not illegal in South Africa, it must be kept in mind that there are steps required to remain compliant, more so within the purview of regulatory oversight. This includes having an understanding of the parameters of what is, and is not, permitted in each case.

Unless taxpayers are given the tools and incentives to facilitate the correct disclosure and assessment of crypto asset transactions for tax purposes, we will likely continue seeing taxpayers and SARS grapple with compliance. We have already seen SARS enforcing tax compliance, with penalties of up to 100% raised following audit.

The private crypto asset sector will also need to adapt to the increased compliance burden in order to effectively operate within the South African market. For example, we may soon see the introduction of certificates issued by crypto asset service providers for tax or other regulatory compliance purposes.

If the commitment in the 2022 Budget Review to introduce new regulations for crypto assets in 2022 is upheld, we will see interesting changes in the South African crypto market. Crypto asset investors and service providers alike must ensure that they remain compliant.