An Update On Crypto Assets – A Move Towards Regularisation

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Although the Blockchain and the various Crypto Assets used on the system are viewed as immensely useful, the official regulatory position of the South African legal system has not yet been established. It may take some time before any official position or regulation will be adopted, but it is refreshing to note that various groups and departments are in the process of developing a framework. With these updates, we are able to establish with some certainty the legal and definition status of crypto assets. This article aims to provide a summary of recent updates, in particular, the Intergovernmental Fintech Working Group (‘IFWG’) which recently confirmed its position on crypto assets, as well as recent international changes which may become relevant.[1]

The Status Quo

The IFWG takes the important step of establishing that despite the importance of Crypto Assets and other technologies as it relates to payments, raising capital and general investments, it is a constantly evolving technology. As such, it is important to then understand that the regulatory framework will have to be designed to keep pace. Of concern is that Crypto Assets are entirely unregulated and have not been defined with any precision. This results in legal uncertainty and presents a high level of risk to those who are involved with Crypto Assets.

The IFWG takes the stance that the definition, and name (i.e., Crypto Asset), is taken from representing the broad functionality of Crypto Assets, as opposed to the technology being only a unity of account. As such, the IFWG adopted the definition as being:

“A crypto asset is a digital representation of value that is not issued by a central bank, but is traded, transferred and stored electronically by natural and legal persons for the purpose of payment, investment and other forms of utility, and applies cryptography techniques in the underlying technology.”

The key difference between the previous position and the new is that instead of simply focusing on the only use case of Crypto Assets relating to the buying and selling of digital currency, it now extends its position to the following aspects:

  • payments;
  • capital raising through ICOs;
  • crypto-asset funds and derivatives:
  • market support, including services for safe storage of crypto assets and digital wallets.

The IFWG provides that Crypto Assets are a new financial innovation and that the technology should be adopted and accommodated within the existing regulatory framework. This, however, comes with the caveat that the authorities have to look deeper into the possible risks and ramifications. The IFWG provides that various risks must be properly assessed to ensure the following aspects are catered:

  • ensure the safety and efficiency of the financial system and financial institutions;
  • ensure consumer and investor protection, which includes financial consumer education;
  • minimise opportunities for regulatory arbitrage;
  • combat the circumvention of exchange control policy and regulations;
  • combat illegitimate cross-border financial flows, ML/TF;
  • combat tax evasion and impermissible tax avoidance arrangements; and
  • support financial inclusion efforts and the advancement of technological innovation in a responsible and balanced manner.

Taking the above into account, the IFWG provides that the  Financial Intelligence Act 31 of 2008, as amended (FICA) should be amended to include Crypto Asset Service Providers (CASP’s), including trading platforms, assets funds, or digital wallet providers, as accountable institutions. This will mean that all CASP’s will have to register like any other accountable institution. This will then mean that the CASP’s will have to adhere to the requirements of FICA. As such, all CASPS, in the case of non-compliance with FICA, may be kept accountable with the threat of criminal sanctions. This would have the effect of ensuring that various CASP’s, such as cryptocurrency trading platforms would be more accountable to its users.

The IFWG, however, continues to maintain that Crypto Assets should not be recognised as legal tender or be provided with a specific asset class, and does not provide certainty on the legal status of Crypto Assets.

Recent International Developments

Until very recently Crypto Assets had not graced the Court of any common law jurisdiction, which includes South Africa, Australia, Canada,  New Zealand and a host of other countries. However, a recent case heard in the New Zealand High Court on 8 April 2020 sheds some much-needed light on how that country, and potentially South African courts may interpret the legal status of the Crypto Assets. [2]

The New Zealand High Court was asked to asses the status of the crypto assets held by Cryptopia Limited, which company was hacked and which resulted in an amount of NZ$30 Million being stolen from its accounts.  Customers of the company invested by buying cryptocurrency which was then held by the company. In the process of liquidation the court was approached and asked to determine what, if anything, customers of Cryptopia were entitled to. The legal questions posed were whether the crypto assets (various types cryptocurrency) where to be considered as property and whether the assets where held in trust on behalf of its customers.

If the Court did not recognise the assets as property held in trust, then the remaining assets would have been distributed to all the creditors of the company in liquidation. This would have meant that the value of the customers investments would have been drastically reduced. The Court answered both questions in the affirmative by a reading of New Zealand company laws. The judgment resulted in the customers of Cryoptia being entitled to recover any remaining Crypto Assets from the company as the assets where viewed as their property being held in trust by the company.

Given that South Africa follow very similar laws, we are led to speculate that this may result in a similar decision being handed down by our Courts when it comes time for Crypto Assets to face judicial scrutiny.

Conclusion

Crypto Assets present a lucrative opportunity to many but are still mostly unregulated with the market being in a state of flux. Our regulatory mechanisms are slowly moving towards rationalising the legislative position but are far from developing the entire regulatory framework. It may be that the legal status of Crypto Assets will soon be provided with a sense of clarity, but until that time, it is always advisable to seek legal advice.

If you are anyone you know needs further advice or guidance on this or any other topic, contact an expert and SchoemanLaw today.

 

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[1]http://www.treasury.gov.za/comm_media/press/2019/CAR%20WG%20Consultation%20paper%20on%20crypto%20assets_final.pdf (accessed on 24 April 2020)

[2] https://www.courtsofnz.govt.nz/assets/cases/Ruscoe-v-Cryptopia-Ltd-in-liq-CIV-2019-409-544.pdf (accessed on 24 April 2020)

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