South Africa: Digital assets not subject to forex controls

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Digital assets are not capital or currency and are not covered by South Africa’s foreign exchange controls, a local court has ruled.

The high-profile court case pitted Africa’s largest lender, Standard Bank (NASDAQ: SBGOF), against the South African Reserve Bank (SARB) and a local firm, Leo Cash & Carry (LCC). The central bank had seized over $1 million held in a Standard Bank account by the firm, which had been declared insolvent. Standard had placed a hold over the funds as the client owed an overdraft facility extended years ago.

However, the central bank declared the funds in the account as forfeited to the state as, before it collapsed, LCC had purchased $37 million worth of BTC and transferred it abroad without official authorization, breaching forex laws.

Standard Bank’s legal team argued that ‘crypto’ is neither currency nor legal tender in South Africa, so the Exchange Control Regulations didn’t apply.

In his ruling, Judge M.P Motha sided with Standard Bank, and according to him, “The answer lies in one’s interpretation of the word currency.”

“Cryptocurrency is not money. The construction that cryptocurrency is money, by looking at the definition of money which includes foreign currency, is strained and impractical,” the Pretoria High Court judge ruled.

The judge further ruled that ‘crypto’ “falls outside the ambit of capital.”

The judgement means that any flow of digital assets outside South Africa does not fall within the scope of the country’s “austere exchange control framework – at least for now,” says the local division of American law firm Baker McKenzie in its analysis.

Wiehann Olivier, the head of digital assets at consulting firm Forvis Mazars, concurs, noting that the ruling creates a loophole that allows unlimited external transfers of digital assets.

“Currently, you can externalize as much cryptocurrency without any limitation as imposed from the exchange control perspective,” he told local outlet Moneyweb.

‘Regulators will act swiftly’

“Given the risk this presents to the exchange control system as a whole, such legislative action seems inevitable, and it is likely that the Exchange Control Regulations will be amended in short order,” Baker McKenzie says.

Olivier believes that even the central bank wasn’t aware of the grey area, otherwise it would have plugged the loophole.

“In the background, [SARB] will most likely be making amendments to the exchange control regulations going forward, probably in the next 12-18 months because of the significance of the fact that you can externalize so much money without oversight,” he stated.

The primary factor that supported the ruling is that the SARB, like most other central banks, has clarified that digital assets are not legal currencies. Even in pro-crypto nations like Russia, digital asset payments remain prohibited.

This oversight could prove costly for South Africa as residents could purchase digital assets en masse and use them to send money offshore unchecked.

The need for digital asset regulations in South Africa

South Africa has the continent’s most advanced digital asset laws, which has allowed regulators to issue licenses to over 200 VASPs. However, the ruling has exposed some of the gaps that still exist.

In his ruling, Judge Motha noted that at this point, regulators could no longer claim digital assets as a nascent sector as their defense.

“Cryptocurrency has been in existence for over 15 years, one cannot say SARB has been caught napping,” the judge noted.

Desiree Reddy, the South African director at global law firm Norton Rose Fulbright, noted, “The decision underscores the pressing need for legislative reform to provide clarity and certainty in this rapidly evolving area.”

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