Treasury’s crypto rethink: round one won, what comes next is what counts

Finance Minister Enoch Godongwana says Treasury will rethink its draft crypto rules. Thousands of objections forced the shift. James Caw and the BizNews Bitcoin community call it round one won. But they have heard reassurances before. In May, officials said they would not criminalise crypto. In August, moving Bitcoin into your own wallet became a regulated export. With R2.2 billion of investment on hold, Caw sets out what the second draft must fix..This article was compiled by members of the BizNews Bitcoin community, led by James Caw, founder of SimplB.Treasury and the Reserve Bank will rewrite their crypto capital flow rules after thousands of public comments. Members of the BizNews Bitcoin community explain what went wrong and what the second draft must fix..On 21 October, Finance Minister Enoch Godongwana told Parliament that Treasury and the Reserve Bank had received “thousands of comments” on their draft crypto rules and needed a different approach. “We must aim to shift away from pre-approvals,” he said. A second draft, guided by Financial Stability Board recommendations, will follow for comment.Many of us in this community were among those thousands.Stafford Masie was at the SARB on the morning of the speech. His message to our group that evening read: “Round 1 won... several more rounds left here. They’re listening and we should applaud this (for now).”We agree, including the two words in brackets. The Minister gave no timeline and named no provision that will change. In May the authorities also told us they had heard our concerns. What followed in August was harsher than the draft we had objected to..From reassurance in May to a one-way door in AugustThe draft Capital Flow Management Regulations, gazetted on 17 April, would replace the 1961 Exchange Control Regulations and bring crypto under exchange control for the first time. On 15 May, after a wave of objections, Treasury and the SARB extended the deadline and said they did not intend “to criminalise the possession of crypto assets”. The draft text stayed as it was. Many of us made submissions on it, and again on the SARB manual that followed.That manual, published on 3 August, treats a transfer from a local crypto exchange “to a non-custodial wallet” as an export of capital. Moving Bitcoin to a hardware wallet in your own study would count as sending it out of the country. A Krugerrand in your home safe is not an export. A hardware wallet in your study should not be either. As an individual this would use your allowance, but for a company this would require SARB approvals. Bringing it back to a local exchange was listed as non-permissible, which left an international exchange as the only way home, out of sight of South African regulators.Companies and trusts could not move crypto across the border at all. The manual also drew no distinction between types of crypto asset.In May the state said it did not intend to criminalise possession. In August it proposed to treat holding your own keys as a regulated export.VALR CEO Farzam Ehsani reported R2.2 billion of foreign investment put on hold. Leading exchanges and platforms, including VALR, Luno and AltCoinTrader, the Crypto Asset Association of South Africa and BizNews Tribe member SimplB, formed the CATASTROPHE coalition. Thousands more comments arrived by 30 September..A reach well beyond cryptoBitcoin specialists were not the only ones alarmed. The draft defines “capital” as “anything with a monetary value”, crypto included. Even Magnus Heystek warned our group in early May that it reached all of a saver’s assets, pushing people out of gold, dollars and crypto and into a currency he estimates has lost 60% of its value in a decade.Regulation 8 requires anyone holding foreign currency or crypto above a “determined threshold” to declare it within 30 days, after which Treasury, an authorised dealer or an authorised crypto exchange may buy it from them. Payment is in Rand, at no less than market value on the day of purchase. The draft does not say who decides what that market value is. The threshold itself was left to a later ministerial notice. No offence has to be proven first, which sits poorly with the protection against arbitrary deprivation of property in Section 25 of the Constitution.Regulation 25(5) goes further, requiring the owner of forfeited crypto to hand over “all and any passwords, personal identification numbers or codes”. For Bitcoin that means the seed phrase, which gives whoever sees it permanent control of the coins and the wallet’s full history. Privacy (Section 14) and the protection against self-incrimination (Section 35) are both in play. Penalties run to R1 million, or the asset’s value if higher, and 5 years in prison.As the IRR’s Dr Anthea Jeffery noted on BizNews, the manual admits its conditions carry “no statutory force” yet have “the effect of law”. The courts are split on whether the 1933 Act even reaches crypto. In Standard Bank v SARB, the High Court held that crypto assets fall outside the 1961 Exchange Control Regulations. In Mangundhla v SARB, decided on 1 June, the same Division reached the opposite conclusion and found Bitcoin to be both “capital” and “money”.A South African High Court has called Bitcoin money. With two judgments of equal standing pointing in opposite directions, only the Supreme Court of Appeal can settle the legal question. A question of that weight belongs with Parliament..Read more:.BNC#9 | John Endres: IRR polling data shows South Africans all want the same thing. Growth..Scrap exchange controlIRR CEO John Endres made the strongest case the day after the speech. Exchange controls were introduced in 1961 to stop capital fleeing after Sharpeville and today mainly keep investment out, with fixed investment below 14% of GDP. The government, he said, “should not rewrite the rulebook. It should throw it away.” VALR’s Farzam Ehsani agrees, provided reporting stays in place.It already is. Licensed exchanges are accountable institutions under the FIC Act, report suspicious transactions and apply the Travel Rule. SARS is adopting the OECD’s crypto reporting standard. A pre-approval regime on top would slow lawful business and tell the authorities little they cannot already find out.If controls stay, separate Bitcoin from issued assetsTreating Bitcoin and every other crypto asset as one thing is the primary flaw in both drafts. Three different assets sit under that single definition: issuerless Bitcoin, stablecoins backed by currency or treasury bills and crypto assets issued by a company or foundation. Recognise them separately and South Africa can build rules that fit each one.The Minister’s own benchmark points the same way. The FSB applies “same activity, same risk, same regulation”. A stablecoin is a liability of its issuer, which can freeze it or fail. An issued token depends on its promoter. Bitcoin has neither, with a fixed supply of 21 million and settles peer to peer, around the clock, with no intermediary. The United States already draws this line: the CFTC treats Bitcoin as a commodity, while the SEC pursued issuer-promoted tokens such as XRP as securities..Holding your own asset is not Capital FlightPeer-to-peer Bitcoin worked before these rules and will keep working after them, as one long-standing member of our community pointed out. Prohibition pushes demand out of sight. A one-way door simply sends Bitcoin where the authorities cannot look.The fix starts with one principle. A change in custody should not, by itself, count as an export of capital. A South African who moves Bitcoin from a local exchange into their own wallet has changed how they secure an asset. The questions that count are beneficial ownership, residency and whether ownership has actually passed to a non-resident. That test should work in both directions, so Bitcoin can return to a local exchange as easily as it left.The cost of getting this wrong reaches well beyond existing holders. Clear, workable rules can attract investment, keep entrepreneurs here and position South Africa to build financial infrastructure for the rest of Africa. Unworkable ones send those businesses, and the activity regulators want sight of, somewhere else. The R2.2 billion already on hold shows how quickly that happens.The way forwardOur first preference is to scrap exchange control. If the second draft keeps it, it should at least:Write the May assurances into the Regulations, with forced disposal only on proof of an offence and under judicial oversight.Recognise issuerless Bitcoin, stablecoins and issued crypto assets as three separate assets.Ban demands for seed phrases and private keys, relying on blockchain transparency, exchange reporting and the Travel Rule.Judge transfers between a licensed exchange and a client’s own wallet by beneficial ownership, residency and whether ownership has passed to a non-resident, in both directions, so that a change in custody alone is never an export.Publish the threshold, move to reporting after the fact and allow at least 24 months to transition.Leave the bigger question of crypto and exchange control to Parliament.A standing working group of Treasury, the SARB and experienced practitioners would help get the detail right. The industry has offered its time.Back in May, when some in our group doubted that comments would change anything, another member put the case for objecting. Pushback seldom stops a government outright. It makes each move slower, narrower and more politically expensive. October proved it once.Stafford Masie summed up where this leaves us:“Round one won means the objections have secured a hearing. The next victory must be a workable framework. Moving your own Bitcoin into your own wallet should not, by itself, constitute capital flight. South Africa needs rules grounded in ownership, residency and actual economic activity, with proportionate reporting and protection for lawful self custody. We should applaud the willingness to listen and remain fully engaged until that willingness is reflected in the text. The stakes include the investment, talent and financial infrastructure South Africa could attract…or lose.”When the second draft appears, we will read it against what was promised and comment again. We hope everyone who commented the first time will do the same..*This article was compiled by members of the BizNews Bitcoin community, led by James Caw, founder of SimplB.

Treasury’s crypto rethink: round one won, what comes next is what counts

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