Regulating crypto: Plaudits for SA’s approach with timely lessons for digital currency investors

In the third episode of our four-part series, Unpacking Crypto, Luno’s GM Marius Reitz and Bowman’s partner Joshua Janks have the perfect platform to discuss SA’s digital currency regulation. The multi-billion-dollar collapse of Bahamas-based FTX, which went into bankruptcy over the weekend, supports the wisdom of the slow-but-thorough approach by SA’s regulators. The duo discusses the current state of regulation in SA, providing context for the 19 October declaration by the Financial Sector Conduct Authority that crypto assets are a financial product.

Excerpts from the interview with Marius Reitz and Joshua Janks

Marius Reitz on whether the FTX bankruptcy will scare the users of Luno

I think it has definitely incurred some damage to the industry. But if we take a step back, we think people, over the long run, will use crypto in their daily lives. We see cryptocurrency as an alternative technology to bring the same financial services and to solve the same financial problems, but just in a better way. So we think that cryptocurrency, the industry will mimic that of existing financial services to some extent. People’s behaviour with money won’t change dramatically. There will still be a need for people to save money, spend money, invest and also to borrow. Secondly, we think the same regulatory forces, the same competitive forces and the same trust-building forces will still be at play. People will always have a need to trust intermediaries or central parties in these financial matters as far as the mass market goes. So we believe cryptocurrency is driving financial services to a more decentralised state. But it’s unlikely we will see fully decentralised financial intermediaries, and therefore we will need to see some form of rules and regulations in the industry to protect consumers. So I think what happens in the industry, in the global crypto market over the last week or so, highlights the need for regulation and especially regulation that’s proportionate with the level of risk. And at this point, it is sitting with the cryptocurrency asset service providers that provide these services to prospective investors or prospective customers and in that regard, I have to commend the local regulators in South Africa for the work they have done over the last couple of years and more notably, the Financial Sector Conduct Authority recently. That is the intervention in South Africa that will play a crucial part in preventing a similar situation from playing out locally to what we have seen playing out globally at this point.

Joshua Janks on whether FTX’s foundation would have been a warning of its future collapse

I don’t think what happened to FTX is necessarily a problem with crypto or decentralised finance. This seems to have been, in its simplest form, a type of fraud or corrupt act, which can happen in any industry. This is where we need sensible regulation and proportionate regulation to give a landscape where these things don’t necessarily happen. But, it is regulation that you need in every industry; we have seen fraud and corruption across the board and in different industries. Alec, you are quite well known in having covered some of these things that have happened and that is not because of a lack of regulation in the particular industry. So, I think what we need is to find the right balance that allows the industry to continue to grow, to find the use cases outside of just as a speculative asset that gives people not only the confidence that their assets, their wealth is protected, but that it allows the flexibility of this type of an instrument. This is where we need to head. As you said, clearly there were some alarm bells with what was going on, but I don’t believe  those were crypto-focused alarm bells. I think those were just having a structure, young person, and little governance in place; that was more the issue than anything purely crypto-focused.

Marius on what the impacts are on regulation in South Africa and how it is reflecting or affecting the global market

I think it’s important to note that there has been a clear global trend as far as regulation goes over the last year or so. So we’ve seen licence regimes in South East Asia and in Europe and in many other parts of the world. And I think the first point is that what we have seen in South Africa, on 19 October, is in line with the global trend. It’s not unique to South Africa and that is a good thing because it prevents regulatory arbitrage where people can take advantage because of different regulations in different countries. What we have seen over the last couple of years is that there’s a really strong demand for cryptocurrency from consumers, and it could be an emerging market thing where you have a new class of investors coming online for the first time because the socio-economic circumstances have improved vastly; they now have access to the internet, they now have first-time job opportunities and disposable income. So we are seeing a new type of, let’s call it, retail investor emerge across pan Africa. And so that’s why we’ve seen a massive demand for cryptocurrency as an investment specifically. It’s not really about hedging against inflation. You know, to some extent, yes there is some level of sophistication, but at large it’s because of access to a financial service. As a result of advances and progress being made from socio-economic development, you know, that aspect of things. There is clear consumer demand and consumer protection is paramount. And again, we have to commend the local regulators as part of the Inter-Governmental FinTech Working Group for identifying the risks, which is that it’s still relatively difficult for the average person to access crypto, and you can do so through some of the more legitimate platforms like Luno. But there are myriad other ways in which you can access cryptocurrency. And what we’ve seen in some other markets across Africa and globally is that where there is a ban, an outright ban on cryptocurrency activity or, for example, on banks providing banking services to cryptocurrency platforms. You tend to see less collaboration between the private sector and the regulators. You tend to see innovation slowing down. You tend to see the use cases not being well understood from a regulatory perspective, and that slows down the progress being made on the regulatory front. It also leads to regulations that are not fit for purpose in the local market. So I think the regulators got it right and they’ve allowed the industry to grow but, at the same time, remaining in touch and keeping in touch with the data. Currently, by far the biggest use case for crypto in South Africa is as an investment, as a speculative essence, not necessarily as a means of payment. Sure, we are at the very early stages of that and we have seen different adoption curves globally. What it means is that the rate of adoption and the use cases won’t grow uniformly across global markets.Different use cases will emerge according to different regions and different markets at different times. But currently, in South Africa, the biggest use case is investing.

Joshua on whether regulation can be a negative for the industry

Well, absolutely. Marius used the word innovation today, and I think that is the key here. Right. This is an industry that is all about innovation. I think there are some amazing use cases and we are really at the early stages. We work with a number of businesses that are trying to unlock opportunities. There are a lot of cross-border remittance opportunities. There are lots of things helping people who don’t have access to the formal banking sector that can be done through the use of crypto. If you regulate it too stringently, you will probably stifle that innovation. You will deny access to those opportunities. And that’s where the regulators need to tread carefully. I think if they find the right balance between protecting the market, protecting consumers, giving confidence to people who are using this, there is oversight but not stifling innovation. I think that’s the magic line, hopefully. I believe the regulators have done a very good job; they’ve listened to the industry. They’ve listened to what’s happened around the world. And they are looking to try and find that kind of magical point and hopefully they continue to do that.

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