Cryptocurrency traders in South Africa have been focused on understanding the tax implications of their transactions under the Income Tax Act. This has proven challenging, as SA Revenue Services (Sars) has simply stated that “the normal rules apply,” without providing authoritative guidance on the various cryptocurrency transactions and when profits are considered capital or income.

However, exchange control regulations are no less important for traders, especially those using foreign cryptocurrency exchange platforms, as the South African Reserve Bank (Sarb) is now paying close attention to them.

Arbitrage opportunities and exchange control rules

Some South African individuals have exploited crypto arbitrage opportunities using the R1 million Single Discretionary Authorization (SDA) and the R10 million Foreign Investment Authorization (FIA). These opportunities arise because exchange control regulations limit the amount of South African assets that individuals can externalize each year, creating a price differential between the local and international cryptocurrency markets. Sarb monitors these externalization events by requiring individuals to apply for FIAs via Sars e-filing.

Arbitrage traders use their SDA, FIA and South African Rand (ZAR) to buy foreign currencies such as US Dollars (USD) through brokers. They send the USD to foreign cryptocurrency exchanges to buy digital assets such as Bitcoin (BTC) or USD-backed stablecoins. These digital assets are then returned to South Africa via their respective blockchains, which are not regulated or controlled by any international intermediary, and liquidated in the local market for a profit.

Passive and bot trading

Beyond these arbitrage opportunities, many engage in passive trading between local and international exchanges, exploiting price differences across different cryptocurrency markets. Investors also use techniques such as high-frequency bot trading, where automated software executes high-volume trades based on predetermined criteria, identifying opportunities and executing trades faster than humans.

Regulatory gaps and their consequences

The Sarb’s oversight of blockchain-based digital assets has been limited because it does not control, monitor or regulate crypto assets that are not considered legal tender. Although the Financial Conduct Authority regulates crypto asset service providers, there are no specific laws governing the use of cryptocurrency in South Africa. Consequently, individuals and non-individuals can legally move digital assets from local to foreign exchanges or self-custody solutions without restrictions, as local exchanges do not restrict the transfer of digital assets to other sources. This allows individuals and non-individuals to “externalise” unlimited value of digital assets outside of the restrictions imposed by the Sarb. However, problems arise when investors purchase foreign currencies using these “externalised” digital assets.

Monitoring and Compliance Issues

Concerns arise when traders buy BTC locally using ZAR, send it to a foreign exchange, and then use it to buy foreign currency. This triggers an externalization event under exchange control regulations, which helps ensure that local exchanges do not facilitate the liquidation of digital assets in foreign currencies.

Potential violations of foreign exchange control regulations occur when individuals exceed their annual SDA and FIA quotas through arbitrage trading and trade between cryptocurrency and foreign currencies, or when individuals or non-individuals purchase foreign currency on foreign cryptocurrency exchanges without the required authorization.

However, traders can bypass the triggering of this externalization event by exchanging BTC for a USD-backed stablecoin if this does not affect the profitability of the trade, as these asset-backed cryptocurrencies fall under the definition of cryptoassets and not foreign currency, regardless of the fact that they are pegged to the value of a specific foreign currency.

Future Considerations for Sarb

The Sarb faces significant challenges in accurately monitoring and limiting the “externalization” of blockchain-based digital assets, as it cannot easily request transaction data from foreign cryptocurrency exchanges. To address this issue, the Sarb may need to require local cryptocurrency exchanges to monitor and limit the value of assets “externalized” on foreign platforms to within the permitted thresholds for individuals.

Of critical importance is how Sarb will handle cryptocurrency returning to South Africa amid large trades between local and overseas exchanges. In the case of foreign exchange, these inflows and outflows cannot be combined with each other in terms of permitted thresholds. If similar rules were to apply to digital assets, this trading activity could be seriously impacted.

In addition, the Sarb must determine how to treat the transfer of cryptocurrencies from local exchanges to self-custody solutions such as hardware wallets. These devices, which can be easily transported and used across borders, allow digital assets to be offloaded and exchanged for foreign currency without the Sarb’s knowledge. The Sarb will likely view the transfer of digital assets to a self-custody solution as an externalization of assets, requiring strict monitoring and regulation to prevent unauthorized externalization events.

Finally, the ability to externalize assets within the permitted thresholds only applies to individuals, raising the question of whether Sarb will prohibit non-individuals, such as trusts and companies, from purchasing cryptocurrencies on local exchanges and transferring those assets to self-custody solutions or sending those blockchain-based digital assets to a foreign source as a means of payment.

Vihann Olivier is a partner in the audit department of Forvis Mazars.

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