Friday, February 3, 2023
  • The South African Revenue Service (SARS) has verified that standard income tax laws apply to cryptocurrency and that taxpayers must report their cryptocurrency profits and losses as part of their taxable income
  • Regulation is also vital for cryptocurrency platforms because it establishes the groundwork for key connections with banking institutions
  • The rapid increase in crypto-trade in South Africa and the necessity to safeguard cryptocurrency investors and clients appear to be prompting the government to regulate virtual assets

South Africa is one of the first African countries to enact cryptocurrency trading and investment legislation, with financial and capital market officials projecting a surge in crypto operations.

This is in contrast to much of the rest of Africa. Many other nations’ central banks are instructing financial institutions to avoid executing transactions involving the exchange of crypto assets. This is despite a boom in market activity, with Kenya, Nigeria, Ghana, and South Africa becoming among the top markets in Africa for cryptocurrency adoption, transaction volumes, and investment.

Nigeria has one of the world’s largest crypto marketplaces in terms of users. Kenya is also a significant crypto market, ranking first for peer-to-peer crypto transactions.

The need for regulation in African crypto markets

The African cryptocurrency legal and regulatory framework is still in flux. While many financial institutions have yet to establish laws, opinion toward cryptocurrency legislation has matured, and regulatory frameworks are likely to be in place in the future.

Read: Africa: The urgent need for regulations to protect crypto investors from fraud and scams

The increased worry about client safety in the aftermath of crypto scams and fraud in Africa has fueled this trend.

Regulation in the crypto business is critical to ensuring that this new technology becomes widely adopted. Regulation is also vital for cryptocurrency platforms because it establishes the groundwork for key connections with banking institutions.

As conventional crypto exchanges and other open platforms experience difficulties resolving payments through banks, customers are increasingly turning to peer-to-peer trading and underground trading alternatives.

The United Nations said in its Africa Renewal journal that “given the continuously changing nature of the cryptocurrency world, one of the major hazards is a lack of effective regulation” in several African nations. According to the research, “regulation is exactly what the business requires.”

Governments in Africa have made various attempts to restrict crypto. Africa’s governments’ responses have ranged from nonchalant “Wild West” lack of control to explicit restrictions that have proven ineffectual in curbing commerce.

South Africa, which has the most advanced financial industry, is taking a different approach, anticipating a surge in crypto commerce in the nation and throughout the African continent. Cryptocurrencies are already recognized as an investment and taxable asset in the country.

“Crypto assets must remain outside of the regulatory purview of South Africa,” argues an intergovernmental working committee entrusted with establishing new regulations.

Cryptocurrency boom and regulation in South Africa

The rapid increase in crypto-trade in South Africa and the necessity to safeguard cryptocurrency investors and clients appear to be prompting the government to regulate virtual assets.

Read: How the Federal Reserve affects the entire cryptocurrency market

According to a working group study, daily crypto asset trading prices in South Africa “exceeded $145 million for the first time” in January 2021. The new restrictions are intended to increase transparency and reduce cryptocurrency usage for illegal purposes.

Regulations should cover customer identity and verification, customer due diligence, retaining the client and transactional information records, and monitoring suspicious and unusual behaviour to combat money laundering and terrorism funding.

Furthermore, the South African Reserve Bank keeps a careful eye on cryptocurrency assets and service providers for “cross-border financial movements.”

Crypto taxation in South Africa

Among the goals of supervising crypto assets in South Africa is to prevent tax evasion and illegal tax avoidance schemes. The South African Revenue Service (SARS) has verified that standard income tax laws apply to cryptocurrency and that taxpayers must report their cryptocurrency profits and losses as part of their taxable income.

A crypto asset can potentially be liable for capital gains if it is held and sold with the goal of profit.

There is a clear VAT policy, which states that transacting in crypto assets does not generate VAT. However, if the VAT registration requirement is satisfied, services linked to such transactions may be subject to VAT.

The rapid increase in crypto-trade in South Africa and the necessity to safeguard cryptocurrency investors and clients appear to be prompting the government to regulate virtual assets. web3africa.news

The rapid increase in crypto-trade in South Africa and the necessity to safeguard cryptocurrency investors and clients appear to be prompting the government to regulate virtual assets. [Photo/ Michalsons]

Despite these steps, according to the regulatory regime, South Africa intends to limit banks and other financial institutions’ exposure to crypto assets “since the risk might over time spill over” and generate financial stability problems.

Financial regulatory agencies in Nigeria, Zimbabwe, and Kenya have already prohibited banks from processing cryptocurrency transactions, leading to the use of mobile money and other digital payment methods to settle crypto transactions.

According to LocalBitcoins–a peer-to-peer trading website–mobile money platform M-Pesa is the most frequent payment method in Kenya, followed by Pesalink, a payments transfer platform. The number of crypto traders on the platform has gradually increased in the previous year.

Read: Kenya: KenGen readies to offer geothermal energy to bitcoin miners

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