Crypto not subject to exchange controls
High court rules that crypto is not 'capital' or 'currency' under exchange control regulations.
An 'avalanche of cryptocurrency export' can now be expected … until a certain 'loophole' is closed. Picture: iStock
Cryptocurrencies are not subject to South African exchange control regulations, according to a recent Pretoria High Court case brought by Standard Bank against the South African Reserve Bank (Sarb).
Cryptocurrencies do not constitute 'capital' or 'currency' under SA's exchange control regulations.
'This means crypto assets are not subject to the country's strict exchange control regime, offering long-awaited clarity for the crypto industry,' says this analysis by law firm Baker McKenzie.
'While this judgment removes the need for Sarb approval to export crypto, the relief may be temporary, as future legislative amendments could reassert regulatory oversight. For now, the decision marks a significant shift in how digital assets are treated under South African financial law.
'This brings an end to a debate in the SA crypto asset industry as to whether cryptocurrencies require exchange control approval for their export out of South Africa.
'However, from experience on similar prior judgments on the Exchange Control Regulations, this reprieve may be short lived.'
This judgment makes it clear that until the law is amended, cryptocurrency transfers outside SA are not covered by exchange control rules.
'The decision underscores the pressing need for legislative reform to provide clarity and certainty in this rapidly evolving area,' according to Desiree Reddy and Ntokozo Ngubane at Norton Rose Fulbright.
ALSO READ: Bitcoin hits record high, surpasses R2 million
Facts of the case
Standard Bank was attempting to recover funds it had lent to Leo Cash and Carry (LCC) before it was liquidated in 2022.
The bank extended a R40 million overdraft facility to LCC in January 2020 on certain conditions, one of them being that it move its banking business to Standard Bank and close its account with Nedbank. The company was also required to place R10 million as collateral in a money market call account.
LCC started drawing down on the Standard Bank overdraft facility and immediately transferred R10 million to settle its overdraft with Nedbank.
A few weeks later, Sarb's Financial Surveillance department (FinSurv) instructed Standard Bank to place a freeze on LCC's accounts due to suspected exchange control violations.
FinSurv had been investigating a number of cryptocurrency transactions by individuals and entities linked to LCC. The cryptocurrencies, especially bitcoin (BTC), had been acquired on a local South African exchange and then transferred to foreign crypto exchanges.
Standard Bank complied with the instruction and placed a hold on LCC's accounts.
It later learned of a fraud perpetrated against it by several of its clients with links to LCC, and then launched a liquidation application against the company – which was granted in December 2021.
In February 2023, the Sarb declared that two amounts of R16.4 million held by Standard Bank and R10 million deposited by LCC with Nedbank had been forfeited to the state for violations of exchange control regulations.
It was this forfeiture that Standard Bank was attempting to have set aside.
Standard Bank succeeded in having FinSurv's forfeiture of the R16.4 million set aside, but failed in its attempts to recover the R10 million from Nedbank.
The court heard how, between September 2019 and March 2020, LCC sent more than 4 400 BTC, then valued at about R556 million, to Seychelles-based crypto exchange Huobi Global.
ALSO READ: Are you making money with crypto assets? Sars is looking for you
Ruling based on earlier case
The court refused to be drawn into rewriting the law to include cryptocurrencies under the definition of 'capital' as part of exchange control regulations.
It relied on a previous 2011 case, Oilwell v Protec International, where the Supreme Court of Appeal similarly refused Sarb's argument that intellectual property constituted 'capital' for exchange control purposes.
Some 15 months after the Oilwell ruling, exchange control regulations were amended to include intellectual property.
In light of the latest Standard bank ruling, the Sarb is expected to amend its regulations to include cryptocurrencies and close the loophole.
But what happened after the Oilwell ruling in 2011 was an intellectual property export free-for-all – it 'was readily exported outside of South Africa without any fear of triggering any exchange control implications,' says Baker McKenzie.
'Standard Bank v Sarb will certainly hasten this amendment and reform. However, until then, if the experience from Oilwell holds true, an avalanche of cryptocurrency export is imminent.'
This article was republished from Moneyweb. Read the original here.
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