Last week the South African High Court ruled that cryptocurrencies are not subject to the country’s exchange controls. The International Monetary Fund (IMF) has long argued that many people use cryptocurrencies to circumvent capital controls in emerging market economies because they can be transferred peer to peer. It is worried this could destabilize those economies if there is a flight of capital. In the South African case, the court ruled that cryptocurrency could neither be classified as ‘money’ or ‘capital’ under South Africa’s exchange control legislation.
Standard Bank sued the South African Reserve Bank (SARB) and others because the central bank claimed forfeiture over R16.4 million ($1m) held in a Standard Bank account where the client, Leo Cash and Carry, was insolvent and the bank had a lien over the funds. The central bank seized the funds because Leo Cash and Carry had bought R556 million ($37m) of Bitcoin in 2019 and transferred it offshore.
SARB lost its case because the Judge said the exchange control legislation had to be interpreted narrowly given the central bank’s extensive powers of forfeiture. Central bankers are often keen to clarify that cryptocurrencies, despite their name, are not currencies. In this case that worked against the central bank. Cryptocurrency could have been interpreted under one of two clauses.
One restricts the export of “currency, gold, securities, etc”. And the other limits the export of “capital”. “The answer lies in one’s interpretation of the word currency. Cryptocurrency is not money.” He quoted from an article provided by the SARB that said cryptocurrencies “are nothing more than codes on a digital ledger. Thus, they exist anywhere and everywhere and have a global nature.”
Turning to the other exchange control clause related to capital, previous South African legal cases debated the issue of whether intellectual property was capital, and the courts had found it was not. Later the legislation was amended to explicitly ensure that intellectual property was subject to capital controls. Hence, the Judge concluded that one could not interpret capital as covering cryptocurrency, and if there is an intention to include it, the law will need to be updated.
He observed that there’s been ample time for a legislative amendment. “Cryptocurrency has been in existence for over 15 years, one cannot say SARB has been caught napping,” the Judge wrote. The obvious conclusion for other central banks is to update exchange control rules to ensure they encompass cryptocurrencies.
Given this finding, there’s likely to be a surge in cryptocurrency activity in South Africa until new legislation is passed. South Africa regulates local cryptocurrency exchanges and it’s conceivable there could be a premium on Bitcoin prices in South Africa in the short term if demand is sufficiently high. Ironically, Standard Bank’s legal victory could prove costly. If there’s a rush to buy crypto to send money offshore, this could severely dent deposit balances, with the net cost being more than the R16.4 million recovered.
