South Africans are increasingly buying cryptocurrencies, many exploring bitcoin or Ethereum as investments for the first time on cryptocurrency platform Luno.
Anyone buying cryptocurrency should not only learn as much as they can about the crypto world, but they must also arm themselves with information about how cryptocurrencies are currently viewed by regulators, writes Marius Reitz, GM for Africa at Luno.
Why labels matter
In the global financial world, labels give regulators clarity in terms of where something fits into an existing framework.
Luno supports sensible regulation as it strengthens the entire industry, offering greater clarity for law enforcement and protection for investors. It’s essential for governments to put adequate controls in place for any disruptive new technology such as cryptocurrency so it’s not used to support crime.
The problem is that to regulate something, you need to know which box to put it in. Putting something in one category implicitly excludes it from other categories. Cryptocurrencies are complex because different people use and regard them in different ways: cryptocurrency has been labelled as a commodity, a security and a currency.
The debate has been raging for a while and is set to continue because boundaries between labels may blur.
The South African Revenue Service (SARS) views cryptocurrency as an intangible asset. This means that any income received or accrued from cryptocurrencies is taxable. The income can either be seen as revenue or capital.
Crypto as a commodity
In the US, the Commodities Futures Trading Commission (CFTC) declared cryptocurrency to be a commodity, indirectly asserting that it’s not a currency, investment vehicle or anything else. Old-school commodities include raw materials like metal ores, precious metals like gold and silver, agricultural products such as coffee and other resources.
These commodities have value because they can be used practically and can be traded on exchanges where supply and demand set the price.
Defining cryptocurrencies as a commodity makes sense to those who regard Bitcoin as digital gold since there is no central banking system that controls it. The individual units are interchangeable and have the same core properties for anyone who uses them.
Crypto as a currency
Cryptocurrencies like bitcoin are designed to be currencies and can be used to buy things from merchants that accept them. This would seem like the most appropriate category because a currency is a medium of exchange which is fungible (each unit is the same), divisible, transferable, portable and scarce.
If something has those qualities, we can use it as a currency. While the price volatility of cryptocurrency is generally impractical for a currency, the stability of its price is not a requirement. The other way in which cryptocurrencies work like currencies is the overlap between their ability to pay for things and the capability for traders to buy and sell them for profit.
Crypto as a security
Ownership of a security can pass between people, with the owner always receiving a profit or loss. Financial products that don’t represent tangible assets fall into this category, including stocks, bonds and unit trusts.
Since Bitcoin is decentralised and nobody controls it, it isn’t seen as a security by some regulators. Regulating cryptocurrencies as securities would be problematic because there’s no one to comply with the rules usually imposed on issuers.
A new category?
It has been suggested that cryptocurrencies are a new category because they’re simply not like anything else. If that’s the case, regulators will need to treat them as unique instead of looking for a home in the existing frameworks.
As each new cryptocurrency has slightly different intentions and technical details, they may need to be considered on a case-by-case basis and slotted into several categories.
The world is rarely black and white, and there’s no single answer to the question of what cryptocurrencies are — not yet anyway. It is this versatility that offers such great opportunities for a diverse range of people.