When Finance Minister Enoch Godongwana presented his delayed budget speech on 12 March amid the furore over a proposed VAT hike, blockchain-based digital assets were the elephant in the room.
By Wiehann Olivier, a partner and fintech and digital assets lead for Forvis Mazars
Despite the Intergovernmental Fintech Working Group (IFWG) publishing a position paper on regulating crypto assets in June 2021, little further tangible progress has been made since then, at a time when other countries are forging ahead with new regulations on blockchain-based digital assets as they realise the potential benefits and positive impact digital assets could have on economic growth and GDP.
While the Financial Sector Conduct Authority (FSCA) incorporated the crypto asset service provider (CASP) licensing regime under the Financial Advisory and Intermediary Services (FAIS) Act in 2023 to grant players Financial Service Provider (FSP) licenses, no other material developments have emerged from the IFWG.
However, South Africa’s grey-listing by the Financial Action Task Force (FATF) in February 2023 impacted the existing framework, with the compliance burden now falling on providers to align with FATF on travel, know your customer (KYC) and anti-money laundering (AML) regulations.
The failure of the government to integrate the digital asset sector into the formal financial services space and broader economy also represents a missed opportunity to shore up falling tax revenues and reduce the widening budget deficit.
Realising meaningful impact in terms of integrating digital technologies across diverse industries necessitates support from a digital economy, which involves the digitisation of tangible entities, such as ownership, identity, data, and currency, all facilitated by blockchain technology.
With the proper regulations, the burgeoning digital economy can breathe new life into South Africa’s ailing economy. While the crypto asset ship has not sailed just yet, the government needs to act sooner rather than later to unlock value from the sector.
Stagnation in the IFWG on critical areas such as exchange control regulations, authoritative guidance on the various tax implications and various other aspects, like the tokenisation of traditional assets, is delaying the mass adoption of various crypto initiatives, including payments.
With cryptocurrencies not deemed currency, they are currently not included in exchange control regulations, but the industry needs guidance and the certainty that regulators provide to drive investment and innovation.
As such, the industry desperately needs more active engagement and tangible efforts from the IFWG to support the adoption and expansion of the utilisation of the asset class with regulations that strike the right balance between stakeholder safety and stability without stifling industry innovation.
Instead, the IFWG has seemingly expanded its scope to stablecoins as detailed in the 2025 budget review tabled. The group recently finalised a diagnostic of the domestic stablecoin landscape, which it plans to publish later in 2025, and continues its analytical work to understand the applicable use cases of stablecoins and recommend an appropriate policy and regulatory response.
While this differs from the work it did in 2021 in relation to cryptocurrencies, it is a welcome development for multiple reasons.
While stablecoins are technically a type of cryptocurrency, the difference is that they are pegged to a reserve asset, such as a central bank-backed fiat currency, to maintain a stable value. For example, Tether and Circle are US-domiciled stablecoins, with a market capitalisation of more than $200-billion, issued by private companies that are backed by the US dollar.
Stablecoins are also different from central bank digital currencies (CBDCs). While both aim to provide digital alternatives to traditional money, stablecoins are decentralised non-native tokens issued by smart contracts and used for crypto transactions, remittances and decentralised finance, whereas CBDCs are official digital currencies issued by central banks for payments and financial inclusion, making them a direct liability of the government.
While unbacked crypto assets like Bitcoin and Ethereum effectively serve as a store of value and medium of exchange, their volatility precludes them from acting as a unit of account.
In contrast, stablecoins effectively address this issue as their value is pegged to an external reference asset. This creates opportunities for businesses to transact using stablecoins, with massive potential benefits for cross-border trade.
In 2022, Forvis Mazars in South Africa piloted an initiative in conjunction with the Asia Pacific region to investigate the feasibility of accepting stablecoins as payment from an accounting, cash flow and risk perspective.
The system enabled cross-border payments in a fiat-backed stablecoin between the Asian and local entities. The transaction cleared within four hours, with the ZAR reflected in the local bank account on the same day. If traditional banking rails were utilised, it could have taken up to a week to complete the transaction.
Given the speed and efficiency of the transaction, it is clear to see why the value of stablecoin transactions rose every quarter in 2024 to exceed the global volumes processed by Visa and Mastercard.
The surge in adoption and usage over the last 12 months has thrust stablecoins into the mainstream global financial services sector, which is prompting governments, including South Africa’s, to explore the potential use cases and challenges that may arise.
The ability to facilitate faster and cheaper cross-border remittance is particularly beneficial for a country that engages in international trade and runs such a large trade deficit.
Using stablecoins can drastically reduce the costs associated with paying for goods and services internationally, while the large migrant workforce can also send money back to their families at a lower cost.
There are also numerous tech businesses that want to invest in South Africa utilising cryptocurrencies as a means of capital.
However, digital assets do not currently meet exchange control regulations, as they are not recognised as a standard form of currency and, therefore, foreign inflows and cannot be placed on record with the SARB for subsequent repayment. The need to use legacy banking rails, as opposed to cryptocurrencies, to invest in local companies is limiting potential direct foreign investment into South Africa.
Furthermore, giving local businesses the ability to transact using stablecoins and leveraging of the advantages it offers, could boost exports to support cross-border trade, which would also facilitate more foreign inflows into South Africa to boost GDP and grow the economy.
However, before that can happen, the country needs a regulated environment that is integrated in to various facets from a practical standpoint to ensure that these processes are amended to allow and support the use of stablecoins.
For instance, legacy mechanisms already make exporting goods complex and cumbersome. This process requires a SAD500 customs declaration form and a Unique Consignment Reference (UCR) code to clear SARS Customs. The issue is that exporters cannot currently include cryptocurrency or stablecoins as a medium of exchange in these forms.
In addition, as a decentralised medium of exchange with transactions processed over the blockchain, there is no third-party provider that can issue a document to provide proof of payment. Without this authentication, exporters currently cannot accept stablecoins for goods, despite the efficiencies.
The same issue would arise should SARS request supporting documentation to verify VAT submissions on zero-rated exports. In these instances, exporters would only have the flow of on-chain movements to prove the transaction occurred, which is currently not an accepted form of validation.
To boost adoption and usage, the IFWG would need to provide greater clarity on what these regulatory frameworks would look like, but it is unclear whether the working paper due for release later this year will cover these issues.
It is critical that the government expedite these matters and deliver firm resolutions. There are many countries that have formalised these regulations, which means South Africa is already a laggard in cryptocurrency-based fintech innovation.
The opportunity cost is massive and continues to grow. For instance, if South Africa had taken a first-mover approach to establish a strategic bitcoin reserve in 2020, it may not have required VAT increases to cover the budget shortfall.
Similarly, if Eskom had used periods where it had surplus power to mine bitcoin, it would not carry the debt burden it does today.
South Africa needs an attitude shift that embraces the potential that cryptocurrencies and stablecoins offer, in addition to greater urgency in developing and enacting enabling regulations. Time will tell whether the IFWG can address the elephant in the room.