South Africa learns a hard crypto lesson amid fast growing demand

South African authorities appear to be paying more attention to the cryptocurrency space in 2021 in the wake of the major Bitcoin (BTC) scheme and increased trading activity. As a result, the Financial Sector Conduct Authority of South Africa has called for tighter controls on the cryptocurrency space following the collapse of what has been billed as the largest Ponzi scheme the country has ever seen.

In December 2020, Mirror Trading International went into temporary liquidation after one of its managers allegedly bypassed the country, taking with him access to an abundant amount of Bitcoin that investors had entrusted to the company over the past few years. In January 2021, MTI claimed to have more than 260,000 members worldwide and collected 23,000 BTC of investor holdings, valued at over $ 1 billion in today’s market.

The South African business arm is alleged to trade high-frequency derivatives using robots, but investors were left empty-handed at the end of 2020 when CEO Johan Steinberg fled the country. Other company directors allege that Steynberg was the only one in direct control of MTI’s entire Bitcoin holdings and believe the CEO has fled to Brazil.

The FSCA warned South African investors not to invest in MTI in August last year after confirming that the company was operating without a financial service provider license. The regulator was also concerned that the company was promoting unusually high returns on investments to clients. This came on the heels of a move by regulators in the state of Texas in the United States to close companies promoting MTI in July of last year.

While the collapse of MTI led to calls for clear regulatory frameworks to use cryptocurrencies in the country, the cryptocurrency markets also helped drive trading in the country, which, as a result, attracted greater interest from the South African tax authority.

“Correct encryption” warning

At the start of February 2021, the FSCA sent a message to the public indicating that it had received a number of complaints from South African investors left out of their pockets in an unnamed “cryptocurrency investment” or “scam as an investment in cryptocurrency” promising high returns, which is what It is understood as the MTI.

The regulator indicated in the letter that cryptocurrency-related investments are not regulated by the FSCA or any other authority in South Africa, leaving the risk of investors not taking refuge in the worst-case scenario.

Brandon Tobham, Executive Officer of the Enforcement Division at FSCA in South Africa, discussed with Cointelegraph how the FSCA is involved in the MTI investigation. The FSCA now deals directly with the MTI liquidator and has also shared details of all MTI investors with the South African Revenue Service. Topham told Cointelegraph that the use of cryptocurrencies was essential for MTI perpetrators to be able to deceive investors:

“The importance of MTI is that they first used the cryptocurrency as a basis for saying that the alleged investment business they were managing did not fall within our jurisdiction because the payment method was cryptocurrency. Later, when they stopped trading foreign currencies due to our investigation, they claimed they were trading cryptocurrencies. , And since the cryptocurrency enjoys a good reputation in terms of large returns, this made it easier for victims to believe that the high returns were real.

Topham added that the situation was not a reflection of South African investors ’lack of understanding of cryptocurrencies, but that people were“ desperate and / or greedy ”and continued to invest in MTI after warning the FSCA not to do so midway through 2020.

The MTI disaster shed light on regulation in the country. Topham told Cointelegraph that at present, there is still no regulation in space, however, the FSCA began the process of declaring cryptocurrencies as financial products in November 2020, which was open for public comment until the end of January 2020. According to him:

“Once implemented, this change will require advisors and cryptocurrency intermediary service providers to register with the FSCA. This does not mean that cryptography is regulated or that it is very important that we support the existence of cryptocurrencies, rather it will be merely a mechanism to ensure that South African citizens who choose to participate in Crypto transactions are properly notified and they are not dealing with fraudsters.

Tobham acknowledged that even registered financial service providers “sometimes get rogue” but insists that the framework will be a first step in protecting the public from abuse in the region. He added that it is difficult to organize something that “has no address, work, or administration in general.” This, according to him, is exactly the reason regulators are strongly advising investors to stay away from cryptocurrencies.

Tax man calls

Although the MTI problem has renewed the perception that cryptocurrencies are often associated with scams or scams for people unaware of the space, the use and trading of cryptocurrencies in South Africa is in a healthy place.

The recent boom in value across the cryptocurrency markets is bringing unexpected gains for many traders and owners of cryptocurrencies. With plenty of profit making there are also tax implications to consider, and recent local reports indicate that the South African Revenue Service is advancing in space.

Local company Tax Consulting South Africa notes that a number of its clients have received audit requests from SARS, with a specific query about their use of cryptocurrencies. The company said users were asked to disclose the purpose of taxpayers ‘purchase of cryptocurrencies, as well as a letter from cryptocurrency exchanges confirming users’ investments, trading history and bank data. The company added that taxpayers should expect this query from SARS if they have previously disclosed crypto-related income or investments in their tax returns.

Marius Ritz, general manager of the local Luno cryptocurrency exchange, told Cointelegraph that he was not privy to the SARS strategy regarding cryptocurrency traders, but said that any type of repression could include all kinds of trading profits or losses.

Reitz also mentioned that neither the SARS nor the SARB has indicated that exchanges will be required to provide any trading information to clients. As it stands, it is up to South African taxpayers to provide tax information to SARS.

While South African cryptocurrency users can rest assured knowing that exchanges are not under pressure to give up information on traders, Reitz indicated that Luno will share customer data with law enforcement or other authorities to comply with correct requests from the relevant authority.

Topham said that they are actively working and supporting SARS efforts to enforce tax laws in the country and that cryptocurrency users should be well aware of the tax implications of trading, holding or dealing with digital assets:

“Cryptography is nothing new when it comes to tax principles. If you are paying in rand, dollars, cows, or any other form of assets, the transaction value still falls into the general definition of income generation. We work closely with all regulators and institutions. It is the Reserve Bank of South Africa where cryptocurrencies are often used to transfer wealth abroad. ”

Cipher thermometer in South Africa

Looking through the lens of the stock exchange, Reitz believes the South African cryptocurrency scene is fertile, having seen an influx of users on his platform over the past year and seen more than 6 million users sign up for exchange services in various jurisdictions around the world.

Luno has also played a role in shaping regulatory considerations in South Africa, having worked with the Intergovernmental Fintech Working Group, which has been working to shape the space regulations. Reitz believes that regulation will provide clarity and protection to businesses and consumers, while the MTI case includes, unfortunately, cryptocurrencies:

“The investment use case for cryptocurrencies remains fundamentally strong, despite the case of MTI. People who invest directly via trusted platforms can attest to their safety, and when unscrupulous” brokers “get involved, questions arise about cryptocurrencies.

Ritz highlighted data from Statista stating that South Africa ranks first in five countries with high rates of ownership of cryptocurrency as another metric showing usage growth in the country.

Meanwhile, Tobham told Cointelegraph that the FSCA still believed cryptocurrencies were not a reliable long-term store of wealth and described investing in space as high risk, as its value is driven by emotion alone and fueled by anti-government thinking:

“We are passionate about the technology behind crypto assets and respect the right of South Africans to buy or invest in whatever they desire. We do not feel that it is a long-term and reliable store of wealth, it is also very risky, the public must be aware and keep their heads up when making Decisions that may end up in them being long possessed have no value. “

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