The definition of cryptocurrency
It’s no secret that cryptocurrency has taken the world by storm, with investors around the globe trying their hand at trading the virtual currencies. One of the biggest barriers to regulating virtual currency became apparent as legislatures and regulators began to deal with the various challenges brought about by its increased popularity. One such challenge was that virtual currency did not have a single commonly accepted definition that encapsulated the various forms of virtual currencies.
In an effort to remedy this, the Financial Action Task Force (FATF) published a report in 2014 in which virtual currencies were defined. In terms of the Report, virtual currencies are defined as “a digital representation of value that can be digitally traded and function as:
(1) a medium of exchange; and/or
(2) a unit of account; and/or
(3) a store of value, but which do not have legal tender status in any jurisdiction”.
As cryptocurrency is not issued, nor guaranteed, it fulfils the above functions only by agreement within the community of users of the virtual currency. Cryptocurrency is thus de-centralised and not regulated or monitored by a central administrating authority.
Is cryptocurrency legal tender
Legal tender is currency that can lawfully be offered by a debtor as payment of an obligation that a creditor is obliged to accept. The regulation of currency in South Africa is governed by the South African Reserve Bank Act No 90 of 1989 (SARB Act). Section 14 of the SARB Act provides that the South African Reserve Bank is the only institution with the right to issue, or cause to be issued, coins and paper notes in South Africa and, as such, is the only institution permitted to issue legal tender. Accordingly, Cryptocurrency does not meet the definition of legal tender in South Africa – the consequence being that all activities related to the acquisition, trading and/or use of crypto assets are at the end users’ sole and independent risk, having no recourse to the SARB.
Risks associated with cryptocurrency
In 2014 the South African Reserve Bank’s National Payment System Department published a position paper that outlined the South African Reserve Bank’s position on virtual currencies. The position paper highlighted the risks associated with cryptocurrency which included inter alia that cryptocurrency has the potential to be more susceptible to use for illicit activities (for example money laundering, tax evasion and the financing of terrorist activities). It also has a potential long term impact on the effectiveness of monetary policy tools and financial stability, along with the potential for the evasion of South African exchange controls, and consumer risks/ consumer protection issues. The absence of legal and regulatory framework governing cryptocurrency means that consumers engaging in cryptocurrency transactions are not protected by the law in the same way that consumers engaging in real currency transactions would be.
Although cryptocurrency falls short of the definition of legal tender in South Africa, currency can exist without legal tender recognition and users can legally trade in cryptocurrency but are urged to be cognizant of the inherent risks.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE).