New cross-border crypto rules could drive business, jobs offshore

New proposed rules for cross-border crypto transactions add another reporting layer to already overburdened crypto exchanges and could drive legitimate business offshore while undermining the very surveillance the authorities are trying to achieve.

The proposals have been roundly condemned by several industry participants, particularly the requirement to report any transfer of crypto from a local exchange to a private self-custody wallet.

Many in the crypto community have long argued for self-custody as a more secure way to protect against potential hacks and confiscation by the state.

The draft Crypto Asset Manual for cross-border activities, recently published for comment by National Treasury and the South African Reserve Bank (Sarb), spells out when a crypto transaction will be regarded as an import or export of capital, how it must be reported, and which service providers may facilitate it.

It complements the draft Capital Flow Management Regulations published in April, which would formally bring crypto assets within South Africa’s exchange control regime.

Neither document is final, and the public has until 30 September to submit comments on the manual.

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In simple terms, buying bitcoin or another crypto asset with rand on an authorised SA crypto platform would be regarded as a domestic transaction and would not need to be reported to the Sarb’s Financial Surveillance Department, known as FinSurv.

Moving crypto between two authorised South African crypto asset service providers (Casps) would also be regarded as a domestic transaction and would therefore not be reportable.

When a transaction must be reported

A transaction becomes reportable when crypto is transferred from a South African Casp to an offshore crypto platform or to a private, non-custodial wallet.

Transfers from an offshore Casp to an authorised South African provider would similarly be regarded as cross-border – and would therefore have to be reported.

Read: Sars’s draft crypto tax guide is years late and lacks clarity in key areas

For now, only individuals would be allowed to send crypto offshore, using either the R2 million Single Discretionary Allowance or the R10 million Foreign Capital Allowance. The latter requires the individual to be tax compliant and obtain approval from the South African Revenue Service (Sars).

This represents an improvement on the earlier suggestion that the purchase of crypto itself could be treated as an externalisation of capital.

When first proposed, this was regarded as both illogical and impractical.

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Farzam Ehsani, CEO of crypto exchange VALR, says he is encouraged that the manual now treats the withdrawal of crypto assets from a Casp, rather than their purchase, as the reportable event.

But he says serious concerns remain.

“South Africa would be better served by abolishing exchange controls altogether while preserving appropriate reporting, transparency and regulatory surveillance, rather than attempting to retrofit a half-century-old regulatory regime onto modern technology and the digital economy,” he says.

If exchange controls are retained, Ehsani argues, they should apply equally regardless of the method used to transfer value.

“Regulation should govern the movement of value and manage the associated risks; it should not dictate which technologies individuals and businesses can use.”

Shiven Moodley, macro strategist and CEO of fintech Novaque, warns that the cost and complexity of the proposals could favour large, well-capitalised institutions while limiting the ability of smaller SA firms to enter and compete in the digital asset market.

“The requirements relating to minimum capital, local infrastructure, reporting, reconciliation, outsourcing and prior approval for offshore liquidity arrangements create high fixed costs before a business has achieved scale,” says Moodley.

The result could be to stifle investment in South African digital asset companies and drive them offshore.

Moodley adds that businesses involved in market-making, treasury, technology and other digital asset activities may end up taking their operations abroad to more favourable jurisdictions, leaving only the regulated, client-facing function in South Africa.

“The result could be less domestic innovation, fewer local jobs and reduced regulatory visibility over the broader digital asset value chain.”

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Says Carel de Jager, CEO of blockchain intelligence and engineering company, Silver Sixpence: “I am very glad that externalisation [of crypto] does not happen on a buy transaction, but rather on a withdrawal. This is still not ideal, but far from the worst-case scenario.”

“They are now going after self-custody, which, in my mind, is a fundamental right,” says Carel van Wyk, CEO of MoneyBadger, which enables merchants to accept crypto payments and was founded by one of the original co-founders of crypto exchange Luno.

The need to report any transfer from a local exchange to a private wallet may face legal challenge as a violation of both privacy and property rights.

Companies locked out

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One of the most contentious proposals is that South African companies and institutions would initially be prohibited from sending or receiving crypto across borders.

A company could buy crypto locally, keep it with a local Casp, transfer it between local providers and sell it for rand. What it could not do is transfer the crypto to an offshore provider or private wallet, or receive crypto from an offshore platform.

This could rule out some of the most useful commercial applications of blockchain technology, such as exporters receiving payment in USD-backed stablecoins, importers settling international invoices, companies using blockchain-based payment rails, and technology businesses receiving crypto payments from foreign customers.

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“On what principled basis should corporations and institutions be prohibited from using this technology to move value legitimately between South Africa and the rest of the world?” asks Ehsani.

Stablecoins and other crypto assets can facilitate cross-border payments more quickly and cheaply than many traditional channels, he says, while still being subject to reporting requirements and regulatory oversight.

Prohibiting companies from using regulated local providers could have the opposite of the intended effect.

“By prohibiting legitimate corporate activity through regulated providers, the proposed framework is likely to drive transactions underground or offshore,” says Ehsani.

“This would reduce the very visibility and surveillance that National Treasury and the Sarb seek to achieve, while undermining employment, tax revenue, investment, innovation and business formation.”

A one-way door for private wallets

The proposed treatment of self-custody wallets creates a striking anomaly. These wallets give owners direct control over their crypto through private keys.

The proposals would allow an individual to transfer crypto from an authorised South African provider to a private wallet, provided the transaction falls within the relevant offshore allowance and is reported.

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But transferring crypto in the opposite direction – from a private wallet into an authorised local Casp – would be prohibited.

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This effectively creates a one-way door: crypto may leave the regulated South African market for self-custody but cannot return through the same channel.

It could affect people holding bitcoin in hardware wallets, receiving crypto as payment, or participating in decentralised finance.

Ehsani says this would encourage self-custody users to transact through offshore exchanges rather than regulated local providers – the opposite of what the framework seeks to achieve.

There is also a conceptual difficulty. A private wallet is not necessarily located in any country; it consists of cryptographic keys controlling assets recorded on a global blockchain.

Smaller providers may also struggle with the new requirements.

A Financial Sector Conduct Authority (FSCA) licence would not automatically permit cross-border business. Casps would need separate FinSurv authorisation, Sarb-compatible reporting systems, and unimpaired capital of at least R5 million or 15% of average positive gross income.

Treating all crypto the same

The manual also treats bitcoin, stablecoins and utility tokens in the same way, despite their different uses.

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Although it provides a lawful route for individuals to move crypto offshore, its restrictions could push more activity to offshore platforms and peer-to-peer markets, leaving South Africa with tighter regulation but less visibility over actual transactions.

Ehsani says SA would be better served by abolishing exchange controls altogether while preserving appropriate reporting, transparency and regulatory surveillance, rather than attempting to retrofit a half-century-old regulatory regime onto modern technology and the digital economy.

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