What you need to know about buying Bitcoin from an offshore exchange
When it comes to cryptocurrencies, an area that is often overlooked is that of exchange control, and whether the acquisition or trading in cryptos may (even inadvertently) lead to a transgression under the exchange control regulations.
According to Leon Rood, director at Werksmans Attorneys, while the South African Reserve Bank (SARB) is still grappling with the regulation of cryptos, there are still existing rules to be aware of.
“Currently no specific laws or regulations exist in South Africa to govern the use of cryptos and, as a result, no compliance requirements currently apply to the local trading thereof. SARB does not oversee, supervise or regulate cryptos and they are therefore not guaranteed/backed,” he said.
“However, should a resident natural person wish to purchase cryptos from abroad, SARB’s view is that the only permissible method is by using the individual’s single discretionary allowance (currently R1 million) and/or individual foreign investment allowance (currently R10 million with a Tax Clearance Certificate), per calendar year.”
This means that the SARB will not allow a local company to use the foreign direct investment dispensation to invest in offshore cryptos, he said.
He added that due to the nature of cryptos, the repatriation of value – for example, on sale and converting to fiat currency into the country – is not a reportable transaction on the SARB’s Reporting system.
“As such, the repatriation will not be acknowledged as a repatriation of an individual’s single discretionary allowance and/or individual foreign investment allowance,” he said.
“Similarly, non-residents who have introduced cryptos into the country for sale locally, and who want to transfer the sale proceeds abroad, will be unable to do so in terms of exchange control because there is no proof that foreign currency or rand has been introduced into South Africa.”
What does this mean for you?
Rood said that a South African resident investor wishing to acquire cryptos locally may use one of the few local exchanges, which will then match trades between local buyers and sellers, with no currency actually leaving the country.
“As a result, there is no exchange control element to these transactions. However, when the local demand outstrips local supply, the local crypto price will rise to persuade holders to part with their cryptos and hence the local rand price often trades at a premium to the global dollar average taken from all major crypto exchanges,” he said.
“If the same resident then rather wishes to acquire cryptos on an offshore exchange at the lower dollar rate, he or she will then have to use their single discretionary or foreign investment allowance to externalise the rand value to acquire the cryptos in dollar on a foreign exchange. This is not dissimilar to investing in shares on a foreign stock exchange.”
However, Rood noted that problems arise when a resident individual buys R20 million worth (being in excess of the ‘normal’ exchange control investment thresholds) of local Bitcoin via a local exchange, and then proceeds to send that Bitcoin to a wallet held with an offshore exchange.
“These inter-wallet (or exchange-to-exchange) transfers only involve cryptos, and as these are not regulated by either the SARB or a local bank, no exchange control regulatory intervention takes place,” he said.
While this can be seen as a ‘loophole’, Rood noted that based on its statement , the SARB regards this as a transgression as the resident effectively exports (some form) of capital, without using the approved dispensations and channels.
“A resident should therefore rather withdraw his investment from his local crypto wallet, and invest the rand amount as per the normal channels,” he said.
“A further transgression may be encountered where a resident acquires foreign crypto in dollar and then transfers this to a local wallet, specifically to make use of the price arbitrage. It is known that the SARB has undertaken a review of these practices to consider whether further compliance intervention is required,” he said.
Rood added that this ‘loophole’ is likely to be closed by the SARB in the near future, and that the investors should not overlook the exchange control regulations when wading into this already risky crypto environment.