With cryptocurrency regulations seemingly just around the corner for South Africa, the extent of their practical ramifications can be speculated over quite a bit. According to a recent survey, South African internet users topped the rankings for cryptocurrency ownership worldwide. Already accounting for 10.7% of all local internet users, this number could climb if regulations serve to alleviate trust and security concerns. Furthermore, South Africa has consistently topped global rankings as the country with the highest internet searches for Bitcoin. But what is the catalyst behind this popularity?
Arguably, the growth in demand cannot be ascribed to one particular factor. Events such as the firing of Pravin Gordhan as South Africa’s finance minister and the downgrade of South Africa’s local currency debt to that of junk status were seen as mentionable contributors to the surge in new users trading Bitcoin in 2017, constituting a 671% rise from January to November on eToro. More recently, cryptocurrencies have received an increase in popularity amidst growing political and economic uncertainty.
Contrary to what a Hollywood-portrayed high school would have you believe, there are downsides to popularity. Hypothetical risks in an unregulated market include:
- a decreased demand for fiat currency, which in turn poses problems for the South African Reserve Bank’s (SARB) monetary supply control;
- a financial stability risk if market capitalisation reaches the $1 trillion threshold (which, although constituting roughly 1.5% of the total global market capitalisation of the S&P 500 Index, is not entirely far fetched when one considers the 3 200% growth rate in market capitalisation in 2017), which figure is seen as the psychological threshold that, when crossed, will lead to increased regulatory scrutiny by financial institutions and legislatures around the globe; and
- potential threats to the national payment system.
Due to its meteoric rise in popularity, regulations to address consumer protection become paramount.
What will the scope of these regulations be, and how will they affect South Africa and its prevalent participation in the cryptocurrency market? It might still be too early to say for certain. However, the SARB has suggested a phased approach to regulation, with the first phase constituting a registration process for persons offering crypto-asset services and arguably aligns nicely with the current regulatory overhaul for financial services. The second phase contemplates a review of existing regulatory frameworks to determine whether new requirements need to be introduced or existing requirements need to be amended.
And lastly, the third phase contemplates an assessment of the effectiveness of the regulatory actions. With the first phase expected to be implemented in the first quarter of this year, interesting times lie ahead for both consumers and service providers of cryptocurrency.
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