Court Finds Cryptocurrency Not Capital Under Exchange Control Regulations in Standard Bank Ruling

In the Standard Bank decision, the court held that cryptocurrency is not capital for purposes of the Exchange Control Regulations. (The South African Reserve Bank appealed this decision and judgment is still awaited.)

The facts

In the Mangundhla & Dangaiso case, one of the applicants used Luno accounts to transfer approximately 1680 bitcoin, purchased in South Africa and worth under R182m, to bitcoin wallets accessible only through cryptocurrency exchanges registered outside of South Africa.

The South African Reserve Bank (Sarb), under Exchange Control Regulation 22B, declared forfeited to the State just under R6m of bitcoin assets and money standing to the applicants’ credit in their Standard Bank and Luno accounts. The basis for the forfeiture was that this money and cryptocurrency constituted either the proceeds of or was itself in the process of being the subject of a contravention of the Exchange Control Regulations.

The central question before the court was whether cryptocurrency, specifically bitcoin, constitutes ‘capital’ for the purposes of Exchange Control Regulation 10(1)(c). This regulation provides that ‘[n]o person shall, except with permission granted by the Treasury and in accordance with such conditions as the Treasury may impose enter into any transaction whereby capital or any right to capital is directly or indirectly exported from the Republic’.

The judgment

The court, in applying established principles of statutory interpretation, considering the ordinary grammatical meaning, context, and purpose of the provision, concluded that bitcoin must be ‘capital’ for purposes of the Exchange Control Regulations.

This was on the basis that bitcoin is plainly capital in the sense that it is a financial asset that is capable of holding value and being used as a medium of exchange.

It can be exchanged for fiat currency, as it is possible to buy bitcoin using South African rand, to hold it in the expectation that its rand price will increase, and to then sell it for a profit. Also in some places, bitcoin is accepted by merchants as a form of currency.

Read the full judgment

It should, however, be noted that the Sarb appealed the Standard Bank case decision to the Supreme Court of Appeal, and that the final position on the exchange control regulatory treatment of cryptocurrency remains unknown pending the outcome of the appeal.

There is currently no regulatory framework for cryptocurrencies in South Africa, although under the draft Capital Flow Management Regulations, which was recently published, South Africa is actively integrating crypto assets into the exchange control legal framework.

In the absence of a framework, one thing is clear – navigating the exchange control landscape in South Africa is complex.