South African authorities appear to be paying more attention to the cryptocurrency space in 2021, due to a major Bitcoin (BTC) Ponzi scheme and increased trading activity. As a result, the South African Financial Conduct Authority has called for tighter controls on cryptocurrencies following the collapse of what has been described as the largest Ponzi scheme the country has ever seen.
In December 2020, Mirror Trading International went into provisional liquidation after one of its directors reportedly left the country, taking with him access to the large amount of bitcoins investors had entrusted to the company in recent years. In January 2021, MTI reported having more than 260,000 members worldwide and having raised 23,000 BTC from investors worth more than $1 billion.
The company’s South African unit had plans to trade high-frequency derivatives using bots, but investors fell short in late 2020 when CEO Johan Steinberg left the country. Other executives at the company claim Steinberg was the only one with direct control over all of MTI’s bitcoin holdings, and believe the CEO fled to Brazil.
The ACSE warned South African investors not to invest in MTI last August after it emerged that the company was operating without a financial services licence. The regulator was also concerned that the company was reporting unusually high returns on investments to its customers. The decision follows the suspension of MTI’s sponsors by regulators in Texas, US, in July.
While the collapse of the MTI has led to calls for a clear regulatory framework for the use of cryptocurrencies in the country, favourable conditions in the cryptocurrency markets have also helped to boost trading in the country, leading to increased interest from South African tax authorities.
Crypto health warning
Beginning February 2021. The FSCA sent out a letter to the public stating that it had received a number of complaints from South African investors who were stranded in unnamed crypto investments or scams that were promoted as crypto investments and promised high returns, which includes MTI.
In the letter, the regulator notes that investments in cryptocurrencies are not regulated by the FSCA or any other authority in South Africa, leaving investors with no recourse in the worst case scenario.
Brandon Topham, head of enforcement for the FSCA in South Africa, explained to Cointelegraph how the FSCA is involved in the MTI investigation. The FSCA is now negotiating directly with MTI’s liquidators and has also passed the details of all MTI investors to the South African tax authorities. Topham told Cointelegraph that the use of cryptocurrencies was key to MTI enabling attackers to scam investors:
MTI’s interest is that it was the first to use cryptography to claim that the investment activity it claims to operate is not subject to our jurisdiction because the payment method is cryptographic. Later, when they stopped trading forex because of our investigation, they claimed they were trading cryptocurrencies. Because cryptocurrencies have a reputation for generating high profits, it was easier for victims to believe that these high profits were real.
Tofam added that the situation is not due to a lack of understanding of cryptocurrencies among South African investors, but that people are desperate and/or greedy and continue to invest in MTI after being warned by the FSCA in mid-2020 not to do so.
The inception of MTI has brought the regulatory environment in the country under the spotlight. Topham told Cointelegraph that there is currently no regulation in this area, but that the FSCA began the process of declaring cryptocurrencies as financial products in November 2020, which was open for public comment until the end of January 2020. According to him:
Once this change is implemented, advisers and intermediaries in cryptocurrencies will need to register with the FSCA. This does not mean that crypto will be regulated or, more importantly, that we approve of its existence. It will simply be a mechanism to ensure that South Africans who choose cryptocurrency transactions are well-informed and do not have to deal with fraudsters.
Mr Topham acknowledges that even licensed financial services firms sometimes get out of hand, but stresses that the framework will be the first step in protecting the public from abuse in this area. He added that it is difficult to regulate something that has no address, no business and no management in general. That’s why regulators are urging investors to stay away from cryptocurrencies.
Taxable person calls.
Although the MTI issue reiterated the idea that cryptocurrencies are often associated with fraud or scamming people who are not familiar with the field, the use and trading of cryptocurrencies in South Africa is in good health.
The recent boom in cryptocurrency markets is bringing good luck to many traders and holders of cryptocurrencies. With a large volume of profits, the tax implications must also be considered and according to recent local reports, the South African tax authorities are very interested in this area.
Local firm Tax Consulting South Africa has noted that some of its clients have received audit requests from SARS with a specific question about their use of cryptocurrencies. The company said users were asked to disclose the purpose for which taxpayers purchased the cryptocurrency, a letter from the cryptocurrency exchanges confirming users’ investment and trading history, and account statements. The firm added that taxpayers should expect this request from SARS if they have previously reported cryptocurrency-related income or investments on their tax returns.
Marius Reitz, managing director of local cryptocurrency exchange Luno, told Cointelegraph he did not know the SARS strategy for cryptocurrency traders, but said any restrictions could include all types of trading profits or losses.
Reitz also said that neither SARS nor the SARB has indicated that it will require exchanges to provide commercial information about customers. South African taxpayers are currently required to provide tax information to the SARS.
While users of cryptocurrencies in South Africa can take comfort in knowing that exchanges are not under pressure to release information about traders, Reitz said Luno will share customer data with law enforcement or other authorities to comply with reasonable requests from the relevant authority.
Topham said they are actively working and supporting SARS’ efforts to enforce tax laws in the country and that users of cryptocurrency should be aware of the tax implications of trading, owning or trading digital assets :
Cryptos are nothing new when it comes to tax principles. If you pay in rubles, dollars, cows or any other type of asset, the value of the transaction still falls under the general category of the definition of income generation. We work closely with all regulatory authorities and agencies. The South African Reserve Bank is another, as cryptocurrencies are often used to transfer assets abroad.
South African Cryptothermometer
From an exchange perspective, Reitz believes the South African crypto landscape is fertile, pointing to the influx of users to his platform over the past year and seeing over 6 million users sign up for his exchange services in different jurisdictions around the world.
Luno has also played a role in the development of regulations in South Africa by working with the Intergovernmental Working Group on Information Technology, which is working to establish regulations for space activities. Reitz believes that regulation provides clarity and protection for businesses and consumers, while the MTI case unfortunately has implications for cryptocurrencies:
The use of cryptocurrencies for investment remains fundamentally strong despite the MTI situation. People who invest directly through trusted platforms can confirm their safety. When unscrupulous middlemen get involved, questions about cryptocurrencies arise.
Reitz drew attention to data from Statista that South Africa is in the top five countries with a high number of cryptocurrencies, which is another indicator of the growth of usage in the country.
Meanwhile, Topham told Cointelegraph that the FSCA still believes cryptocurrencies are not a reliable store of wealth in the long term, and describes investments in the space as high-risk because their value is only driven by sentiment and fueled by anti-government thinking:
We are passionate about crypto asset technology and respect the right of South Africans to buy or invest what they want. We don’t think it’s a reliable long-term store of wealth, and it’s extremely risky, and the public should be aware of that and keep a cool head when making decisions that could result in holding a long number that has no value.
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