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Follows a high court ruling in May that exporting funds via cryptocurrencies does not violate exchange controls.
The Reserve Bank says the court was wrong to find that cryptocurrency is not ‘money’ from an exchange control perspective. Picture: Shutterstock
t took the South Africa Reserve Bank (Sarb) just two weeks to appeal a legal loophole that would allow unlimited funds to leave the country using cryptocurrencies.
On Monday, it filed an appeal against a Pretoria High Court ruling that cryptocurrencies are not subject to South African exchange control regulations. The Sarb appeal has effectively shut off that legal loophole.
The high court ruling in May followed a case brought by Standard Bank against the Sarb, the minister of finance, Nedbank and the liquidators of Leo Cash and Carry, in which the bank was attempting to recover funds it had lent to Leo Cash and Carry (LCC) before the company was placed in liquidation in 2022.
LCC had come under scrutiny by Sarb’s Financial Surveillance department (FinSurv) when it was discovered, among other things, that the company had shipped more than 4 400 bitcoin, then valued at about R556 million, to Seychelles-based crypto exchange Huobi Global.
The Pretoria High Court said it would not be drawn into rewriting the law to include cryptocurrencies under the definition of “capital” as part of exchange control regulations.
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In its appeal filed on Monday, the Sarb says the Pretoria High Court erred in finding that LCC had not contravened exchange control regulations, and had likewise erred in its ruling that cryptocurrency does not fall within the ambit of these regulations.
This was despite the court finding that LCC was undeniably involved “in a scheme, and/or used as a conduit to directly or indirectly export funds, foreign currency, and capital from the Republic”. The result of this was that LCC was able to export capital abroad.
The Sarb goes on to argue that the court was wrong to find that cryptocurrency was not “money” or “foreign currency” from an exchange control perspective.
It also takes issue with the court finding that cryptocurrency falls outside the ambit of “capital” or the “right to capital” as defined in the regulations.
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The Sarb says the court erred in failing to find that Regulation 22C was applicable in this case. Regulation 22C allows the Reserve Bank to block transactions where there is a reasonable suspicion of exchange control violations.
Based on these errors, the court should have dismissed Standard Bank’s application, it says.
Standard Bank was successful in setting aside Finsurv’s forfeiture of R16.4 million held by the bank prior to the LCC liquidation, but failed to recover an amount of R10 million paid by LCC to Nedbank in settlement of an overdraft facility.
The appeal by Sarb gives some insight into possible changes in exchange control regulations that would specifically extend definitions of capital, the right to capital, money and foreign currency to cryptocurrencies.
Harry Scherzer, CEO of Future Forex comments: “It was relatively clear that the Reserve Bank made an error in the sense that it allows people to evade exchange control which basically makes the whole of exchange control redundant, because you can essentially take out as much money as you want as crypto and send it into dollars abroad, and I’m sure there are some people that did exactly that.”
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Scherzer says it was very clear that the Sarb got it wrong and needed to change things.
“The only thing that is surprising is the speed with which the Reserve Bank responded in appealing this, and that’s a good thing. If SA wants to keep exchange control laws as all-encompassing, they can’t have crypto as a means of sending funds out of the country without monitoring.
“We carried on as if this loophole was a mistake and didn’t allow crypto to be used to send funds out of the country as we saw it would be something that would be corrected. So, we’re back to the status quo [as far as exchange controls go],” Scherzer adds.
This article was republished from Moneyweb. Read the original here.
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