“Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us….”
In a climate characterized by the exponential growth in technological innovations resulting in the world moving into the cyber space, the development of digital money was almost inevitable as money evolves with time. History has shown us that money can be anything that enough people agree to trade with and it often reflects the progressive nature of our societies. Hence the construct of money has been expressed in the form of salt, farm animals, gold and diamonds. Then paper money was developed, which remains the most basic form of currency to date. But overtime, it has been supplemented by innovations such as credit-cards, E-money, Paypal and the like. Unlike these innovations, whose function is mainly rooted in the value of fiat currency, Bitcoin is so radical because with enough acceptance, it could eventually substitute fiat currency and become the preferred medium of exchange.
Bitcoin is essentially an encrypted computer file. It was introduced by a programmer known as Satoshi Nakamoto in 2008. Proponents of the crypto-currency argue that Bitcoin is the link between currency and the inevitable technological advancements that the world is subjected to and like every other innovation that initially scared people and brought about skepticism, such as social media platforms, online shopping and online banking etc, the world will catch on and the introduction of a regulatory framework will make the process of “catching on faster and safer”. But before we even divulge in the regulation of Bitcoin, the crypro-currency must first be classified.
Thus far, the classification of Bitcoin remains contentious. Bitcoin has been classified as a commodity since it has similarities with gold, and because of its volatility, it has been regarded as a type of speculative investment. Some jurisdictions classify it as a store of value or an alternative method of payment. Further, the US court in SEC v Shavers explained the function of Bitcoin as an Investment and how it can be used “as money”. Be that as it may, Bitcoin cannot operate in the above classes without any friction. Further, overburdening the Bitcoin Industry with various regulatory frameworks may bring about more anarchy and uncertainty. Hence, it has been suggested by experts in International Banking law that Bitcoin should be classified as a unique asset. Doing so, will not only ensure that Bitcoin is adequately regulated but it will also ensure that participants can realise the optimum benefits offered by the Bitcoin ecosystem with minimum exposure to risk.
Currently, participants in the Bitcoin ecosystem, are subjected to many risks, most of which are inherent in the design of Bitcoin. These risks include price instability to an extent that Bitcoin’s price could plummet from US$17.00 to $0.001 within a few hours. Further, the anonymity provided by the system has proven to attract a lot of criminals. Hence Bitcoin has been associated with crimes such as money laundering, financing of terrorist activities and drug trufficking. Most notably, the Bitcoin ecosystem does not offer adequate protection to its consumers. For instance, Bitcoin consumers are susceptible to security breaches with no recourse, transactions are not reversible, and there are no deposit insurance mechanisms in place to compensate consumers in instances of loss. This means that lost Bitcoins cannot be traced or recovered.
Proponents of Bitcoin argue that the benefits of Bitcoin outweigh the risks; Bitcoin transactions are cheaper and faster since Bitcoin is a peer to peer network, eliminating costly intermediaries and offering participants absolute control of their “currency”. Further, the Bitcoin network is easily accessible because it only requires an internet connection to operate. Unlike fiat currency, Bitcoin has no jurisdictional boundaries, it is independent of any government, and therefore it is not subject to any political influence or monetary policies. Despite its volatility, Bitcoin has proven to be a good investment for most.
In South Africa, the Finance department has made it clear that neither The SARB, the National Treasury nor the Financial Services Board regulate Bitcoin. A position paper on Virtual Currency was issued in 2014 to this effect. However, the then Minister of Finance, Melusi Gigaba assured the people of South Africa that the finance department would continue to monitor and come up with ideas on how to regulate the use of VCs. Following this, in December 2016, a committee tasked with monitoring developments of VCs in SA was constituted and suggestions were put forward regarding adopting an industry-based-approach to the regulation of VCs. In 2017, the SARB made an announcement that it is working with a company called Bankymoon, specialising in Blockchain solution, in order to find the best regulatory framework for the operation of VCs in South Africa. In the same year, the SARB released another statement which expressed a possibility of developing a digital currency, most likely using Distributed Ledger Technology (DLT) and in the beginning of 2019, an announcement was made in which members of the public were requested to suggest ways in which Virtual Currency can be regulated In the country.
Despite the lack of regulation, Bitcoin is growing in SA. This is evidenced by the increase in the number of Exchanges (Luno and ICE X being the largest Exchanges), more merchants, approximately 153, accept Bitcoin, including Takealot, Earth Child and eBay. Furthermore, there has been a multiple of Bitcoin conferences hosted in the country and most notably a Bitcoin ATM was installed in Midrand. This growth should encourage regulators to come up with a framework for Bitcoin and other VCs.
With adequate and effective regulation, Bitcoin could be accepted by a majority of service providers worldwide, and facilitate day-to-day trade. Regulated Bitcoin can also be used to create job opportunities through the process of mining and minimize the risks that consumers are exposed to. Furthermore, Bitcoin has the potential to promote inclusivity by encouraging micropayments in developing countries and reducing the trade friction amongst them. If globally regulated, Bitcoin could become a global trading instrument.