Authorities in South Africa appear to be paying closer attention to the cryptocurrency space in 2021 in the wake of a major Bitcoin (BTC) Ponzi scheme and increased trading activity. As a result, the South African Financial Sector Conduct Authority has called for tighter controls of the crypto space following the collapse of what has been described as the biggest Ponzi scheme the country has ever seen.

In December 2020, Mirror Trading International went into provisional liquidation after one of its directors allegedly skipped the country, taking with him access to a copious amount of Bitcoin that investors had entrusted to the company over the past few years. In January 2021, MTI claimed to have over 260,000 members around the world and had amassed 23,000 BTC of investor’s holdings, which is worth over $1 billion in today’s market.

The South African arm of the business purported to conduct high-frequency derivatives trades using bots, but investors were left empty-handed at the end of 2020 when CEO Johan Steynberg fled the country. The firm’s other directors claim that Steynberg was the only one with direct control of MTI’s entire Bitcoin holdings and believe the CEO has fled to Brazil.

The FSCA warned investors in South Africa against investing in MTI in August last year after ascertaining that the company had been operating without a financial service provider license. The regulator was also concerned that the firm was touting unusually high returns on investments to clients. This had followed a move by regulators in Texas, United States to shut down promoters of MTI in July last year.

While the collapse of MTI has led to calls for clear regulatory frameworks for cryptocurrency use in the country, favorable cryptocurrency markets have also helped to drive trading in the country, which, as a result, has attracted greater interest from the South African tax authority.

“Crypto health” warning

At the beginning of February 2021, the FSCA sent out a letter to the public indicating that it has received a number of complaints from South African investors that have been left out of pocket in an unnamed “crypto-related investment” or a “scam packaged as a crypto investment” promising high returns, which is understood to be MTI.

The regulator noted in the letter that cryptocurrency-related investments are not regulated by the FSCA or any other authority in South Africa, which leaves the risk of investors having no recourse should a worst-case scenario happen.

Brandon Topham, the divisional executive of enforcement at the FSCA in South Africa, discussed with Cointelegraph how the FSCA is involved in the MTI investigation. The FSCA is now dealing directly with the liquidators of MTI and has also shared the details of all of MTI investors to the South African Revenue Service. Topham told Cointelegraph that the use of cryptocurrencies was key for MTI the perpetrators to be able to dupe investors:

“The importance of MTI is that they first used the crypto as a basis to argue that the alleged investment business being conducted by them did not fall into our jurisdiction as the payment method was crypto. Later, when they stopped trading forex due to our investigation, they alleged to be trading crypto, and as crypto had a reputation for large returns, this made it easier for victims to believe the high returns were real.”

Topham added that the situation was not a reflection of a lack of understanding of cryptocurrencies by South African investors but that people were “desperate and/or greedy” and continued to invest in MTI after the FSCA’s warning against doing so midway through 2020.

The MTI debacle has cast a spotlight on regulation in the country. Topham told Cointelegraph that at present, there is still no regulation in the space, however, the FSCA began the process of declaring cryptocurrencies as financial products in November 2020, which was open for public comment up until the end of January 2020. According to him:

“Once implemented, this change will require the advisors and intermediary service providers of crypto to register with the FSCA. This will not mean that crypto is regulated or very importantly that we are endorsing the existence of crypto, it will just be a mechanism to ensure that South Africans who choose to participate in crypto transactions are properly advised and that they are not dealing with con men.”

Topham conceded that even registered financial service providers “sometimes go rogue” but insists that the framework would be a first step in protecting the public from abuse in the area. He further added that it’s difficult to regulate something “which has no address, no business and no management in general.” This, according to him, is exactly the reason why the regulators strongly advise investors to stay away from cryptocurrencies.

The taxman is calling

While the MTI issue has renewed the perception that cryptocurrencies are often associated with scams or fraud for people unfamiliar with the space, the use and trade of cryptocurrencies in South Africa is in a healthy place.

The recent boom in value across the cryptocurrencies markets brings with it a windfall for many traders and crypto holders. With plenty of profit to be made, there are also tax implications to be considered, and recent local reports indicate that the South African Revenue Service is honing in on the space.

Local firm Tax Consulting South Africa noted that a number of its clients had received audit requests from SARS, with a specific query on their use of cryptocurrencies. The company said that users were asked to disclose the purpose for which the taxpayers had bought cryptocurrency, as well as a letter from cryptocurrency exchanges confirming the users’ investments and trading history and bank statements. The firm added that taxpayers should expect this query from SARS if they had previously disclosed crypto-related income or investments in their tax returns.

Marius Reitz, general manager for a local cryptocurrency exchange Luno, told Cointelegraph that it was not privy to SARS’ strategy in relation to cryptocurrency traders but said that any sort of clampdown could include all types of trading profits or losses.

Reitz also stated that neither SARS nor SARB has indicated that it will ask exchanges to submit any trading information of customers. As it stands, it’s up to South African taxpayers to provide tax information to SARS.

While cryptocurrency users in South Africa can rest easy knowing that exchanges are not being pressured into giving up information on traders, Reitz did indicate that Luno will share customer data with law enforcement or other authorities to comply with valid requests from the relevant authority.

Topham said that they actively work and support SARS’ efforts to enforce tax laws in the country and that cryptocurrency users should be well aware of the tax implications of trading, holding or transacting digital assets:

“Crypto is nothing new when it comes to the principles of taxation. If you pay with Rands, dollars, cows or any other form of asset, the value of the transaction still falls into the general in the Production of Income definition. We work closely with all fellow regulators and institutions. Another being the South African Reserve Bank as crypto is often used to move wealth offshore.”

South Africa’s crypto thermometer

Looking through the lens of the exchange, Reitz believes that the South African crypto landscape is fertile, having marked an influx of users on its platform over the past year and has seen over 6 million users sign up to its exchange services in different jurisdictions around the world.

Luno has also played a role in shaping regulatory considerations in South Africa, having worked with the Intergovernmental Fintech Working Group, which is shaping regulation for the space. Reitz believes that regulation will provide clarity and protection to businesses and consumers, while the MTI affair, unfortunately, involves cryptocurrency:

“The investment use case of cryptocurrencies still remains fundamentally strong, despite the MTI situation. People who invest directly via credible platforms can attest to their safety, it is when unscrupulous ‘middlemen’ get involved that there are questions about cryptocurrencies.”

Reitz highlighted data from Statista that reports South Africa ranking in the top five countries for high rates of cryptocurrency ownership as another metric showing the growth of usage in the country.

Meanwhile, Topham told Cointelegraph that the FSCA still believes that cryptocurrencies are not a credible long-term store of wealth and described investing in the space as high risk, as their value is driven by sentiment alone and is fuelled by anti-government thinking:

“We are excited by the technology behind crypto assets and respect South Africans’ right to buy or invest in what they wish. We do not feel it is a credible long-term store of wealth, and it is extremely high risk, and the public must be aware and keep their heads when making decisions which could end up having them hold a long number which has no value.”