The blockchain is an emerging and disruptive technology that’s revolutionising the financial industry. Sonya Kuhnel, founder and MD of the Blockchain Academy in South Africa, looks at some of the technology’s use cases, and the tax implications and regulation of bitcoin in South Africa.
THE BLOCKCHAIN IS A DIGITAL, DISTRIBUTED TRANSACTION database or ledger. It’s best known as the technology behind bitcoin, storing all bitcoin transactions as well as transactions of other types of cryptocurrencies, such as ether. It’s a write-only database, which means data can only be added and not edited or removed.
The blockchain is decentralised, meaning it’s not stored in one location or controlled by any central authority. Multiple identical copies of the blockchain are stored and maintained, so the data on the blockchain is resistant to any single point of failure, and can’t be forged or destroyed.
Cryptography protects all transactions recorded on the blockchain.
Bitcoin: digital currency or investment?
It’s entirely your choice. As a digital currency or cryptocurrency, you can send bitcoins to anyone anywhere in the world at any time – without the need for a bank account. Some merchants also accept bitcoin as payment.
As an investment, bitcoin is very volatile and therefore a high-risk investment with the potential to offer high returns.
What the blockchain can do for the financial industry
Beyond bitcoin, the blockchain has many other possibilities. Many major banks around the world are researching blockchain-based technologies to build trust, and improve and streamline existing processes. Current systems and processes are expensive, inefficient and insecure. Although researchers are just beginning to scratch the surface, they’ve already identified some interesting use cases:
Tax implications for bitcoin in South Africa
‘Transactions or speculation in bitcoin is subject to the general principles of South African tax law and taxed accordingly,’ SARS says.
This applies to income generated from trading cryptocurrency. Owning bitcoin may be regarded as an asset and if you hold bitcoin as an investment, capital gains tax (CGT) may be applicable at the disposal of this asset. SARS has not, to date, specified the tax requirements for specific bitcoin-to-rand transactions.
In the USA, only 8 000 people have declared bitcoin as an income since its inception. As a result, Coinbase, one of the biggest digital asset exchanges in the world, has been taken to court by the Internal Revenue Services (IRS), forcing it to reveal its records for all users between 2013 and 2015.
Regulation of bitcoin in South Africa
The regulation of cryptocurrencies such as bitcoin varies largely from country to country. Japan and South Korea, for example, now recognise bitcoin as legal tender. But in South Africa, no regulation currently exists around bitcoin and other digital currencies.
In South Africa, bitcoin falls under the Financial Intelligence Centre Act 38 of 2001 (FICA). By simply following FICA rules and regulations, local companies such as Luno, a bitcoin trading platform in South Africa, can operate legally and freely, allowing innovation and rapid development.
However, as cryptocurrencies are unregulated, they aren’t recognised as legal tender in South Africa. A merchant may refuse bitcoin as a payment instrument so the use of cryptocurrencies depends on willingness to accept it.
In its December 2014 ‘Position Paper on Virtual Currencies’, the South African Reserve Bank (SARB) said, ‘Decentralised Convertible Virtual Currencies (DCVC) are not legal tender in RSA and should not be used as payment for the discharge of any obligation in a manner that suggests they are perfect substitute of legal tender.’
In 2017, SARB Governor Lesetja Kganyago publicly expressed the bank’s ‘openness’ towards blockchain technologies. ‘As a central bank, we are open to innovations despite the different opinions of regulators on matters such as cryptocurrencies. We are willing to consider the merits and risks of blockchain technology and other distributed ledgers.’
As we begin to see early adopters benefiting from blockchain technology, more and more incumbent institutions will get on board and embrace the new technology paradigm and disrupt from within.
Glacier Research comment
Blockchain technology and the accompanying cryptocurrency market are novel and exciting technologies that have certainly attracted a lot of media attention this year, particularly within the financial industry. Subsequently, a frenzy of ‘investment buying behaviour’ has seen the price of many cryptocurrencies, bitcoin in particular, experience exponential gains over the past few months.
Critics of cryptocurrency and the speculative buying behaviour that accompanies it have warned that the sharp rally experienced is reminiscent of a market bubble. In response to such critics, proponents of the technology have argued that given the technology’s infancy and the ever-growing list of applications for which it can be used, it’s short-sighted to rule that this is just another bubble and that the industry will collapse. Just like other modern-day technologies such as the PC, cellphone, internet and social media, blockchain technology displays signs of tangibly revolutionising the way individuals and institutions could potentially interact and relate going forward.
But whichever side of the fence one may lean toward, there are important things to keep in mind when considering cryptocurrency as an alternative ‘asset class’. The price of a cryptocurrency (bitcoin) can unpredictably increase or decrease over a short period of time due to its young economy, novel nature, and sometimes illiquid markets.
Lastly, dealing in virtual currencies is at the user’s own risk with no recourse to South African authorities. Since it is unregulated, there’s absolutely no investor protection and any losses incurred are purely the responsibility of the holder.
Source: GlacierQuarterly – Sonya Kuhnel