In a recent decision, the High Court of South Africa (Gauteng Division, Johannesburg) held that cryptocurrency, constitutes both "capital” and “money” for purposes of South Africa’s Exchange Control Regulations, 1961 ("Regulations").
Background
The pertinent background facts were as follows:
- Mr. M possessed cryptocurrency trading accounts on the Luno platform (a well-known cryptocurrency trading website);
- between January 2018 and March 2020, Mr. M used his account (and the second applicant’s account) to 'funnel' approximately 1680 Bitcoin purchased in South Africa (worth about ZAR 182 million) to bitcoin wallets accessible through cryptocurrency exchanges registered outside South Africa;
- Mr. M was behind the transactions/caused them to be carried out;
- Mr. M acted in concert with other individuals;
- Mr. M did not have permission to perform such transactions;
- the South African Reserve Bank ("SARB") concluded that such conduct amounted to the export of the Bitcoin and their value (contrary to Regulation 10(1)(c) of the Regulations);
- the Deputy Governor, under Regulation 22B, declared forfeit to the State ZAR 6 million in Bitcoin and money (standing to the credit of the applicants’ accounts); and
- the forfeiture was affected on the basis that such amounts were the proceeds of the contravention of the Regulations or were in the process of being unlawfully exported.
Issue
The applicants sought to review and set aside the forfeiture orders on, inter alia, the basis that the Regulations were not applicable.
Key Regulation
Regulation 10 of the Regulations provides as follows:
“10(1) No person shall, except with permission granted by the Treasury and in accordance with such conditions as the Treasury may impose –
(c) enter into any transaction whereby capital or any right to capital is directly or indirectly exported from the Republic.
…
(4) For the purposes of sub-regulation (1)(c)-
(a) ‘capital’ shall include, without derogating from the generality of that term, any intellectual property right, whether registered or unregistered; and
(b) ‘exported from the Republic’ shall include, without derogating from the generality of that term, the cession of, the creation of a hypothetic or other form of security over, or the assignment or transfer of any intellectual property right, to or in favour of a person who is not resident in the Republic.”
Applicant’s submissions
The applicants’ submissions were, inter alia, as follows:
- Bitcoin’s unique, intangible and technological features meant cryptocurrency is not capital, currency, or a security. Transfers to a wallet registered on a foreign cryptocurrency exchange is not a payment to the holder of that wallet. Accordingly, the Regulations did not apply to cryptocurrency;
- even if cryptocurrency qualified as capital, there was no evidence that it was exported (as contemplated by Regulation 10(1)(c));
- reports and papers issued by entities controlled by or associated with the SARB tended to treat cryptocurrency as a phenomenon which may not be adequately regulated by the Regulations;
- cryptocurrency could not have been in the contemplation of the drafters of the Currency and Exchanges Act and the Regulations (at the time of promulgation in 1933 and 1961 respectively);
- an export could not have taken place unless the holders of the wallets were identified as resident in a foreign jurisdiction or if the Bitcoin was converted to foreign currency in a foreign jurisdiction;
- that because Bitcoin wallets were capable of being accessed from anywhere (including South Africa) this indicated that the Bitcoin was not exported; and
- the forfeiture order was not competent in respect of Bitcoin because the empowering Regulation referenced money and goods and Bitcoin was neither.
SARB’s contentions
The SARB alleged that:
- Mr. M used his and the second applicant’s Luno accounts to purchase Bitcoin on behalf of third parties (using ZAR provided by third parties);
- the Bitcoin purchased was credited to wallets held on cryptocurrency exchanges registered outside South Africa;
- the ordinary rules applicable to the export of capital were avoided (the cryptocurrency transferred to the foreign cryptocurrency exchanges could only be held in a cryptocurrency account outside South Africa);
- the net effect was that the ZAR value of the Bitcoin, transferred to the foreign exchanges (worth approximately R182 million), was exported.
The SARB contended that the transactions were carried out in contravention of Regulation 10(1)(c) because cryptocurrency is capital and its transfer to wallets on exchanges registered outside South Africa amounted to the export of the Bitcoin and their ZAR value.
High Court decision
Wilson J described Bitcoin as follows:
- Bitcoin is a virtual currency whose value is reliant on the blockchain;
- the blockchain is a finite ledger of all the Bitcoin transactions that have taken place;
- as Bitcoin is used/exchanged, the blockchain grows because more transactions are recorded;
- the ledger requires complex cryptographic technology to maintain its accuracy (requiring vast quantities of computing power) and the trust of the people who use it;
- users lend their computer processing power (mining) to perform the complex cryptographic functions necessary to add securely and accurately to the blockchain. When users do so they are paid in Bitcoin and are given a cryptographic key enabling them to alter the record of a credit in their favour on the blockchain;
- the ledger credit (Bitcoin) can be ceded/sold to others who then acquire their own cryptographic key to a portion of the blockchain (which records a credit in the acquirer’s favour and a corresponding debit against the person from whom they acquired the Bitcoin);
- the computing power needed to add to the blockchain, and the fact that there is a finite number of Bitcoin that can be produced according to complex mathematics, keeps Bitcoin scarce enough to hold value;
- mining Bitcoin increases the supply of Bitcoin at a predictable rate until the mathematically set rate is reached.
Against this background Wilson J interpreted Regulation 10(1)(c) as follows:
- Regulation 10(1)(c)’s effect must be determined by considering the ordinary grammatical meaning of its text, the context in which the text appears, and the purpose of the Regulation (read in light of the overall purpose of the legislation in which it appears);
- the starting point is the language of the provision itself read in context and having regard to the purpose of the provision;
- capital, at its broadest, is an asset produced to bear value, or which is used to produce other assets of value – however, the Regulation was not intended to apply to every capital asset, and was used in its financial sense per the Supreme Court of Appeal decision in the Oilwell decision;
- capital is closely identified with “cash for investment” or “money that can be used to produce further wealth” but, in accordance with the decision in Oilwell, capital is not synonymous with fiat currency (money issued by a central bank whose value depends upon the State’s promise to pay the bearer of a banknote the amount specified and on its capacity to guarantee the value of bank deposits made in the fiat currency);
- capital refers to any financial asset that is capable of holding value or used as a medium of exchange;
- capital includes fiat currency, negotiable instruments, documents, or tokens that bear a fixed or ascertainable exchange value;
- if capital meant fiat currency there would be no difference between the terms “capital” and “currency” – terms deployed in the Regulations to mean different things;
- the meaning of capital was broadened after the Oilwell decision to expressly include intellectual property rights;
- Bitcoin is plainly capital in the sense that it is a financial asset that is capable of holding value and being used as a medium of exchange (Bitcoin can be exchanged for fiat currency and is accepted by merchants as a form of currency);
- the regulation of Bitcoin as capital is essential to maintain the effectiveness of the capital controls embodied in the Currency and Exchanges Act and Regulations – otherwise anyone of any means who wished to take their money abroad could do so without oversight simply by converting it to cryptocurrency and transferring it to a foreign cryptocurrency exchange – completely at odds with the purpose of the exchange control regime, which is to regulate and, where necessary to curb, the outflow of capital as per the Constitutional Court decision in Shuttleworth;
- text, context and purpose all point to Bitcoin being capital for purposes of Regulation 10(1)(c) (including any similar financial asset capable of holding value or being used as a medium of exchange);
- the fact that Bitcoin was credited to cryptocurrency wallets on foreign exchanges is sufficient to conclude that capital was exported;
- once Bitcoin is placed beyond the jurisdiction of the SARB it was exported;
- in determining whether there was an export, the location of the account mattered rather than the location of the account holder (the example was given of an export of money by a person drawing money from a South African bank account at an ATM in London);
- the forfeiture order was competent in respect of the Bitcoin because its general characteristics bring it within any sensible concept of money (it is a store of value, can be exchanged for money, and functions as a medium of exchange). He also stated that it constitutes a negotiable instrument in that it is no more than a right to be credited a specified sum of Bitcoin exchangeable for money or things of value.
Wilson J highlighted the following:
- Regulation 10(1)(c)’s interpretation is unaffected by what a consultant thinks the regulatory framework covers when writing a report for a parastatal or Government – such material may not always be irrelevant, but its impact is marginal at best;
- whilst drafters may not have foreseen cryptocurrency they knew all about financial assets, negotiable instruments and fiat currency. The Currency and Exchanges Act was drafted during the Great Depression brought on in part by a collapse of confidence in financial markets making draftsman keenly aware of how fungible financial assets can be;
- the Standard Bank decision dealing with cryptocurrency was incorrectly decided. The focus there was on cryptocurrency’s nature (existence as an entry on a digital ledger, technological features and not constituting legal tender) instead of the use to which cryptocurrency could be put; and
- courts should be careful not to ascribe unusual or irreducibly exotic properties to novel/unique phenomena which exhibit the same attributes an enactment is intended to regulate.
Conclusion
This judgment took a more detailed approach to defining/describing Bitcoin and a deeper dive into applicable jurisprudence whilst maintaining a focus on key principles of statutory interpretation, being context and purpose.
From a future regulation perspective, the judgment may not be as significant – a draft revised regulatory framework has been prepared that expressly includes cryptocurrency. The judgment makes a case supporting such draft framework.
Please contact one of our specialists should you have any queries in this regard.
