CRYPTO-CURRENCY TRANSACTIONS HAPPEN BELOW THE REGULATORY RADAR

Tuesday, June 03, 2014
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“Because of their intangible nature, and lack of transparency and disclosure, crypto-currencies have become a nightmare for regulatory authorities around the world, including South Africa,” says Brandyn Lilley.

“Unlike conventional currencies, crypto-currencies are completely decentralsed, operating without a central authority or bank, and not backed by any government. The identities of transacting parties are encrypted, and no personal information is exchanged.”

This ability to transact with such a high degree of anonymity is ideal for transactions associated with criminal activities, particularly fraud and money laundering.

Without the involvement of banks or other central authorities, it is difficult to follow the flow of money, and enforcement officials may have difficulty seizing or freezing illicit proceeds held in crypto-currencies. Also, unlike money held in a bank, crypto-currencies may not be held by a third-party custodian.

“Indeed, they have many of the characteristics of a tax haven, where earnings are not reported and users enjoy a degree of anonymity,” says Lilley.

The anonymous nature of these transactions facilitates the circumventing of currency controls, and this was the case with post-bailout Cyprus where certain funds leaving the country in 2013 were attributed to high volumes of Bitcoin transactions.

“In South Africa, all foreign exchange transactions are subject to exchange control regulations governed by the SA Reserve Bank. The use of crypto-currencies will make it increasingly difficult, if not impossible, for the Bank to monitor the value of these inflows and outflows,” says Lilley.

He adds that the SA Revenue Service (SARS) has yet to issue a guiding statement on the tax treatment of crypto-currencies. Arguably, SARS may follow the route of the US Internal Revenue Service (IRS) which, according to a recent notice, describes how existing general tax principles apply to transactions using virtual currency.

This approach seems sensible, says Lilley, as it reminds taxpayers of basic tax reporting requirements for crypto-currency transactions having real world implications.

“Crypto-currency transactions know no national boundaries, and regulators in each jurisdiction will have to consider their own legal and regulatory framework. However, as the use of crypto-currencies increases, it’s likely that there will be a degree of international co-operation among regulators.”