Finance Minister’s Firm Position on Bitcoin Hinders Growth and Innovation

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JEREMY MAGGS: South Africa faces the risk of lagging in the digital finance landscape. Finance Minister Enoch Godongwana has reiterated his stance that collective investment schemes should not invest in crypto assets due to concerns about risk and investor protection.

However, it seems global trends are moving in a different direction. Companies like Luno argue that such restrictions are limiting South Africa’s potential.

To explore this issue further, I’m joined by Marius Reitz, the general manager for Africa and Europe at Luno. Marius, welcome. Why do you believe the minister’s comments are restricting South Africa?

MARIUS REITZ: Hi, Jeremy. As you pointed out, crypto assets like Bitcoin are currently prohibited as underlying investment assets in collective investment scheme products such as ETFs and unit trusts. Consequently, both retail and institutional investors have to invest their capital in US-based funds, which comes with multiple implications.

For starters, these investors must utilize their offshore investment allowances, and many have already hit their limits. This restriction suppresses growth in the local crypto sector, hinders economic progress and job creation, and represents a significant tax opportunity cost for the country.

Ultimately, Jeremy, there is a clear demand; both retail and institutional investors are keen to gain exposure to Bitcoin.

The demand is clear and well-established. Bitcoin has moved beyond being a niche asset.

We can present numerous metrics indicating the growth and adoption of Bitcoin—overall, it is a $2.3 trillion asset and ranks among the top ten global assets by market capitalization.

Its returns significantly surpass those of the traditional markets. Yes, it carries inherent risks, but the demand is apparent. We’ve seen close to $165 billion of investments into US-based ETFs, a substantial portion of which could have been invested in emerging markets including South Africa.

JEREMY MAGGS: Marius, the risk factor you mentioned is exactly what is concerning the finance minister.

MARIUS REITZ: Absolutely. It’s a new asset class. While it has been around for roughly 17 years, we have made considerable advancements recently, Jeremy.

Locally, we have observed progress on the regulatory front: both the Financial Intelligence Centre and the Financial Sector Conduct Authority (FSCA) have started to regulate the industry. Crypto assets are now recognized as financial products alongside other financial instruments. The sector is regulated, and numerous sophisticated firms are active in South Africa.

When we assess some risks, price volatility has lessened. Nonetheless, we’re really addressing a minimal allocation—1% to 3%, or even 1% to 5%. Responsible allocation is critical. A 1% to 5% allocation sends a positive message to the private sector and asset managers.

Many of the country’s largest asset managers are eager to provide Bitcoin-backed products to their clients but are currently unable to do so, which stifles potential growth.

JEREMY MAGGS: So, is the minister mistaken in his caution regarding “unsophisticated investors”?

MARIUS REITZ: Well, Jeremy, investors will inevitably find ways to invest in what they choose. There’s no method to control that behavior. However, we argue that offering regulated crypto products traded on the Johannesburg Stock Exchange (JSE) significantly aids in investor protection.

Read: Look out JSE, here come tokenised stocks

Investors will seek exposure, whether through a crypto investment app, offshore investing, or other avenues.

Essentially, this is driving the market underground to a certain extent.

We contend that a publicly listed or traded crypto-backed investment product will bring the market into the open, making it safer for investors, as the JSE would provide oversight on the issuance of such products.

JEREMY MAGGS: What specific clarity are you hoping to see in the central bank’s upcoming framework on this topic?

MARIUS REITZ: It’s rather simple, Jeremy. We want the finance minister and National Treasury to approach this with an open mind. We hope they will consider the inclusion of crypto assets in Board Notice 90.

Board Notice 90 outlines the types of investments allowed in portfolios of collective investment schemes, such as ETFs and unit trusts.

We don’t want them to prohibitively exclude crypto assets from any upcoming amendments to Board Notice 90.

This would not only benefit the crypto industry but also encourage the traditional asset management sector to engage in productive discussions about permitting small allocations of crypto assets in these investment products.

JEREMY MAGGS: In relation to these constructive discussions, what initiatives is your organization pursuing with the central bank or finance minister?

MARIUS REITZ: Jeremy, we have been pioneers in South Africa’s cryptocurrency landscape since 2013. Over the years, we have played various roles in engaging with regulators and the SA Reserve Bank (SARB), along with the FSCA. We consistently engage with National Treasury on crucial regulatory building blocks that must be established.

For example, it remains uncertain whether crypto assets are classified as onshore or offshore assets, a distinction that has significant repercussions for institutions. Therefore, we are discussing this matter with SARB.

Read: Calls for overhaul of Regulation 28 to allow crypto investments

We firmly believe that crypto assets should be categorized as onshore assets, allowing retail and institutional investors to avoid exhausting their foreign exchange allowances when investing in them. This would enable asset managers to confidently create and offer products that track the value of crypto assets like Bitcoin to their clients.

JEREMY MAGGS: Marius Reitz, thank you for your insights.

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