Cryptocurrencies outside Exchange Control Regulations, court rules

The High Court in Pretoria has ruled that cryptocurrencies, such as Bitcoin, do not fall within the scope of the Exchange Control Regulations. The ruling, which set aside a forfeiture order on funds linked to cryptocurrency transactions, highlights a significant gap in the regulation of digital assets.

Background to the case

The litigation arose from a dispute involving Leo Cash and Carry (Pty) Ltd (LCC), a wholesale trading business, which operated from 2018 until its liquidation in December 2021.

In August 2019, LCC opened a business current account with Standard Bank, followed by a money market call account. In December 2019, LCC secured a R40-million overdraft facility from Standard Bank, using the money market account, with a balance of R15m, as collateral. As part of the agreement, LCC transferred R15m from its current account to the money market account in February 2020 and used R10m from the overdraft to settle a separate overdraft with Nedbank.

In July 2019, the Financial Surveillance Department (FinSurv) of the South African Reserve Bank (SARB) initiated an investigation into LCC and other entities for suspected violations of the Exchange Control Regulations, specifically related to cryptocurrency transactions.

FinSurv found that LCC had acquired Bitcoin on local exchanges and transferred significant amounts – about 4 405.9783 BTC, valued at R556 020 325.68 – to foreign exchanges.

In February 2020, FinSurv instructed Standard Bank to place a hold on LCC’s accounts under Regulations 22A and/or 22C, suspecting contraventions of Regulations 3(1)(c) and 10(1)(c), which restrict the export of currency and capital without National Treasury’s approval.

After the hold was lifted in March 2020, with instructions for continued surveillance, Standard Bank, having uncovered fraud by LCC and related clients, initiated liquidation proceedings against LCC, which were granted in December 2021.

In December 2022, FinSurv invited Standard Bank and LCC’s liquidators to make representations against the forfeiture of R16 404 700.27 in the Standard Bank money market account and R10m in the Nedbank account. Despite these representations, the SARB’s deputy governor, Nomfundo Tshazibana, issued a forfeiture order in February 2023, under Regulation 22B, published in the Government Gazette.

Standard Bank brought a review application to set aside the forfeiture orders, arguing it had a secured interest in the money market funds through a pledge and cession agreement, and cryptocurrencies did not fall within the scope of the Exchange Control Regulations.

The bank contended that the forfeiture was unlawful, because the regulations did not apply to LCC’s cryptocurrency activities and sought to protect its financial exposure as a secured creditor of LCC’s insolvent estate.

Main legal issue

The primary issue before the court was whether LCC’s cryptocurrency transactions, involving the acquisition and transfer of Bitcoin to foreign exchanges, contravened Regulations 3(1)(c) and 10(1)(c) of the Exchange Control Regulations, thereby justifying the SARB’s forfeiture orders under Regulation 22B. These regulations, promulgated under section 9 of the Currency and Exchange Act, form the backbone of South Africa’s exchange control framework, designed to regulate capital outflows and protect the domestic economy.

• Regulation 3(1)(c) states that, without National Treasury’s permission, no person shall “make any payment to, or in favour, or on behalf of a person resident outside the Republic or place any sum to the credit of such person”. The court was tasked with determining whether cryptocurrencies, such as Bitcoin, constitute “currency” or a “sum” under this regulation.
• Regulation 10(1)(c) prohibits, without Treasury approval, any transaction whereby “capital or any right to capital is directly or indirectly exported from the Republic”. The court had to assess whether cryptocurrencies qualify as “capital” within this definition.
• Regulation 22B allows the SARB to declare funds or goods forfeited to the state if they are involved in or suspected of being involved in contraventions of the regulations. The court needed to evaluate whether the forfeiture orders were valid absent a clear contravention.

Additionally, the court considered whether Standard Bank had locus standi (legal standing) to challenge the forfeiture of the R10m in the Nedbank account, given that those funds were transferred to settle LCC’s debt with another bank.

What the High Court concluded

The judgment centred on the definitions of “currency” and “capital” under Regulations 3(1)(c) and 10(1)(c), respectively, and drew heavily on the precedent set by the Supreme Court of Appeal (SCA) in Oilwell (Pty) Ltd v Protec International Ltd and Others (2011).

The court scrutinised whether Bitcoin and cryptocurrencies generally constitute “capital” under Regulation 10(1)(c). It adopted a restrictive interpretive approach, citing the need for clarity in penal legislation, as mandated by the Oilwell case.

Judge Mandlenkosi Motha noted, “When dealing with Regulation 10(1)(c), the court must be mindful of the dicta in Oilwell. The court categorically stated that, ‘These examples show that a restrictive interpretation is called for, particularly in view of the fact that any legislation that creates criminal and administrative penalties, as the Regulations do, requires restrictive interpretation.’”

In Oilwell, the SCA had to determine whether intellectual property rights (IPRs) constituted “capital” under Regulation 10(1)(c). The court ruled that IPRs did not fall within this definition, because “capital” referred to specific forms of financial value, not all assets, and required a narrow interpretation because of the regulations’ penal consequences.

The Oilwell decision led to a legislative amendment in 2012, with Regulation 10(4) explicitly including IPRs in the definition of “capital”, illustrating that legislative action was necessary to expand the regulation’s scope.

Applying this precedent, Judge Motha held that cryptocurrencies, like IPRs in Oilwell, do not fit within the current definition of “capital”. He stated, “To me, on any construction, much less on a restrictive interpretation, cryptocurrency falls outside the ambit of capital under Regulation 10(1)(c).”

The judgment emphasised that extending the scope to include novel assets such as cryptocurrencies requires legislative amendment, not judicial reinterpretation, to uphold the rule of law and the separation of powers.

The court also examined whether cryptocurrencies constitute “currency” under Regulation 3(1)(c). It concluded that Bitcoin is not “money” or “currency”, because it lacks legal tender status in South Africa and operates as a digital asset on a decentralised blockchain.

Judge Motha remarked: “Cryptocurrency is not money. The construction that cryptocurrency is money, by looking at the definition of money which includes foreign currency, is strained and impractical.”

The court highlighted practical challenges, such as the inability to deposit cryptocurrencies such as cash or attach crypto wallets, reinforcing its exclusion from the regulation.

Court’s orders

The court concluded that LCC’s cryptocurrency transactions did not contravene Regulations 3(1)(c) or 10(1)(c), rendering the forfeiture order under Regulation 22B unlawful for the Standard Bank money market account. Consequently, it set aside the forfeiture order in respect of the R16m.

However, Standard Bank’s application to set aside the forfeiture of R10m in the Nedbank account was dismissed, because the court found that Standard Bank lacked locus standi. The court reasoned that the Nedbank funds, transferred to settle LCC’s debt, became Nedbank’s property by commixtio (mixing of funds), and Standard Bank had no direct legal interest.

Significance and possible implications

Law firms Baker McKenzie and Norton Rose Fulbright say the judgment is a landmark decision with profound implications for South Africa’s cryptocurrency industry and financial regulation. They believe the ruling provides temporary relief for the crypto industry and anticipate regulatory changes in the not-too-distant future.

The ruling “brings an end to a debate in the South African crypto asset industry as to whether cryptocurrencies require exchange control approval for their export out of South Africa,” say Ashlin Perumall, a partner at Baker McKenzie, and Gabriel Rybko, an associate at the same firm.

They emphasise that the court’s finding – that cryptocurrencies do not constitute “capital” under Regulation 10(1)(c) or “currency” under Regulation 3(1)(c) – means “crypto assets are not subject to the country’s strict exchange control regime, offering long-awaited clarity for the crypto industry”.

Both firms underscore the regulatory vacuum exposed by the judgment.

“The court acknowledged a regulatory vacuum regarding the treatment of cryptocurrency within the exchange control framework”, emphasising the “pressing need for legislative reform to provide clarity and certainty in this rapidly evolving area”, say Desiree Reddy, a director at Norton Rose Fulbright, and Ntokozo Ngubane, a senior associate.

Baker McKenzie’s Perumall and Rybko note that the Exchange Control Regulations, “created in an era dominated by corporeal wealth and traditional currency”, are “ill-suited to deal with contemporary challenges, such as those posed by cryptocurrencies”.

They highlight the regulations’ “archaic” nature and their “exacting” penalties, such as fines up to 40% of transaction values or criminal sanctions.

Baker McKenzie draws parallels with the Oilwell case, where the SCA ruled that intellectual property did not constitute “capital” because “capital was not merely synonymous with assets, but rather to specific species of value”. This precedent led to a 2012 amendment (Regulation 10(4)) that included intellectual property, closing a regulatory loophole.

“In about 15 months after the Oilwell judgment was handed down, the Exchange Control Regulations were amended … It is possible and likely that a similar mass export of currency, through the use of cryptocurrencies such as BTC, stablecoins or others, may occur following the ruling in Standard Bank v SARB, unless the regulators move swiftly to address the gap.”

Perumall and Rybko predict that “given the risk this presents to the exchange control system as a whole, such legislative action seems inevitable, and it is likely that the Exchange Control Regulations will be amended in short order”.

They say these amendments should not come as a surprise. The 2021 Intergovernmental FinTech Working Group Position Paper on Crypto Assets recommended amending the regulations to include crypto assets as “capital”.

Furthermore, Judge Motha referred to an academic position paper published by the SARB in 2020 in which the SARB stated, “Exchange control regulations do not govern the transfer of cryptocurrencies in and out of South Africa. Any cross-border exchange can therefore not be authorised by SARB,” hinting at the need for regulatory reform.

Click here to download the judgment.