What is Happening to the South African Bitcoin Market?

The evolution of bitcoin has created a new market in Africa. The biggest economies in the continent, Nigeria and South Africa are at the helm of the boom, which is showing a lot of young people a way out of unemployment.

It is more like a fulfillment of the 2018 United Nations’ report, which predicted that Africa could be the next frontier for cryptocurrency due to poor governments’ fiscal policies and regulatory bottlenecks that pose a challenge to economic growth in the continent.

While Nigeria leads the African crypto market, South Africa is trailing with a ground-breaking volume of transactions.

Apart from its 32.5% unemployment rate, South Africa is a country where the majority of the population is unbanked, creating the opportunity for more people to embrace bitcoin not only as a way of transaction, but also as means of employment.

For the past five years, the South African cryptocurrency market has evolved to become one of the leading peer-to-peer marketplaces in the world. South Africa processed nearly $100 million in P2P bitcoin exchange in 2020, opening opportunity for further investment in 2021.

The growth has been spurred by many factors, including flexible payment systems, cross border trade, currency fluctuation and fair regulation.

Before now in South Africa, cross-border financial transactions were expensive, rigorous and unreliable, even within the Southern African Development Community (SADC) bloc. Across the continent, the complexity was limiting business transactions and frustrating Small & Medium Enterprises (SMEs) and other markets.

Then there’s currency fluctuation. The South African rand is one of the most volatile major currencies in the world. Since 2014, it has lost 30% of its value as the economy wobbles.

Another factor fueling the surge of bitcoin in South Africa is the African Continental Free Trade Area (AfCFTA), a bloc idea born in 2012 and signed in July 2019 to facilitate intra-African trade. So far, more than 30 countries have ratified their instrument, which means there is anticipation of increased cross-border trade within Africa that will need flexible means of financial transactions.

In addition, seeing where the world is headed with digital payments, the South African Reserve Bank has established a team of players from the financial sector, including stakeholders in the cryptocurrency industry, tasked to develop a regulatory framework for the industry.

These factors have spurred significant growth in the South African bitcoin market, stoking the interest of many who are joining the trend daily.

However, as interest grows in the South African Cryptocurrency market, challenges remain. In January, South African financial sector regulator, the Financial Sector Conduct Authority (FSCA) requested more oversight power to regulate cryptocurrencies in order to be able to prosecute fraudsters in the industry.

FSCA made the request after Mirror Trading International (MTI), a bitcoin trading club, was accused of a $740 million bitcoin scam, conducting operations illegally and lying to investors. The regulator shut MTI down in December due to the enormity of the fraud allegations leveled against it. The club was, among other acts of fraud, accused of falsifying trade statements and did not declare losses after promising customers daily returns of 0.5% for $100 deposit.

It has been the biggest scandal in the South African cryptocurrency market, and set a trajectory that would have scared traders off the market if not that many exchanges have established good reputations that withstood the scandal.

“Mirror Trading International is another example of why the industry must spread the word that algorithmic trading platforms promising unrealistically high returns are nearly always scams,” data firm, Chainalysis said.

“When cryptocurrency exchanges and other services learn of these scams and receive their cryptocurrency addresses, they should discourage users from sending funds to those addresses or at least warn them that financial losses are highly likely,” it added.

Despite these pitfalls, the South African authorities have taken a different approach from their Nigerian counterparts, who in February 5 announced the ban of cryptocurrency exchanges’ operations. The South African regulators are poised on regulating existing exchanges to give credibility to the industry.

But due to the scandal, the exchanges, including peer-to-peer (P2P), a decentralized platform whereby two individuals interact and transact directly with each other, without the need of a middleman to broker the deal, have come under the radar of both regulators and traders.

Against this backdrop, the South African bitcoin market is set for full regulation aimed at curtailing fraud practices. This means that all the exchanges including P2P platforms being used in South Africa will have to undergo credibility verification.

The FSCA has proposed stringent regulations that will mandate crypto startups to obtain a financial services provider (FSP) or cease operations. But there is more to it that has thrown the market into disarray. Under the proposed regulation, taxpayers are required to disclose all crypto-related transactions to South African Revenue Service (SARS), or face a penalty that may involve a two-year jail term.

As a result of this proposed regulation, the South Africa’s daily bitcoin transaction volume plunged 10%, from $258,783 to $235,470 in January; as many traders began to withdraw their investment.

The proposed tax rule will undermine the autonomy of cryptocurrency in South Africa, spooking investors as they wouldn’t want to operate in a market where the government is interfering with transaction autonomy.

Although the South African authorities claim their aim is to sanitize the cryptocurrency market through regulation, the proposal is suggesting that the government wants a share of the bitcoin boom.

SARS had earlier proposed capital gains tax (CGT) on crypto investments that would require traders paying from 7% to 18% tax on profits made, another development crypto traders don’t want to reckon with.

Generally, the growth of the cryptocurrency market both in Nigeria and South Africa appears partially dependent on the regulatory policies of both governments. For this reason, exchanges have been innovating to keep the market flow going through P2P platforms where the authorities have no control.

Local Bitcoin, a Finland-based exchange is among the many stepping up to fill the void that would be created by the South African regulatory proposal if approved.

With a P2P platform that supports hundreds of different payment methods, Local Bitcoin has become one of the most established crypto exchanges in the world; offering escrow-secure P2P services that gives traders a sense of security. It also wades in when there is dispute between traders and provides all parties with deserving resolution.

Although recent happenings have thrown the South African bitcoin market into a state of distrust, resulting in government’s intervention that is currently slowing the market’s growth, credible exchanges are fighting through secure and transparent transactions to protect the market.