A recent South African case shows why regulation is important and a better approach than arbitrary and knee-jerk bans.
In June 2021, Bloomberg reported that founders of South Africa-based crypto investment firm Africrypt were nowhere to be found, along with 69,000 bitcoins worth $3.6 billion in their possession on behalf of investors. Two months earlier, in April, Africrypt froze all client accounts, after a purported hack and advised its clients not to report the incident to law enforcement authorities.
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Shortly thereafter, founders Ameer Cajee and Raees Cajee, transferred the investor funds in its First National Bank account in Johannesburg and reportedly moved to the United Kingdom. The duo are still nowhere to be found and South African authorities can do little at the moment, owing to lack of a regulatory framework for digital assets.
Now, even as South African authorities are clearly not culpable, the reputational damage would nonetheless rub off on them. It is a cautionary tale for jurisdictions like Nigeria and elsewhere, where hitherto, cryptocurrency exchanges were under some level of scrutiny but are now left to their own devices, after banks were barred from facilitating their transactions.
How is a regulator to regulate what it cannot see? A more robust approach would be to regulate cryptocurrency exchanges like other participants in a country’s financial markets. In that event, some young Turks would not be able to simplyscamper away with more than $3 billion worth of bitcoins.
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In clearly a knee-jerk reaction, the South African Reserve Bank has now barred South African banks from facilitating the crypto transactions of their customers. Thus, cross-border or foreign exchange transfers for the explicit purpose of purchasing crypto assets are now no longer allowed in South Africa.
But would such measures be effective? The original intention and design of P2P-based cryptocurrencies like bitcoin and others is precisely such that banks and their regulators would not be able to get in the way.
With bans and zero regulation, however, criminals are literally unhooked from their leashes, with tragic consequences like the recent South African crypto scam
To gain mainstream acceptance, however, cryptocurrency exchanges have gladly subjected themselves to regulation. The successes of such regulatory approaches in Switzerland and some parts of the United States are instructive.
With bans and zero regulation, however, criminals are literally unhooked from their leashes, with tragic consequences like the recent South African crypto scam.
It is sometimes difficult to fathom why regulators resist adopting new ideas that would palpably be a net gain for the systems they preside over. Still, it would be an error to assume obstructionism or malice is always the intention when they do so.
In his 2015 book, “Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future”, author Ashlee Vance put it rather well when rationalising the regulatory holdups his subject similarly endured with his groundbreaking technological innovations. The asymmetry of the reward and punishment of action or inaction is fundamentally why regulators tend to be annoyingly overly cautious.
According to Vance (2015), “if a regulator agrees to change a rule and something bad happens, they could easily lose their career” but “if they change a rule and something good happens, they don’t even get a reward.”Consequently, they resist changing the rules. This is because “there’s a big punishment on one side and no reward on the other (Vance, 2015).”
In the African context, there is probably even greater risk for progressive regulators. Not only do they have to be cautious for fundamentally technical reasons, there are numerous political minefields that they have to navigate with finesse if they are to achieve anything meaningful with their mandates.
When there is global momentum towards a change, however, it becomes easier for African regulators to move on an issue. The colonialist argument does not apply here. Most African countries remain developing mono-economies with shallow markets. In any case, African economies could not hope to move faster than the developed ones that they rely on for managing their reserve assets, funding their fiscal deficits and facilitating their cross-border payments.
Well now, there is global traction on cryptocurrency regulation. And perhaps countries like Nigeria, and more recently, South Africa, and others, which have barred their banks and fintech firms from facilitating cryptocurrency transactions, may begin to ponder more nuanced regulatory approaches.
