South Africa to Regulate Bitcoin

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With the South African Reserve Bank looking at a cryptocurrency regulatory experiment, it is no longer a question of whether Bitcoin should be regulated or not, but rather who will be doing the regulating.

At present, decentralisation is paramount in the Bitcoin ecosystem – the core principle that no one institution or authority is responsible for the operation, function or governance of the ecosystem is its greatest strength. In South Africa, it is this core principle that the notions of financial service democratisation and financial inclusion are premised.

According to Seshree Govender, associate at Webber Wentzel: “The stalemate Bitcoin scaling debate, and the plethora of Bitcoin improvement proposals, culminated in a New York meeting of various players within the Bitcoin economy in May 2017, and with that, the Bitcoin Scaling Agreement came into being.”

Simply put, this was an agreement that the Bitcoin community would move to a separate, parallel currency to increase efficiency such as transaction times and fees. As of May 2017, the signatories of the Bitcoin Scaling Agreement represented:

  • 58 companies located in 22 countries;
  • 83% of hashing power;
  • $5.1 billion monthly on chain transaction volume; and
  • 5 million Bitcoin wallets.
  • The signatories of the Bitcoin Scaling Agreement represent the critical mass of both the technical and economic communities within the global bitcoin ecosystem.

Bitcoin in South Africa

According to Govender, the scaling agreement has two very important lessons for the currency in South Africa – (i) how the decentralised network makes decisions and (ii) the where the decision-making power lies.

“The key point to note about the Bitcoin Scaling Agreement is that the scaling solution was adopted by those market players who chose to adopt it, which happened to be the majority of the Bitcoin ecosystem,” Govender said.

While this did not mandate the dissenting market players to adopt the same solution, failing to do so could have potential operational consequences due to the interdependence between the Bitcoin communities within the ecosystem.

However, Govender noted that the regulatory experiment has grown far beyond the initial intention of ensuring that innovation is not hindered by regulation, and now faces unique social and political challenges in regulating the industry.

How SA can regulate

Govender said that a self-regulatory organisation (SRO) model is one of the most likely ways forward for Bitcoin in South Africa. This is because it is a well-known and implemented concept with the South African financial markets, with SRO status already conferred upon the JSE Limited and the central securities depository (Strate).

 

The concept of self-regulation does not mean that the SRO is regulating itself, but rather that it is tasked with regulating the market it services. These organisations are permitted to regulate the affairs of the market which it services by creating rules, supervision protocols and disciplinary mechanisms.

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