A Bitcoin is a cryptic bundle of data that can be used to make digital payments and it forms part of the wider specter of virtual currencies. A Bitcoin is a decentralised, virtual cryptocurrency that lingers predominantly beyond the ambit of the banks and the government. Willing participants can use Bitcoins to buy and sell goods and services without the involvement of commercial banks.
Virtual currencies are a digital representation of value that can be digitally traded and functions as a medium of exchange, a unit of account and/or a store of value. Virtual currencies constitute a leap away from the traditional banking and payment systems. Virtual currencies can either be centralised or decentralised, and convertible or non-convertible. Convertible virtual currencies have an equivalent value in real currency and can be exchanged back-and-forth for a real currency.
Due to the fact that Bitcoin is decentralised and operates without the authority or administration of the state or the banks, some users have questioned its trustworthiness. This leads to various issues including concerns about taxation, circumvention of exchange control regulations, loss of fees for banks, and even a diminishing demand for local currencies. It is however the ease of use and low transaction costs that provide an attractive alternative to traditional banking.
The South African Reserve Bank issued a position paper on virtual currencies whereby it declared that virtual currency had “no legal status or regulatory framework” and is therefore unregulated in South Africa. The Reserve Bank has furthermore warned that as Bitcoin has no legal status or a regulatory framework, it thus poses a number of risks for those that would choose to transact with it.
The Reserve Bank further advised that it does not oversee, supervise or regulate the virtual currency landscape, systems or intermediaries for effectiveness, soundness, integrity or robustness. Consequently, any and all activities related to the acquisition, trading or use of virtual currencies are performed at the end-user’s sole and independent risk and have no recourse to the Reserve Bank.
According to the South African Reserve Bank Act 90 of 1989, the Reserve Bank governs the management of currency and has the sole right to issue coins and notes, i.e. “Legal Tender”. Bitcoin however falls outside of the definition of legal tender. Consequently, payments made via Bitcoin in South Africa may not discharge a debtor of a monetary obligation and purchasers run the risk that their Bitcoin payments are not recognised by South African law. Merchants are also legally entitled to refuse to accept Bitcoin as legal payment.
Additionally, virtual currencies are not defined as securities in terms of the Financial Markets Act 19 of 2012. They are therefore not subject to the regulatory standards that apply to the trading of securities.
Given the current landscape and information currently available, the Reserve Bank contends that virtual currencies pose no significant risk to financial stability, price stability or the National Payment System. In line with this approach, the Reserve Bank’s position is that regulation should follow innovation. The Reserve Bank has therefore stated that it will continue to monitor developments in this regard should the landscape warrant regulatory intervention.
Similar to the position in South Africa, the European Central Bank has cautioned that any activities performed or undertaken with virtual currencies are at the end-user’s sole and independent risk. In light of this Bitcoin remains legal and largely unregulated in most countries around the world. Many countries have however issued regulations with regards to taxation of such virtual currencies.