Finance Minister’s Tough Stance on Bitcoin Suppresses Growth and Innovation

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JEREMY MAGGS: South Africa risks falling behind in the digital finance revolution. Finance Minister Enoch Godongwana has reiterated his position that collective investment schemes should be prohibited from investing in crypto assets, citing concerns over risk and the protection of investors.

However, it appears that global trends are shifting in the opposite direction. Companies like Luno argue that such restrictions are hindering South Africa’s potential.

To delve deeper into this issue, I’m joined by Marius Reitz, the general manager for Africa and Europe at Luno. Marius, welcome. Why do you see the minister’s comments as holding South Africa back?

MARIUS REITZ: Hi, Jeremy. As you mentioned, crypto assets like Bitcoin are currently not allowed as underlying investment assets in collective investment scheme products such as ETFs and unit trusts. This means that both retail and institutional investors are forced to invest their capital in US-based funds, which has several implications for us.

For one, these investors must use their offshore investment allowances, and many have already reached their limits. This restriction stifles growth in the local crypto industry, hampers economic development and job creation, and presents a significant tax opportunity cost for the nation.

Ultimately, Jeremy, there is a proven demand; both retail and institutional investors are eager to gain exposure to Bitcoin.

The demand is evident and established. Bitcoin has transcended its status as a niche asset.

We can highlight numerous growth and adoption metrics for Bitcoin—overall, it represents a $2.3 trillion asset and ranks among the top ten global assets by market capitalization.

Its returns vastly outpace those of traditional markets. Yes, it carries inherent risks, but the demand is unmistakable. We’ve witnessed nearly $165 billion of investment flowing into US-based ETFs, much of which could have been directed into emerging markets like South Africa.

JEREMY MAGGS: Marius, that risk factor you mention is precisely what concerns the finance minister.

MARIUS REITZ: Absolutely. It’s a new asset class. While it’s been available for approximately 17 years, we’ve made significant strides in recent years, Jeremy.

Locally, we’ve seen advancements on the regulatory front: both the Financial Intelligence Centre and the Financial Sector Conduct Authority (FSCA) have begun to regulate the industry. Crypto assets are now categorized as financial products alongside other types of financial instruments. The sector is regulated, and several sophisticated firms operate in South Africa.

If we examine some of the risks, price volatility has diminished. However, we’re really discussing a minimal allocation—1% to 3%, or even 1% to 5%. Being responsible in this allocation is crucial. A 1% to 5% allocation sends a strong signal to the private sector and asset managers.

Many of the largest asset managers in the country are eager to offer Bitcoin-backed products to their clients but currently cannot, which stifles potential growth.

JEREMY MAGGS: So, is the minister mistaken in his caution against exposing “unsophisticated investors”?

MARIUS REITZ: Well, Jeremy, investors will inevitably find ways to invest in whatever they choose. There’s no way to control that behavior. However, we believe that presenting investors with a regulated crypto product traded on the Johannesburg Stock Exchange (JSE) contributes significantly to investor protection.

Read: Look out JSE, here come tokenised stocks

Investors will seek exposure, whether directly through a crypto investment app, offshore investing, or through other channels.

Essentially, you’re driving the market underground to a degree.

We argue that a publicly listed or traded crypto-backed investment product will bring the market to the forefront, rendering it safer for investors, as the JSE would provide oversight over the issuance of such products.

JEREMY MAGGS: What specific clarity do you hope to see in the central bank’s upcoming framework regarding this matter?

MARIUS REITZ: It’s quite straightforward, Jeremy. We want the finance minister and National Treasury to approach this with an open mind. We wish for them to consider the inclusion of crypto assets in Board Notice 90.

Board Notice 90 defines the types of investments permissible in the portfolios of collective investment schemes, such as ETFs and unit trusts.

We don’t want them to indiscriminately exclude crypto assets from the forthcoming amendments to Board Notice 90.

This would not only benefit the crypto industry but also encourage the traditional asset management sector to engage in healthy discussions about allowing small allocations of crypto assets in these investment products.

JEREMY MAGGS: Regarding these constructive dialogues, what initiatives is your organisation pursuing with the central bank or finance minister?

MARIUS REITZ: Jeremy, we are pioneers in South Africa’s cryptocurrency landscape since 2013. Over the years, we’ve played various roles in engaging with regulators and the SA Reserve Bank (Sarb), along with the FSCA. We actively dialogue with National Treasury on vital regulatory building blocks that must be established.

For instance, it remains unclear whether crypto assets are classified as onshore or offshore assets, a distinction that affects institutions significantly. Hence, we are in discussions with Sarb on this matter.

Read: Calls for overhaul of Regulation 28 to allow crypto investments

We strongly believe that crypto assets should be treated as onshore assets so that retail and institutional investors do not exhaust their foreign exchange allowances when investing in them. This would provide asset managers the confidence to develop and offer products that track the value of crypto assets like Bitcoin to their clients.

JEREMY MAGGS: Marius Reitz, thank you for your insights.

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