When 52-year-old KwaZulu-Natal based primary school principal Londumusa Mashiyane first deposited R10 000 into his Luno wallet to buy cryptocurrency at the beginning of August, he hoped his new venture would yield positive returns. Five months later — and with more than R179 000 deposited into his Luno wallet — Mashiyane had lost it all: he had no money and no cryptocurrency.
His troubles started when a “Mr Adams” contacted him by phone and excitedly informed him that he had accumulated R5-million in his Luno wallet. If he deposited R400 000, Mashiyane was told that he could either withdraw the R5-million or keep it as cryptocurrency.
The primary school teacher picked the cash option, and transferred R35 000 into the FNB account provided to him by Adams as a first tranche. The account number was different from Luno’s FNB account into which Mashiyane had previously deposited money, but he believed that the funds would go into the same account as before.
“When I deposited the money into Luno, [Mr Adams] was able to see the money reflected in the account. That’s why I was convinced that he was working for Luno,” he said.
Mashiyane was, however, wrong.
The company told the Mail & Guardian that it does not employ a “Mr Adams” in a customer-facing role. “Luno will never force a customer to deposit funds into any of Luno’s bank accounts,” it said.
Mashiyane said that when he tried to contact Luno through its app, the company did not respond. Instead, Adams contacted him by telephone, telling him that the transaction was still being processed and that a “pin” to withdraw the funds would be sent.
The pin never arrived.
“The other thing that I noticed is that Mr Adams even managed to delete some of the emails between me and Luno,” Mashiyane said, suggesting that “Mr Adams” had intercepted his communication.
FNB declined to comment on Mashiyane’s case because it “cannot provide any information on specific bank accounts”. The bank did, however, announce last month that it would be terminating its banking services to virtual currency exchanges and other intermediaries trading in virtual currency.
“FNB considers this to be a prudent course of action, following a comprehensive review of the potential risks currently associated with these entities, particularly given that appropriate regulatory frameworks are not yet in place,” the bank said in an email response.
Mashiyane has opened a fraud case. But it is unlikely that he will recover the funds that he transferred to the account number provided by Adams. This is because South Africa has no legislation that regulates the financial risk associated with trading in cryptocurrencies and tokens.
As it stands, South Africans may use their crypto assets to pay for goods and services. But these assets are not registered as legal tender. Users who engage in trading of cryptocurrency do so at their own risk.
Virtual currencies such as Bitcoin and Ethereum (which can be bought on Luno) were designed to create a type of currency that is controlled by its individual users, instead of a centralised authority such as a commercial or central bank. The transactions occur in the open and a record of each one is accessible to the public.
The nonregulation of this sector could soon change — by as early as 2020. The Reserve Bank has confirmed that it will draft a policy paper on crypto assets by the first quarter of next year. The bank said the policy would look into mitigating potential risks of dealing with cryptocurrency, such as “money laundering, illicit financial flows and lack of consumer protection”.
The Reserve Bank said the policy paper will be based on its position paper on cryptocurrency that was published earlier this year by the intergovernmental fintech working group. This consists of the central bank, the treasury, the Financial Intelligence Centre (FIC) and the Financial Sector Conduct Authority.
South Africans’ appetite for cryptocurrency is growing, fast. In September alone at least R80-million worth of crypto-related transactions originating in South Africa were completed on the Luno platform. Although trading in cryptocurrency provides, among other benefits, an alternative and cheaper banking system, the Reserve Bank has noted that its nonregulation has led to unintended consequences such as “money laundering and the financing of terrorism.”
According to the Reserve Bank’s position paper, trading in cryptocurrency also poses risks to consumers, including being exposed to fraud or unauthorised use by anyone in possession of the consumer’s credentials. “Transactions in most currencies are not reversible, even if the result of fraud or unauthorised use,” the paper states.
The policy paper will also be in line with the recently released recommendations on crypto assets, published by the international Financial Action Task Force. In its paper, the task force states that countries should assess and mitigate the risks associated with virtual currency including to “licence or register service providers and subject them to supervision or monitoring by competent national authorities”.
There is currently an international trend to tighten laws associated with cryptocurrency trading. The possession of and trade in digital currencies has been banned in some countries including Ecuador, Bolivia, Egypt and Morocco, while Singapore and South Korea have begun to regulate it more strictly.
General manager at Luno Africa, Marius Reitz, welcomed the Reserve Bank’s proposed regulations, saying it will provide consumers with a clear regulatory framework when dealing with cryptocurrency.
“This means they [crypto asset providers] will be under a legal obligation to comply with [the] anti-money laundering and counterterrorist financing requirements in the FIC Act. We believe it will help keep out fraudsters and other operators with low concern (or capability) to keep customer information and money safe,” Reitz said.
Chief executive and co-founder of local cryptocurrency exchange valr.com, Farzam Ehsani, said he hopes the publishing of rules regulating cryptocurrency trading in South Africa will persuade FNB to reverse its decision to shut down accounts related to crypto-exchanges. “We remain firm in our belief that cryptocurrencies have the potential to dramatically improve our financial system and we will continue with our goal in helping to build a financial system that recognises the oneness of humanity,” he said.
Thando Maeko is an Adamela Trust Business Fellow at the Mail & Guardian