/ 17 January 2021

Bitcoin rules take edge off crypto-nite

France Economy Bitcoin
Get paid, pal: Bitcoin. Not available in Nigeria. Try again later. (Nicolas Tucat/AFP)

On the back of a record-breaking year in 2020, Bitcoin’s growth has stumbled in recent weeks. But analysts say the cryptocurrency has staying power. With possible continued growth in 2021, responsible regulation and becoming crypto savvy will help to protect and give confidence to investors, experts say.

In 2020, Bitcoin recorded dizzying heights. Early in the year, it fell victim to the global sell-off that accompanied Covid-19 panic and was down 30% in March. But the digital currency rallied, rounding out 2020 up by almost 300%. This has been attributed to bitcoin moving in the same direction as gold. At the time of writing, one bitcoin was worth R556 562.

Although the bitcoin experienced volatility this month — causing some to hark back to its rapid growth in 2017 and subsequent collapse the following year — analysts predict it will continue to grow in 2021.

According to an analysis by financial research firm Investtech this week, Bitcoin is set for even more robust growth rate in the medium and long term.

Earlier this month JP Morgan strategist Nikolaos Panigirtzoglou bolstered views that cryptocurrency will continue to grow in 2021, projecting that Bitcoin could rise by about 350% above its current levels.

But, Panigirtzoglou noted, for cryptocurrency to match gold as a safe-haven investment it will also have to become less volatile.

Risky business

The volatility of cryptocurrency has long been cause for concern. Unlike other currencies, crypto is created, distributed, traded and stored using a decentralised digital ledger called a blockchain

In 2014, the treasury warned members of the public about the risks associated with digital assets because they were largely unregulated. Over the years, several scams by third-party bitcoin traders have successfully fooled investors as a result.

The astronomical growth of crypto in 2020 coincided with the widely covered collapse of the illegal Stellenbosch-based bitcoin trading scheme Mirror Trading International (MTI), which saw investors losing in the range of R10-billion. 

In its investigation into MTI, the Financial Sector Conduct Authority (FSCA) found that the entity contravened several laws. MTI publicly denied the FSCA’s allegations.

If it’s too good to be true …

Carel de Jager, a lead instructor at Blockchain Academy, which provides training on investing in cryptocurrency, said potential investors need to be savvy when choosing where to put their money.

“If this cryptocurrency of yours or this investment scheme that you are looking to invest in has a company or a person central to it, then you have reason to be cautious,” De Jager said, adding: “If it is too good to be true, then it probably is.”

De Jager suggested people looking to buy or invest in cryptocurrency should do their research before becoming involved with a third-party company. “There is such a lot of information on the internet trying to warn the public about these things,” he said. He added that scammers take advantage of the vague regulations around cryptocurrency. 

“The space is a little bit like the Wild West. And unfortunately, by definition, the space can never be as tightly regulated as the conventional investment bank space, because cryptocurrencies are decentralised. They don’t have owners; they don’t have call centres or CEOs or headquarters.”

In the first move to regulate cryptocurrencies in South Africa, in November the FSCA published a draft declaration declaring crypto assets financial products. This means that any person giving advice or rendering intermediary services relating to crypto assets must be authorised as a financial services provider and comply with the Financial Advisory and Intermediary Services Act.

De Jager said: “The FSCA is doing excellent work in trying to protect investors. But the FSCA is not a guardian angel … The responsibility will always rely on the investor to do due diligence prior to investing in these things.”

In response to questions by the Mail & Guardian, head of enforcement at the FSCA Brandon Topham said that while the new regulations may not have prevented what happened at MTI, because “fraud is fraud”, they may have made it easier for the public to know not deal with the firm. 

“Unfortunately be it investing in cattle, minerals, crypto, shares, offshore gold holdings, or any other ‘investment’, the public tends to forget that there are certain basic rules to money: If it sounds too good, it is too good. And that greed and stupidity will be rewarded with tears and loss.”

Waiting for regulations

Desiree Reddy, director in the banking and finance practice at Norton Rose Fulbright, agreed that it would be challenging to regulate cryptocurrencies fully and effectively. But it is not impossible, she said. 

“Any regulation would need to be capable of continuous development. Because with cryptocurrency, the technology behind it may develop at a pace that is much faster than regulations develop.”

She added that the FSCA’s draft declaration is motivated by the growing interest in cryptocurrency in South Africa and globally. “The regulation being in place is very important. From an uptake perspective, I can’t see that there was as much of an imperative for the regulator to issue regulations up until this point as there is now.”

Marius Reitz, general manager for Luno in Africa, South Africa’s largest cryptocurrency exchange, said: “Scammers will always exist. But I think something that will definitely counter this is when we see regulations come to the market … Now consumers will be able to differentiate between a licenced platform and any other platform without a licence.” 

Reitz told the M&G this week that he expects that in 2021 the market will see the culmination of various long-term efforts to  regulate cryptocurrencies. 

It is clear to regulators around the world that Bitcoin is growing and becoming increasingly integrated into existing financial infrastructure, Reitz said. 

He said that for Bitcoin’s price to stabilise, it would need a critical mass of people to participate in the market. 

“I think a lot of people will be sitting on the sidelines, waiting for regulations — a lot of potential investors. As we see regulations coming into the market, people will have more confidence … When we reach that point globally, we will see more people buying and selling.”