Crypto-Asset Regulation in Retirement Funds.
20 Jul, 2022

At the start of 2021, crypto-assets trades in South Africa exceeded R2 billion in a day, making headlines all over the country. In the second half of the year, the proposed legislative changes from Finance Minister Enoch Godongwana, which disallows pension fund’s ability to invest in crypto-assets such as Bitcoin, have stolen the headlines. NMG’s Head of Investment Consulting, Raazia Ganie, explores the proposed regulatory changes and crypto-asset environment in more detail.

What is a crypto-asset, what happened to cryptocurrency?

“Crypto-asset” is replacing the previously used term “cryptocurrency” in the South African regulatory space. The term has been coined by the Intergovernmental Fintech Working Group (IFWG), a collaborative task force consisting of the major financial regulatory bodies, established in 2016. The focus of the task force is to foster innovation and develop appropriate regulation in the FinTech space. The IFWG has enabled the use of the broader term as it is more reflective of the growing sector. The definition of crypto-assets, provided by the National Treasury is any, “digital representation of value that is not issued by a central bank, but is capable of being traded, transferred or stored electronically by natural and legal persons for the purpose of payment, investment and other forms of utility”.

When people refer to cryptocurrencies, they think of Bitcoin, the decentralized digital currency that first appeared 12 years ago. Bitcoin was the first introduction to blockchain technology which underpins most of the innovation in the crypto space. The industry, and investor interest, have grown at an exponential rate, and it’s not only cryptocurrencies that investors and regulators need to be aware of.

The growth includes the development of decentralized finance (DeFi), a public decentralized blockchain network for financial products that cut out the middleman (defined as banks and brokers), Smart Contracts, and other blockchain based technology that enable payments to be made and received digitally without the involvement of traditional banking systems. Based on this expansion, the term “cryptocurrency” was no longer broad enough.

What are the latest regulatory changes?

Finance Minister Enoch Godongwana’s latest proposal on crypto-assets delves deeper into the Regulation 28 limitations governing pension funds in South Africa. Currently, the legislation permits a 2.5% exposure to assets deemed as “other”, funds have used the broad definition to gain exposure to crypto-assets such as Bitcoin.

The new proposal specifically prevents this by stating that funds will NOT be allowed to use the “other” bucket to invest directly or indirectly in to crypto-assets. The simplified reason – risk mitigation. Regulation 28 was developed to protect fund members, by mitigating risks through proper valuation, diversification, transparency, and disclosure. It is important to understand that in the eyes of regulators unregulated instruments, such as crypto-assets, pose too great a risk to investors’ long-term life savings.

The regulation is not aimed at disallowing any exposure to crypto-assets in an individual’s entire investment portfolio, the goal is to allow for appropriate exposure, and the regulatory proposal reads that retirement funds are not the appropriate place. As the regulation over the FinTech industry advances, there is a possibility for rules, such as the proposed limit, to be adapted. We must also acknowledge the price volatility of crypto-assets are quite high, and this also talks to the inappropriate nature for Retirement fund assets.

Regulation 28 proposed changes are not the only limitation investors should be aware of. South African Revenue Service (SARS) has brought crypto-assets into the income tax process, and it is pertinent for investors to be aware of this development. In addition to this, crypto users need to be cautious of how they are interacting with the transfer of funds abroad, as FinTech regulation hasn’t fully been established in this area. As it currently stands, funds that are transferred internationally need to go through the appropriate offshore funding approval processes, otherwise, the transfers would be illegal.

Where is the risk?

So why is crypto seen as such a risky asset? First and foremost, the risk lies in the lack of regulation. There have been several Ponzi schemes and scams that have taken advantage of the lack of regulations and complex nature of crypto-assets to steal investors’ money. It is imperative to note that crypto-assets, including cryptocurrencies, are not deemed as legal tender in South Africa, currently, the only legal tenders are the coins and notes printed by the South African Reserve Bank (SARB).

This doesn’t mean that goods and service providers don’t accept crypto-assets as means of payment, they can do so, if they choose to. It means that there is little to no recourse around the unethical use of crypto-assets as it doesn’t fall under any regulatory body – an important risk that anyone involved in the crypto market needs to be aware of.

Secondly, crypto-assets are difficult to value (or price). There is no intrinsic value to a crypto-asset, as there is no physical asset backing it, or defined measure of worth. Crypto-assets pricing is fully driven by market sentiment, basically how much one person is willing to pay for it and how much another person is willing to sell it for. This means that the price can be drastically impacted by something as simple as an influential person’s Twitter post, such as Elon Musk’s posts about Bitcoin, making the asset incredibly risky.

How does South Africa regulation compare against the rest of the world?

The IFWG has made every effort to set a neutral tone when it comes to crypto-assets, and educate the markets on its objectives, without stifling innovation. The Regulation 28 limitation is just the latest iteration of the work from the South African regulators to protect investors and mitigate risks, and they are leading the way on the continent.

Markets are taking a mixed approach. China, the world’s second largest economy, has prevented banks from offering crypto-related services and is heavily regulating the FinTech space. Countries such as El Salvador are making headlines as the first market to approve Bitcoin as a legal tender. Currently, there is not a one-size-fits-all solution to the regulation of crypto-assets globally.

What does this mean for investors?

We encourage investors to seek out professional guidance if they are interested in gaining exposure to crypto-assets. When doing so it is of the highest importance to understand not only the benefits, but also the risks that are associated with it, and to consider how they play into the dynamics of personal portfolios and investment goals.

The Regulation 28 limits are there to protect pension fund investors, the development is an educational one for private investors to take note of: the current level of risk perceived by regulators is too high for retirement savings products, however, this doesn’t mean that investors can’t gain exposure through other products in South Africa.



The information in this communication is for information purposes and is not to be detailed advice described in the Financial Advisory and Intermediary Services Act. The fund, administrator and trustees cannot be held liable for damage or loss suffered as a result of any action that you take based on the contents of this communication.

T&C’s apply. NMG Consultants and Actuaries Administrators (Pty) Ltd t/a NMG Benefits. FSP33424


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