Cryptocurrencies and security dealing activities in South Africa

The main players in securities dealings and South Africa’s position

The rise of cryptocurrencies has introduced new dynamics in securities dealing, challenging traditional financial markets and regulatory frameworks.

Security dealings generally mirrors a country’s economic progress. The most extensively utilised exchanges are in advanced economies like the US, the EU, and China/Hong Kong, where brokers or security dealers represent institutional and individual investors who buy and sell shares. Exchanges have extended beyond pure shares to include products like turbos, derivatives, and, more recently, cryptocurrencies.

South Africa has the largest bourse on the African continent but lacks the size of other large bourses as illustrated in the graph here. The JSE is also struggling to grow; due to the underlying performance of the economy.

The link between the economy and securities

As in many countries that have experienced decline, South Africa had to learn how difficult it is to undo poor choices. Unlike correcting or changing policies, reversing economies (choosing an opposite direction) requires patience, careful planning, and incremental but significant and persistent modifications, akin to trying to turn a mammoth ship around.

The future of South Africa’s exchanges security dealings is good if it can reverse the poor governance and socialist policies that have created dependency on government’s social grants by most of its citizens, and prompted an absence of productive investments and foreign direct investment inflows.

New technologies and new products like cryptocurrencies pose a further challenge to established wealth managers and security dealers. To counter this, countries, such as China, the US and even South Africa are exploring the use of central bank digital currencies to issue digital currencies that could coexist with or compete against decentralised cryptocurrencies like Bitcoin.

The WOW report on security dealing activities in South Africa reported a drop in transactions on the JSE of 15.7% to R2tn year on year in January to May 2024, and fewer listings. The declining number of new listings, as shown, could not offset delistings.

JSE regulations are not particularly heavier than other established bourses like the New York or London stock exchanges, but it is facing much stronger external headwinds. In the first quarter of 2024, foreign investors sold a net R36bn of local equities, up 25% from the previous year, according to Valdene Reddy, the JSE’s capital markets director. She believes this is largely attributable to South Africa’s weak economic growth over the past decade and its deteriorating relationship with Western countries.

The spread and ascent of Bitcoin has been impressive from an obscure beginning only a few years ago. The cryptocurrency market cap today exceeds US$2tn. Like the dominance of the US dollar in currency markets, Bitcoin dominates the cryptocurrency market.

Transacting in cryptocurrencies is also done outside of the traditional security dealing brokers, and bypasses bourse listings, adding pain to the JSE transaction volumes.

How safe is the cryptocurrency industry

Exchanges and (cryptocurrency) wallets are often targeted by hackers, leading to significant financial losses. In South Africa, there have been several high-profile cases of crypto-related fraud, which have raised concerns about the security and traceability of digital assets.

There have been hiccups and losses to investors that could otherwise have been prevented if there were more regulation.

Cryptocurrencies are slowly moving towards better integration, becoming more subject to regulation and being included in investment funds in the US, although their global mobility and anonymity are still highly valued by many investors, but less so by regulators as they are open to money laundering and tax evasion.

Where to from here for cryptocurrency

The South African Revenue Service is doubling down on tracking cryptocurrency investment to collect the taxes on capital gains investors make. The very nature of cryptocurrencies with their borderless arrangements makes them hard to track.

Investors should remain cautious and research the most reputable exchanges for their investments to remain safe. Some cryptocurrency exchanges like Luno in South Africa, were sold by Naspers to a US exchange and went through turbulent waters.

Like with most things that are higher risk and higher potential reward, timing is everything but is difficult to get right. Bitcoin went from just 9 cents in 2010 to US$10,000 by 2019 on to more than US$60,000 in 2021, then back to below US$20,000 back up to US$70,000, and now down to around US$55,000, all within three to four years. These fluctuations are not for the weak-hearted.

As cryptocurrencies continue to disrupt traditional financial systems, South Africa faces the dual challenge of embracing innovation while safeguarding investors.