Why “Crypto Assets”?

Definitions

Within the cryptocurrency world there is a generally common understanding of things like “Bitcoin” or “Litecoin“, or “virtual currencies“, or “cryptocurrencies“, or “utility tokens“, or “stablecoins“, or “shitcoins“, as terms of reference representing tokens individually, collectively, and by some defining quality.

Within the South Africa Regulatory world, the definitions from 2014 include Treasury:

A virtual currency is a unit of account that is digitally or electronically created and stored. Members of the virtual community agree to accept these units as a representation of value in the same way that currency is accepted. In contrast to traditional currencies, virtual currencies operate without the authority of central banks, and are therefore not regulated.

along with SARB:

A virtual currency (VC) is a digital representation of value that can be digitally traded and functions as a medium of exchange, a unit of account and/or a store of value, but does not have legal tender status. VCs constitute a leap away from the traditional banking and payment systems. The Financial Action Task Force (FATF) classifies VCs as either centralised or decentralised, and convertible or non-convertible. Convertible VCs have an equivalent value in real currency and can be exchanged back-and-forth for a real currency. Convertible VCs may be either centralised or decentralised VCs or crypto-currencies that are distributed, open-source, math-based peer-to-peer virtual currencies with or without a central administration, monitoring and oversight authority. Examples of decentralised VCs include Bitcoin (convertible), LiteCoin and Ripple. In contrast, non-convertible VCs are centralised to a particular virtual community and cannot be exchanged for real currency. Examples of centralised non-convertible VCs include Q Coins and World of Warcraft Gold.

The SARB definition from 2014 draws from the FATF REPORT on Virtual Currencies – Key Definitions and Potential AML/CFT Risks:

Virtual currency is a digital representation of value that can be digitally traded and functions as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but does not have legal tender status (i.e., when tendered to a creditor, is a valid and legal offer of payment) in any jurisdiction.

It is not issued nor guaranteed by any jurisdiction, and fulfils the above functions only by agreement within the community of users of the virtual currency. Virtual currency is distinguished from fiat currency (a.k.a. “real currency,” “real money,” or “national currency”), which is the coin and paper money of a country that is designated as its legal tender; circulates; and is customarily used and accepted as a medium of exchange in the issuing country. It is distinct from e-money, which is a digital representation of fiat currency used to electronically transfer value denominated in fiat currency. E-money is a digital transfer mechanism for fiat currency —i.e., it electronically transfers value that has legal tender status. Digital currency can mean a digital representation of either virtual currency (non-fiat) or e-money (fiat) and thus is often used interchangeably with the term “virtual currency”. In this paper to avoid confusion, only the terms “virtual currency” or “e-money” are used.

In 2018 an Intergovernmental Fintech Working Group (IFWG) / Treasury FinTech WG report footnote [1][2] refers to:

Private crypto-currencies are still a relatively a novel concept and therefore different interpretations and terminology have been used in the public domain. This report uses both of these terms ‘crypto-assets’ and ‘crypto-tokens’ as reference to these financial technology innovations.

The term “crypto assets” was never used in 2014 documentation, despite the 2019 documentation indicating as such:

The initial public statement on crypto assets1 was issued by National Treasury (NT) in 2014 as a joint initiative with the South African Reserve Bank (SARB), the Financial Services Board (now the Financial Sector Conduct Authority (FSCA)), the South African Revenue Service (SARS) and the Financial Intelligence Centre (FIC). The public statement warned members of the public about the risks associated with the use of crypto assets for the purpose of transacting or investing, and advised users to take extreme caution in this regard. It further noted that no specific legislation or regulation exists for the use of crypto assets. Therefore, no legal protection or recourse is offered to users of, or investors in, crypto assets.

However, it does come with the following footnote:

At the time this statement was issued, the term ‘virtual currencies’ was used to refer to “crypto assets”.

And on page 22 of the CAR WG Proposed Regulations, footnote 20 is a URL link to the “FATF Recommendations and Glossary” and includes a tailpiece which then introduces the change from “virtual asset service providers” to “crypto asset service providers”

20 http://www.fatf-gafi.org/publications/fatfrecommendations/documents/regulation-virtual-assets.html. It is noted that during October 2018, the FATF adopted changes to the FATF Recommendations and Glossary that clarify how the Recommendations apply in the case of financial activities involving virtual assets. These changes add to the Glossary new definitions of ‘virtual assets’ and ‘virtual asset service providers’ – such as exchanges, certain types of wallet providers, and providers of financial services for issuers’ offers and/or sale of crypto assets. As a result of these changes, jurisdictions, including South Africa, have to ensure that crypto asset service providers are subject to FATF requirements that are aimed at combatting money laundering and terrorist financing, for example, conducting customer due diligence, including ongoing monitoring, record-keeping and reporting of suspicious transactions. Crypto asset providers that fall within the FATF’s definition of ‘virtual asset service providers’ is proposed to be registered and subject to monitoring to ensure compliance with these requirements.

Further in the 2019 document “crypto assets” are defined as:

2.1.1. From a regulatory perspective, having definitional clarity on the crypto- phenomenon is crucial, as it directly influences its classification and concomitant regulatory treatment. It may accordingly be noted that various naming conventions have been adopted from ‘digital tokens or assets’ and, most recently, ‘crypto tokens’ and ‘crypto assets’, (CPMI, 2015; FSB, 2018; BIS, 2018, Carney, 2018a) in the space of just a few years. Despite the various nomenclature used, the crypto-phenomenon is commonly based on decentralised technology such as blockchain and distributed ledger technology. The definitions used generally focus on its electronic nature, its potential role as a medium of exchange, and its perceived role as a representation of value. Some jurisdictions have classified it as a unit of account, while others have rejected it as a financial instrument or financial product. Central banks, in particular, have been reluctant to refer to the phenomenon as ‘currencies’ for concern of giving it unwarranted legitimacy as a form of legal tender.

2.1.2 The South African regulatory authorities have taken a functional approach, focusing on the economic activities being performed, compared to a more generic ‘all-encompassing’ clinical classification. It is acknowledged that crypto assets may perform certain functions similar to those of currencies, securities and commodities. The preferred term of ‘crypto assets’ thus encapsulates and extends to all these functions and is used throughout this document. The proposed definition is as follows:
“Crypto assets are digital representations or tokens that are accessed, verified, transacted, and traded electronically by a community of users. Crypto assets are issued electronically by decentralised entities and have no legal tender status, and consequently are not considered as electronic money either. It therefore does not have statutory compensation arrangements. Crypto assets have the ability to be used for payments (exchange of such value) and for investment purposes by crypto asset users. Crypto assets have the ability to function as a medium of exchange, and/or unit of account and/or store of value within a community of crypto asset users.”

So for the purposes of legislation and regulation going forward, the revised naming mechanism set by the Crypto Assets Regulatory Working Group [1][2][3](established 2 January 2019) will determine the definitions landscape locally.

In the April 2020 Position Paper[1], the usage of “Crypto assets” continues similar to above:

2.1 Defining crypto assets

2.1.1 From a regulatory perspective, having clarity on the term ‘crypto assets’ is fundamental as it directly influences the term’s classification and concomitant regulatory treatment. Various naming conventions have been adopted in just a few years, from ‘digital tokens’ and ‘digital assets’ to, most recently, ‘crypto tokens’ and ‘crypto assets’ (CPMI, 2015; FSB, 2018; BIS, 2018; Carney, 2018a). Despite the various terminology used, the crypto phenomenon is commonly based on decentralised technology such as blockchain and distributed ledger technology (DLT). The definitions used generally focus on its electronic nature, its potential role as a medium of exchange, and its perceived role as a representation of value. Some jurisdictions have classified it as a unit of account, while others have rejected it as a financial instrument such as a security or other financial product. Central banks, in particular, have been reluctant to refer to the phenomenon as ‘currency’ as it is not deemed to be a form of legal tender nor fiat currency. Annexure 2 describes the regulatory positions that have been adopted by some jurisdictions.

2.1.2 The regulatory authorities have taken a functional approach, focusing on the economic activities being performed, compared to a more generic, ‘all- encompassing’ classification. It is acknowledged that crypto assets may perform certain functions similar to those of ‘traditional’ currencies, securities or financial products and commodities.

2.1.3 The term ‘crypto assets’ is thus preferred, as it encapsulates and extends to these functions. It is used throughout this position paper. Furthermore, ‘crypto assets’ are seen as a broader, or ‘umbrella’, term for different crypto asset tokens. These tokens can be classified into three types of crypto asset tokens18:
(i) Exchange or payment token: These are tokens designed to be used as a means of exchange or payment for buying goods and services. Some users also utilise it for investment purposes.
(ii) Security token: These tokens provide rights such as ownership, the repayment of a specific sum of money, or entitlement to a share in future profits.
(iii) Utility token: These tokens can be redeemed for access to a specific product or service that is typically provided using a DLT platform.

2.1.4 The following definition of crypto assets is adopted by the regulatory authorities, through the IFWG:

A crypto asset is a digital representation of value that is not issued by a central bank, but is traded, transferred and stored electronically by natural and legal persons for the purpose of payment, investment and other forms of utility, and applies cryptography techniques in the underlying technology.

2.1.4.1 The definition of crypto assets presupposes the inclusion of stablecoins and, by extension, global stablecoins. The Financial Stability Board (FSB) defines a stablecoin as ‘as a crypto asset designed to maintain a stable value relative to another asset (typically a unit of currency or commodity) or a basket of assets’ (FSB, 2019). Global stablecoins are stablecoins ‘with a potential global reach and the ability to rapidly scale in terms of [the] users/holders of the crypto asset’ (FSB, 2019).

2.1.4.2 However, this definition of crypto assets does not include digital representations of sovereign currencies, and is therefore not regarded as legal tender19 or public money.

Despite the stated intentions for using “crypto assets“, it is our opinion that perfectly acceptable definitions existed in 2014.

As of 20 November 2020, in the FSCA’s draft Declaration of crypto assets as a financial product (download – zip file) the following definition is provided:

“crypto assets” means any digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes, but excluding digital representations of fiat currencies or securities that already fall within the definition of financial product.

The use of any is problematic as it could be argued the definition applies to domain names, or in-game representations of money. The definition is too broad in scope.

This is expanded to declare the defined “crypto assets” a financial product:

2. Declaration of crypto assets as a financial product

The Authority hereby, in terms of paragraph (h) of the definition of financial product, declare crypto assets as a financial product.

3. Short title, commencement and transitional arrangements

(1) This Declaration is called the Declaration of crypto assets as a financial product, 2021.
(2) This Declaration comes into effect on the date of publication thereof on the website of the Authority.

Further explanation is provided in the Statement supporting the draft Declaration

5.4 The FSCA is of the view that, in the aforementioned context, it is sensible to define crypto assets in the Declaration in line with the definition of virtual assets contained in the FATF Recommendations. As such, the definition of crypto assets in the Declaration is therefore largely based on the definition of virtual assets contained in the FATF Recommendations.

On 20 January 2021, National Treasury published the Explanatory Memorandum on the Taxation Laws Amendment Bill, where the word “cryptocurrency” was replaced with “crypto asset” in line with the proposed adoption of a uniform definition of crypto assets within the South African regulatory framework.

Clause 2(1)

Sub-clause (c): Definition of “financial instrument” – The proposed amendment to paragraph (f) deletes the word “cryptocurrency” and replaces it with “crypto asset” in line with the proposed adoption of a uniform definition of crypto assets within the South African regulatory framework.

CLAUSE 23
Income Tax Act: Amendments to section 20A
The proposed amendment to subsection (2)(b) deletes the word “cryptocurrency” and replaces it with “crypto asset” in line with the proposed adoption of a uniform definition of crypto assets within the South African regulatory framework.

On the 4 February 2021, the FSCA published a generic definition in a crypto health warning press release, which reads:

Cryptoassets, or cryptocurrencies as they are commonly called, are digital representations of value that are not issued by a central bank. Some of the more well-known cryptoassets include Bitcoin (BTC) and Ethereum (ETH). Cryptoassets are traded, transferred and stored electronically. They have been used for payments, investments and capital-raising.

As of 19 March 2021, the Financial Action Task Force (FATF) has published a new 99-page draft guidance proposal to further clarify and define its June 2019 risk-based-approach (RBA) to Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs) Guidance. It has not yet been approved and amends the FATF definition linked above of “Virtual asset” to:

“Virtual asset” as a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes. Virtual assets do not include digital representations of fiat currencies, securities, and other financial assets that are already covered elsewhere in the FATF Recommendations; and

On 11 June 2021, the Intergovernmental Fintech Working Group (IFWG) published a press release and position paper that referenced “crypto assets” and provided a detailed explanation for the naming convention.

From footnotes:

At the time the initial statement was issued, the term ‘virtual currencies’ was used to refer to crypto assets.

The FATF prefers the terms ‘virtual assets’ and ‘virtual asset service providers’, while the South African preference is for ‘crypto assets’ and ‘crypto asset service providers’.

In the position paper:

Crypto assets are a form of fintech innovation that may impact on the financial sector of the country: Given the wide range of innovations across financial services, the existing regulatory architecture should be assessed to determine its appropriateness and effectiveness, and if any enhancements or refinements are required to ensure the regulatory framework remains appropriate and fit for purpose. Crypto assets are regarded as an innovation that could materially affect financial services given their ability to perform some functions of money or currency (albeit privately issued), with a direct impact on economic activities such as payments, investments and capital raising.

Unfortunately, this hasn’t aged well as Bitcoin is legal tender in some countries:

Crypto assets are not ‘money’ (i.e. legal tender), but they perform certain functions of money

A detailed explanation of the naming convention:

2.1.1. From a regulatory perspective, having clarity on the term ‘cryptoassets’ is fundamental as it directly influences the term’s classification and concomitant regulatory treatment. Various naming conventions have been adopted in just a few years, from ‘digital tokens’ and ‘digital assets’ to, most recently, ‘crypto tokens’ and ‘crypto assets’ (CPMI, 2015; FSB, 2018; BIS, 2018; Carney, 2018a). Despite the various terminology used, the crypto phenomenon is commonly based on decentralised technology such as blockchain and DLT. The definitions used generally focus on its electronic nature, its potential role as a medium of exchange, and its perceived role as a representation of value. Some jurisdictions have classified it as a unit of account, while others have rejected it as a financial instrument such as a security or other financial product. Central banks in particular have intentionally refrained from referring to the phenomenon as ‘currency’ as it is not deemed to be a form of legal tender or fiat currency.

2.1.2. Consistent with the international preference, the term ‘crypto assets’ is preferred in the South African context as it encapsulates and extends to these functions. Furthermore, ‘crypto assets’ are seen as a broader, or ‘umbrella’, term for different crypto asset tokens which maybe classified in to three types:

  1. Exchange or payment token:
    These are tokens designed to be used as a means of exchange or payment for buying goods and services. Some users also utilise it for investment purposes.
  2. Security token:
    These tokens provide rights such as ownership, the repayment of a specific sum of money, or entitlement to a share in future profits.
  3. Utility token:
    These tokens can be redeemed for access to a specific product or service that is typically provided using a DLT platform

“crypto assets” is explicitly defined as:

2.1.3 The following definition of crypto assets is accordingly adopted by the CAR WG:

A crypto asset is a 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; applies cryptographic techniques and uses distributed ledger technology