Crypto Crimes and the South African Legal Framework

Article written by Lesai Seema, Candidate Attorney, checked and released by Shaun Piveteau, Senior Associate at Schindlers Attorneys

13 December 2021

INTRODUCTION

Unlawful (or at the very least, what appears to be unlawful) cryptocurrency/Crypto assets (“Crypto”) transactions have been concluded almost immediately after blockchain technology was developed. The anonymity in the blockchain system, is a complex matter and has added a vail to transactions on the peer-to-peer network system. This has, for obvious reasons, making it ideal for criminals and illicit activity.

Over recent years, there has been a sizeable rise in the use of Crypto for unlawful transactions. In an attempt to bring the illegal activity under control, South African authorities are considering, amongst other things, extending the current legislation regulating Crypto so as to implement certain deterrents to the ongoing unlawful Crypto transactions. This article contemplates and considers the South African legislation that will likely extend to these types of Crypto transactions.

THE USE OF CRYPTO ASSETS TO CONCLUDE UNLAWFUL TRANSACTIONS

The unlawful use of Crypto can, at this stage, be separated into 3 main categories –

1. Crypto used to purchase illicit goods or services such as the purchasing of illicit substances;
2. Crypto used to evade statutory requirements such as using crypto to evade tax; and
3. Crypto obtained illegally through, for example, Cryptojacking (Malicious Cryptomining) and ‘gimcrack’ crypto investment schemes.

In the absence of the introduction of central Crypto regulating legislation, it is likely that the offences contemplated in the above categories, will be regulated by various pieces of legislation. Suppose a person has used Crypto to purchase large amounts of cocaine, the applicable legislation will likely be the Drugs and Drug Trafficking Act 140 of 1992. On the other hand, the Income Tax Act 58 of 1962 will likely be the applicable legislation in the event that a person has failed to declare income accrued to him from Crypto or is utilising Crypto to evade tax.

However, whilst it is all good and well identifying the relevant piece of legislation, there is a fundamental issue that the legislature will face in its attempts to extent the legislation to create Crypto related offences.

A CRIME RECOGNISED BY LAW AS A CRIMINAL OFFENCE?

In a South African legal context, the ius praevium principle states that a person may only be found guilty of a crime if the conduct was recognised by the law as a criminal offence at the time that the conduct took place. The ius certum principle states that criminal offences and corresponding sanctions should be demarcated clearly and unambiguously. As such, in order for a person to be found guilty of a Cyrpto related offence, the legislature, in its attempts to create Crypto related offences, will need to comply with the ius praevium and ius certum principles. Simple enough, right? Wrong!

At this stage, the South African Reserve Bank does not recognise Crypto as legal tender and Crypto remains largely unregulated within the South African legal framework. Moreover, in order for the South African justice system to work effectively, the South African Police Services and other law enforcement officials need to be in a position to identify the perpetrator/suspect in question. If the suspect cannot be identified, he cannot be prosecuted regardless of whether a criminal offence exists.

Unfortunately, Anonymity in Crypto and, more specially, the blockchain system is a complex issue, one which creates a nightmare for the South African Legislature. How do you formulate a criminal/statutory offence in circumstances where the suspect is nearly always unidentifiable or untraceable?

In the circumstances, prior to the Legislature extending or creating Cypto based legislation and corresponding offences, it will need to be possible for law enforcement officials to de-anonymise the user. Until then, it is uncertain whether this is possible.

Conclusion

Recovering and prosecuting Crypto assets will be a complex process considering the lack of regulation and the uncertainty of whether the current legal framework extends to Crypto. The Finance Sector Conduct Authority will need to get over the regulation hurdle first in order to be in a position where it can consider formal investigations and law enforcement. As it stands Crypto is not considered legal tender in South Africa. This will raise further definition and regulation issues when transactions are concluded in foreign jurisdictions – South Africa may have to consider collaborative legislation with foreign countries and treaties alike. What is needed is a proactive approach and a firm implementation of the policies and frameworks contemplated in the IFWG Crypto Assets Regulatiory Working Group Position paper on crypto assets.

VALUE

With the rise in illicit uses of Crypto Assets over recent years. It is important to consider the laws that these unlawful transactions are breaking and where crimes are committed – how will the authorities and regulatory bodies apply/extend the existing legal framework

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