Are Crypto Assets Property in South African Law?

Article written by Wade O’ Connor, Candidate Attorney and Chantelle Gladwin-Wood, checked and released by Chantelle Gladwin-Wood, Senior Partner at Schindlers Attorneys

29 September 2021

Introduction

The introduction of blockchain technology (the “Blockchain”) has seen various uses since its famous ‘reintroduction’ in 2008. The Blockchain has been the vehicle for various uses, but most notably would be that of cryptocurrencies and tokenization.

Despite the likes of Bitcoin and Dogecoin being defined by many as cryptocurrencies, South African regulators, like many others around the world, have declared that cryptocurrencies are not legal tender in South Africa and therefore not a currency at all. Instead, the South African regulators have categorised cryptocurrencies, and a few others, as “Crypto Assets”.

This article will briefly discuss the legal definition of crypto assets and investigate whether they fall under the pre-existing categories in South African Property Law.

How Crypto Assets Operate on the Blockchain

Blockchain technology is most simply defined as a decentralized, distributed ledger that records the provenance of a digital asset. A blockchain is open to anyone and once data is stored on the blockchain, it becomes difficult to change it.

By inherent design, the data on a blockchain is unable to be modified, which makes it a legitimate disruptor for industries like payments, cybersecurity and healthcare. In order to ensure that the blockchain is secure, the blockchain is stored across millions of computers, instead of one record keeper. In order for a change to occur, the network of computers has to approve a change, which mitigates potential corruption as approval does not vest with a single person.

Once data is stored on the blockchain, it creates a unique ‘block’ that can’t be altered. When additional information is added, it creates another block which is then attached to the previous block, thereby creating a chain of blocks that records every change/transaction.

Blockchain technology is essentially the vehicle for crypto assets in that blockchain technology is the underlying technology on which crypto assets, and their ownership, is recorded on.

What is a Crypto Asset in South African Law?

At present, South Africa law does not expressly regulate crypto assets. In 2021 the Intergovernmental Fintech Working Group (the “IFWG”) published its position paper (the “Position Paper”) setting out the proposed developments which are to act as the regulatory framework for crypto assets in South Africa.

The Position Paper was drafted and prepared by the IFWG’s Crypto Assets Regulatory Working Group (the “CAR WG”) whose membership comprises of the South African Reserve Bank, the Financial Sector Conduct Authority, The South African Revenue Service and the Financial Intelligence Centre.

In the IFWG’s position paper, the CAR WG defined “crypto assets” as:

“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 cryptographic techniques and uses distributed ledger technology ¹. ”

The definition of crypto assets has been adopted by the regulatory authorities, through the IFWG ².

Despite the IFWG’s stating that crypto assets are not money (legal tender), they do acknowledge that crypto assets do perform similar functions of money³ in that it has value.

Property in South Africa

As mentioned above, crypto assets are not deemed as money. However, the use and value suggest that crypto assets ought to be classified, in law, in a manner that preserves their commercial value.

The concept of property in law is highly abstract in nature, founded upon classical principles tested over time and adapted where required. Though the term is used broadly in everyday language, in a legal sense ‘property’ means rights. Simply put, the law of property in South Africa deals with the legal relationship between a person and a thing. Whilst, determining whether someone (or ‘something’) is a person is relatively simple, the determination of a ‘thing’ is slightly more complicated.

The Legal Concept of a Thing

Traditionally, a thing is defined as a corporeal or tangible object external to persons and which is, as an independent entity, subject to juridical control by a legal subject, to whom it is useful and of value⁴. This definition requires that, in order for a proper determination, the characteristics of thing should be referred to:

I. Corporeality
II. External to a Person
III. Independent
IV. Subject to Judicial Control
V. Useful and Valuable to Humans

Complexity arises when addressing the question of whether corporeality is an essential characteristic or a common characteristic of a ‘thing’. Some scholars reject the idea that incorporeal property can’t be regarded as “things”. Referring to the characteristic of a thing highlights the problem as crypto assets are clearly not physical objects and therefore do not fall within the definition of a ‘thing’.

Additionally, even the strongest proponents for corporeality being an essential rather than common characteristic concede that, in practice, incorporeal are ‘frequently treated as the objects of real (proprietary) rights. Such a conclusion is further bolstered by the broader definition of ‘property’ found in the Constitution. While the Constitutional Court has interpreted ‘property’ in section 25 of the Constitution as having corporeality as a starting point, constitutional protection of the incorporeal property is viewed as unproblematic. In Law Society of South Africa v Minister for Transport, the Court held that

“Section 25(4)(b) makes it clear that property is not limited to land. It must follow that both corporeal and incorporeal property enjoys protection.”

These different approaches render a clear definition of the core concept of property law problematic, yet, it is necessary to understand which sorts of objects are governed by property law and which are not.

Characteristics of a Crypto Asset

Despite the difference in opinions referred to above, it is imperative that crypto assets are capable of legal classification as a thing, in order to be characterised as property.

Whilst it is uncontentious that a crypto asset is external to a person, independent, subject to control and of use and value, corporeality is not a characteristic of a crypto asset. It is clear that crypto assets are incorporeal as they cannot be perceived by the five senses.

Silberberg and Schoeman’s Law of Property explains that “there seems to be no reason why an immaterial property right cannot also be the object of a real right, considering the economic value implicit in such immaterial property rights”⁶. Provided that the other requirements of a ‘thing’ are met, there ought to be no obstacle to recognising intangible objects as property for the purposes of our law.

Regarding the characteristic of control, in order to fall within the scope of a ‘thing’ crypto assets must be susceptible to human control. Control need not manifest in the physical form of the word but rather amounts to ‘the possibility of enforcing and protecting the right in the thing.

As alluded to above, ownership of crypto assets is linked to the private (cryptographic) key(s) stored in a ‘wallet’. Holders are storing digital “assets”, each of them with their own unique identification code, as well as their private and public keys. Thus, a crypto asset is essentially a record of a value in a wallet on the blockchain.

The fact that a crypto asset is linked to the distinguishable key held by a holder, and the fact that the value thereof is transferable and transferable only by the holder in possession of the requisite corresponding key, is evidence enough of the appropriability of crypto assets.

Crypto assets can constitute digital representations of real-life assets, and are used to prove ownership of real-world assets (for example, in the same way, that a share certificate evidences ownership of a share, both of which constitute property). Although they are intangible, they undoubtedly represent assets that have value to the people that own them, and which assets can be traded with others, as other forms of property can, and therefore do fall within the realm of property in South Africa.

Final Thoughts

Whilst crypto assets are the ‘new kids on the block’ from a technology perspective, they are nothing new from a legal perspective. They fit neatly into pre-existing property law categories – namely that of incorporeal things. This enables us to determine what the consequences of certain transactions pertaining to these kinds of things must or will happen, at least in part, because we can apply the age-old accepted rules that apply to the class of property concerned to crypto assets just as easily in many instances. Being so unique in nature, however, it is inevitable that at some point our courts will be faced with differences that cannot be reconciled and at that point, our law will have to be changed or developed to cater for unique aspects of their operation.

Value

Discussing the legal definition of crypto assets and investigating whether they fall under the pre-existing categories in South African Property Law.

[1] Para 2.1.1 of the Position Paper.

[2] Ibid.

[3] Para 1.2.1.3 of the Position Paper.

[4] Van der Walt, AJ and Pienaar, GJ.  Introduction to Law of Property, Cape Town, Juta & Co. 2009.

[5] 2011 (1) SA (CC).

[6] Silberberg, 20.

Please note: this article is for general public information and use. It is not to be considered or construed as legal advice. Each matter must be dealt with on a case-by-case basis and you should consult an attorney before taking any action contemplated herein.

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