An article by Forbes compares Virtual Asset adoption in Africa to the desert rose, an emblem of resilience and the ability to thrive amid great difficulty. Indeed, by 2022, according to the International Monetary Fund, out of merely a quarter of Sub-Saharan African countries that formally regulated crypto, as many as two-thirds had implemented restrictions and six countries had outright banned it. As a result, many investors and entrepreneurs interested in this sector in Africa were holding back due to the regulatory uncertainty and policy swings.
The Forbes article then goes on to posit that regulatory statements about cryptocurrency adoption in Africa have transitioned at different rates between 2018 and 2023 – but equally states that the last five years have been a key landmark in Africa’s efforts to adopt virtual asset legislation. The article then goes on to look at virtual asset legislations in 7 African nations including Mauritius, stressing that each regulatory stance has presented opportunities and challenges in equal measure.
At ITL, we are excited to see global publications such as Forbes taking an active interest in the African ecosystem for virtual assets, and indeed, harking to Mauritius as a pioneering jurisdiction among the African nations that are taking firm strides towards putting in place conducive virtual asset legislation. In our own thought leadership that unfolds below, we have adopted a wider scope and compared VA legislation in Mauritius to that of International Financial Centres (IFCs) across the world. This is based on our understanding that the direct competition for Mauritius is not simply from renowned African jurisdictions such as South Africa and Rwanda but indeed leading IFCs globally such as Singapore and the UAE as well.
MAURITIUS: Leading the way in Africa with dedicated legislation
At the crucial cross-roads of the Financial Action Task Force (FATF) grey listing, the one outstanding FATF Recommendation where Mauritius had to work the hardest to fulfil was Recommendation 15 on New Technologies. Significantly, Mauritius successfully upgraded from ‘Partially Compliant’ to ‘Largely Compliant’ in 2022 consequent on the adoption of the Virtual Assets and Initial Token Offering Services (VAITOS) legislation in February 2022 – making it the only African nation to be fully or largely compliant with all forty FATF recommendations. At the time of the introduction of the VAITOS Act, ITL had covered this pioneering legislation in detail in our March 2022 newsletter.
Since then, the island economy has come a long way, and the recent budget contains several measures to clarify the jurisdiction’s stance on virtual asset taxation and the VAITOS implementation, as follows:
- Amendments to the Income Tax Act 1995 pertaining to virtual assets
The announcement that the exemption granted in respect of income derived from the sale of securities will be extended to cover sale of virtual assets and tokens was long awaited by players in the virtual assets industry. Being one of the leading jurisdictions in Africa to have quite recently adopted a novel licensing framework in respect of virtual assets, there was still a major void in Mauritius in respect of taxation of virtual assets. This new measure clarifies the fiscal position of virtual assets in Mauritius while also boosting its attractiveness in the crypto sphere.
- Amendments to the Virtual Assets and Initial Token Offering Services Act 2021
It was stated that the VAITOS 2021 will be amended to introduce a statutory obligation on a virtual asset service provider to appoint a senior executive, duly approved by the FSC. The qualification and criteria of the senior executive would have to be defined and, subject to such criteria, may pose a challenge for early start-ups, although it may assist in attracting knowledgeable and experienced individuals to Mauritius. It is also anticipated that the senior executive would need to be a fit and proper person in accordance with FSC requirements.
RWANDA: National bank pursues ambitious retail Central Bank Digital Currency project
In December 2023, the Capital Markets Authority of Rwanda joined forces with the central bank to conduct the first industry consultative meeting on Virtual Assets (VA) and VASPs risk assessment in Rwanda.
Meanwhile, the National Bank of Rwanda (BNR) is forging ahead with plans for a retail CBDC, marking a significant step towards Rwanda’s goal of transitioning to a cashless economy. The BNR recently completed a feasibility study on the retail CBDC and has now opened it up for public comment, emphasising its commitment to incorporating the latest technological innovations tailored to local conditions, as outlined in the following aspects:
- The proposed retail CBDC aims to advance Rwanda’s cashless economy initiative while enhancing the resilience of the financial system, particularly in light of frequent power outages. With the Rwandan financial sector facing challenges such as low financial literacy and high remittance costs, the BNR sees reducing cash circulation as an avenue to formalise more of the economy towards potentially addressing these challenges. Despite the country’s cashless goals, the BNR anticipates spending $35 million on printing and maintaining cash supply over the next five years.
- Key features of the proposed CBDC include interoperability with existing payment systems, potential integration with other CBDCs, and an interest-free, intermediated model. The BNR recommends a token-based approach, allowing for offline transfers using Bluetooth or Near Field Communication (NFC) technology, eliminating the need for smartphones.
- While programmability offers opportunities for innovative products and services, concerns about privacy and security remain. The BNR envisions “partial pseudo-anonymity” for the CBDC, balancing innovation with regulatory considerations. Finally, the choice of a distributed database model over a distributed ledger aims to enhance reliability, drawing from the World Economic Forum’s CBDC Policy-Maker Toolkit.
SOUTH AFRICA: Tightening regulations to balance digital asset growth with investor protection
Excitingly, cryptocurrency use is legalised in South Africa. In 2021 and 2022, a collaboration between the Financial Sector Conduct Authority (FSCA) and the South African Reserve Bank SARB saw the release of a consultation paper outlining a regulatory framework. The legislation has supported people and businesses keen on growing in the region, besides enabling the growth of a vibrant community of crypto enthusiasts, investors, and entrepreneurs.
Lately, however, South Africa has tightened transaction rules for crypto asset service providers amid the grey listing of the jurisdiction by the FATF.
- South Africa’s Financial Intelligence Centre (FIC) has issued a draft directive to ensure that accountable institutions that provide crypto asset services adhere to and implement the FATF’s recommendations.
- The directive requires crypto asset service providers in South Africa to transmit and verify certain identity information and provide documentation when conducting a cryptocurrency transaction.
- This move is part of an effort to resolve the Financial Action Task Force’s (FATF) greylist action by adhering to the “Travel Rule” for virtual assets like cryptocurrency.
In addition, observers note that South Africa’s cryptocurrency landscape may be in for a shift as the FIC released a proposed directive regarding crypto asset transfers:
- On the back of the recent announcement about the issuing of licences to 75 crypto asset service providers (CASPs) by the FSCA, the FIC published Directive 9 in April 2024.
- Directive 9 aims to tighten the reins on CASPs by ensuring that accountable institutions engaging in crypto asset transfer activities implement more detailed and stricter requirements while engaged in digital transactions.
SINGAPORE: Tightening scrutiny of VASPs amid FATF’s global AML/CFT concerns
In Singapore, the move to recognise virtual assets was encapsuled in the Payment Services Act 2019 (PSA), which came into force in early 2020. The intention then was to consolidate previous disparate laws towards providing “a forward looking and flexible framework for the regulation of payment systems and payment service providers in Singapore”, including transfers through virtual assets.
Recently, while virtual asset service provider/digital payment token service provider activities in Singapore form a small portion of global activities, Singapore authorities are closely monitoring the risks involved in this sector. Other sectors identified within the financial industry that pose higher ML risks are payment institutions providing cross-border money transfer services (including remittance agents), and external asset managers.
- At the FATF level, it has been identified that the virtual asset sector, which includes cryptocurrencies, is at high risk of being exploited for money laundering and terrorism financing activities. Speaking at the close of its plenary sessions in Singapore on June 28, FATF president T. Raja Kumar said the sector remains poorly regulated in many countries. The global financial watchdog had issued global, binding standards to prevent the misuse of virtual assets for money laundering and terrorist financing.
- It is no mere coincidence then that just prior to the FATF session, on 20 June 2024, the Monetary Authority of Singapore (MAS) announced the publication by Singapore of its updated Money Laundering National Risk Assessment, as part of its continuing efforts to maintain the effectiveness of its anti-money laundering (AML) regime amidst the evolving risk landscape. The press release notes that within the financial sectors, digital payment token services providers (or virtual assets service providers) are a higher risk sector of note.
- The MAS also underlines that the findings in the updated ML NRA will guide Singapore’s ongoing efforts to ensure that its AML regime keeps pace with the identified risks. These include continued risk-targeted efforts to sensitise financial institutions and designated non-financial businesses and professions to the key, new and emerging ML risks, as well as to allow more timely detection, disruption and enforcement of illicit activities by law enforcement and supervisory agencies.
UAE: Pioneering a separate authority to oversee and regulate virtual assets
The Virtual Assets Regulatory Authority (VARA)is the regulatory body established in Dubai, tasked with overseeing and regulating the virtual assets sector. VARA’s responsibilities include empowering investors, raising awareness about virtual asset activities and products, and fostering innovation in the industry. It ensures the regulation, supervision, and management of virtual assets and related activities within all zones of the Emirate of Dubai, deeming it the first global regulator specifically focused on virtual assets.
Working closely with the Dubai Department of Economy & Tourism (DET) and the Dubai Free Zone Authorities (FZA), VARA is implementing top-tier standards in consumer protection and security throughout Dubai’s mainland and free zones. This collaboration is a driving force behind Dubai’s ongoing economic and financial development. Below is a comprehensive list of VARA-regulated activities related to virtual assets:
- Advisory Services
- Broker-Dealer Services
- Custody Services
- Exchange Services
- Lending and Borrowing Services
- Virtual Asset Management and Investment Services
- Virtual Asset Transfer and Settlement Services
Since VARA was established, VASPs operating in Dubai are subject to increased regulatory requirements. VARA will monitor all VASPs in order to ensure that they comply with the Regulations (and associated Rulebooks, as noted below) requirements. VARA may conduct regular inspections and audits to assess VASP compliance.
- The Regulations provide that the issuance of anonymity-enhanced cryptocurrencies and all virtual asset activities related to them are prohibited in Dubai.
- In addition to the Regulations, VARA has released several rulebooks, including the Company Rulebook; Compliance and Risk Management Rulebook; Technology and Information Rulebook; and Market Conduct Rulebook. VASPs licensed by VARA must comply with the provisions of all the rulebooks.
How Mauritius can entrench its position as the leading virtual asset jurisdiction in Africa
We note that pioneering African economies such as Nigeria and Kenya have adopted frameworks – but these serve more to protect investors than to overtly encourage digital asset acceptance. In Kenya, for instance, 2023 saw the government introduce a proposal to levy a 3% tax on digital assets in the financial year 2023–2024. The proposal also taxes the monetisation of digital content through a 15% levy. The tax could however indicate a form of government recognition of digital assets, compared to their dampening stance in 2015 when the Central Bank of Kenya (CBK) issued a public notice, highlighting that “Bitcoin and similar products are not legal tender nor are they regulated in Kenya.” The Central Bank of Nigeria (CBN) too issued regulatory notices in 2021 expressly banning the use of Bitcoin, further prohibiting financial businesses from “dealing with cryptocurrencies”. However, this only spurred peer-to-peer transactions and in the wake of this growth, the CBN introduced some regulations for digital assets outlining registration fees and requirements for VASPs. Since then, Nigeria has also pioneered the e-Naira towards testing the operationalisation of a CBDC.
In Mauritius, it is clear that the VAITOS Act offers a path-breaking set of guidelines for international compliance and harmony with the FATF in terms of mitigating and averting money-laundering risks connected with cryptocurrencies. As such, the island economy is uniquely positioned to help other regulators in Africa to equip their laws to protect investors and minimise risks associated with financial crimes, such as those identified lately by the FATF and enshrined in Singapore’s latest ML National Risk Assessment.
Across all jurisdictions, it is also clear that regulators acknowledge the potential impact of innovation associated with blockchain technology, which is the infrastructure behind cryptocurrencies. Although they differ on what extent they can engage with the crypto ecosystem, there are coherent plans in place to tax cryptocurrencies and their usage, such as in Kenya. Finally, IFCs such as Dubai are also instituting separate authorities to regulate digital assets, on the understanding that emerging technologies need dedicated and specialised resources in the regulatory space as they merit in the corporate compliance arena.
Sources:
- https://www.forbes.com/sites/roselynewanjiru/2023/07/05/crypto-regulation-in-africa-here-are-seven-nations-and-their-regulatory-stance-in-the-last-five-years/
- Dentons – Legal highlights: Mauritius National Budget 2024/2025
- Digital Assets – Rwanda | Statista Market Forecast
- Rwandan Central Bank Pursues Ambitious Retail CBDC Project – Charltons Quantum
- Travel Rule Crypto in South Africa by the FSCA 🇿🇦 [2024] – Notabene
- Digital Assets – South Africa | Statista Market Forecast
- https://www.ifcreview.com/articles/2024/march/singapore-tightening-scrutiny-of-virtual-asset-service-providers-vasps/
- https://www.straitstimes.com/singapore/courts-crime/virtual-asset-sector-remains-poorly-regulated-in-many-countries-global-financial-watchdog-fatf
- https://www.mayerbrown.com/en/insights/publications/2023/03/varas-new-regulations-for-virtual-assets
