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The state says the aim is to modernise the system and align South Africa with expectations on money laundering and illicit financial flows from the Organisation for Economic Co-operation and Development and the Financial Action Task Force. However, one of the consequences is that the Treasury wants crypto assets treated less like free-moving digital assets and more like traditionally regulated financial assets. Purchases, holdings, and transfers of crypto could therefore become subject to declarations, permissions, and enforcement action similar to what may apply to other asset classes – with the implication that South Africa regulates itself out of a short-cut to becoming a more competitive economy with a reduced country risk profile.

Crypto providers do not object to regulation as such, but they do argue that the draft regulations go much further than sensible oversight.

On at least three counts they have a point.

The first is that under the draft regulations there is no apparent distinction drawn between different forms of crypto, even though the spectrum of assets that collectively make up crypto is very broad, and different products have different functions and applications. There is no apparent distinction drawn between assets moving into or out of the country and no differentiation between those bought and held on local exchanges versus offshore exchanges.

Rand-denominated stable coins, for example, which are essentially a one-to-one physical-rand-backed digital coin, need to be regulated differently from Bitcoin.

A crypto industry expert told The Common Sense that the impression created by lumping the whole industry into one basket is that the state regards the entire idea of crypto as something to regulate into irrelevance and that it has no intention of engaging seriously with the industry – let alone appreciating the potential upsides for the economy.

A second issue is that thresholds are set to determine how much crypto an investor may purchase or hold. These thresholds appear set to apply retrospectively – which is unfair to people who have in good conscience, and in line with local laws, invested in building up crypto assets. However, even on the forward view it is problematic to apply such thresholds.

These kinds of thresholds exist already, in areas from forex transactions to what share of pension fund holding may be held offshore – which is troublesome to begin with. People should be free to decide what they do with their own money and if the state is worried about offshoring it should improve the domestic investment climate. But even if you can get past the fact that such restrictions should not apply to begin with, an obvious question is why the thresholds for crypto should not just be the same as those currently applying to forex transactions?

A third issue is that onerous and costly administrative processes will apply where a person wishes to withdraw crypto held by a regulated exchange and transact with it or hold it instead in their own crypto wallet.

This is equivalent to placing an onerous administrative burden on a person who wishes to withdraw cash from their bank account either to transact with it, or to keep it in their safe at home, or under the bed (or in the couch), as the case may be. In the case of crypto, the state may seek to go further and demand the access codes to private wallets, even where no crime is suspected, which would be equivalent of asking someone to leave a key to their home or safe in the custody of the government.

But the greater issue is that the regulations may grant the state the power to demand full access to these wallets on the grounds of suspicion alone.

That is the equivalent of the state taking possession of the keys and codes to your safe at home so that it always has access to it. It is a very serious intrusion into private property and financial privacy.

In justifying such regulations, governments stress the dangers inherent in the alleged privacy afforded by crypto to investors. The transactions they conduct out of their own wallets are said to be opaque. But the extent of this much-vaunted privacy is greatly overstated. Transactions and holdings are trackable by governments that license the point-of-sale providers of crypto, as is already largely the universal case globally, including in South Africa.

The Treasury would do well to pause and understand why the crypto world has reacted so strongly to some of this.

The crypto industry arose in large part through the motivation of overcoming heavy-handed state regulation around the administration of money. Such regulation is costly to both buyers and sellers of goods and services, and to the economy in which they operate. Each transaction attracts an administrative cost, which, multiplied millions of times, adds up to vast sums expended inefficiently.

The state’s administration of money, and the regulatory obstacles this imposes, further serve to undercut financial and entrepreneurial innovation while retarding savings. If you add friction to any process, you undermine both access and demand, and governments, their best intentions notwithstanding, are very good at adding friction.

But overall, the best argument in favour of enlightened crypto regulation is that fiat currencies are very poor stores of value. That value is undermined both by the inflation engineered by central banks and the interest rate decisions of their monetary policy committees, even before getting to the often counter-productive decisions of the governments or legislatures that appoint the central bankers.

By forcing investors and savers to transact only via state-administered currencies, the local economy in question is fully exposed to the inherent vulnerabilities of poor political and policy decisions, which increases currency-related country risk.

The upshot is that, by being forced to transact and save in state-regulated currencies, ordinary people end up getting a raw deal, the economies they transact in are less efficient and grow more slowly than they otherwise might, and country risk is exacerbated.

It follows naturally that the crypto world and its thinkers would be particularly frustrated at any government seeking to impose an onerous and costly regulatory system for crypto, let alone a separate system that is in key respects more onerous than the system applied to other assets, less well defined, and not designed to allow the country to benefit from the new technology around which the enlightened world is building more efficient economies.

The result, if the state proceeds down its current crypto-regulatory path, will ultimately be the removal of crypto’s cost and efficiency advantages. For some policy makers that is undoubtedly the intent, as this would serve to maintain the state’s monopoly over the administration of money – regardless of the inefficiencies and risks. A rethink that looks particularly at how crypto might contribute to a domestic economic kick-start would be a sensible thing to do.