Cryptocurrency blew into our consciousness around 2011 as an alternative investment.
It quickly gained prominence for its massive returns as it grew in popularity. Invented around 2008, this digital currency was released as open source software and was underpinned by blockchain technology. The two biggest cryptocurrencies are Bitcoin and Ethereum. By November 2021, trading in Bitcoin reached a peak price of over USD68 500 and in the digital world made a number of billionaires globally. Locally as well, a significant number of investors in this asset class have reaped the benefits.
However, since December 2021, the well-known cryptocurrency has shed almost 70 percent of its value, dragging down all the other cryptocurrencies with it, resulting in massive losses to investors. As at the close of business on August 7th, it was trading at USD18 473. This dramatic drop has exposed a key feature of this asset class, which is its volatility, which, while being attractive to investors, can be potentially devastating. Trading in cryptocurrencies has been largely unregulated until recently, and the Government of Botswana has also taken steps to regulate the sector.
On February 25, 2022 the Virtual Assets Act (VAA) came into effect, its purpose primarily to regulate and license trading in virtual assets in the Republic of Botswana. On the same day, by Government Notice, NBFIRA declared virtual asset service providers and issuers of initial token offerings as non-bank financial institutions. A virtual asset has been defined as a digital representation of value that may be digitally traded or transferred, and may be used for payment or investment purposes, or is distributed through a distributed ledger technology where value is embedded or in which there is a contractual right of use, and includes virtual tokens. The definition excludes fiat currency and financial assets regulated under the Securities Act.
Virtual asset business has been defined as trading in virtual assets, including an issuer, payment services in relation to virtual assets, and a service provider that provides or makes available a distributed ledger platform (blockchain) that facilitates the exchange between virtual assets and fiat currency, between virtual assets themselves, and the transfer of virtual assets. A virtual asset service provider has been defined as a person, under agreement, who provides or undertakes a virtual asset business. The definition includes a system that provides virtual liquidity to allow traders to buy and sell derivatives (of the virtual asset).
The VAA purports to apply to any person carrying on a virtual asset business irrespective of the physical location from which the activity is carried out. It will be interesting to find out how the government is intending to extend application of this law outside Botswana because this goes against the presumption against extra-territorial application of laws. However, NBFIRA has come out to say they will enforce the VAA through collaboration with other regulators.
The VAA goes further to say that a person is considered to be carrying on a virtual asset business if (a) irrespective of geographical location, such person offers a virtual asset service to persons resident in the Republic of Botswana, or (b) is resident in the Republic of Botswana and offers a virtual asset service to person in or outside the Republic of Botswana.
In terms of the VAA, a person shall not participate in a virtual asset business unless the person is the holder of a virtual asset service provider and/or issuer licence(s).
Our Observations:
- Crypto currency is not legal tender in the Republic of Botswana. This raises issues around its usefulness locally, should an investor wish to deal with his holdings, or transfer into fiat currency.
- Local trading is done primarily through WhatsApp or Facebook groups or dedicated apps, and there is no physical presence locally. This raises issues around the ability of the regulator to effectively regulate the sector. This also lends cryptocurrencies susceptible to hacking, scams and financial crimes such as money laundering and terrorist financing.
- Due to its extreme volatility (as compared to other asset classes), there may be concerns around regulation of redemption, (i.e. during a market crash or prolonged bear market). This raises issues around whether local investors are adequately protected, should they wish to undertake capital preservation or realise gains on short notice. Specifically, peer to peer trading is generally recognised as the fastest and most cost effective redemption tool.
- The licensing requirements only require that an application include a risk management and an investment strategy (in so far as investor protection/awareness is concerned). Does this go far enough or is it irrelevant to the inherent core risk of the investment and protection of the stability of the sector and protection of local investors? The VAA though does mandate that the virtual asset provider shall provide for the safeguarding of virtual assets belonging to customers.
- How does the Government intend to tax the gains from trading in virtual assets?
However, as regulation is relatively new, only time will tell how effectively the sector will be regulated. As always, investors are cautioned to seek professional legal and financial advice, particularly when investing in alternative asset classes, prior to making any substantial investment. In our view, the ability to redeem your investment is a grey area, particularly because in some instances websites (traders and exchanges) have been known to close overnight.
Chilume, a Partner in the Corporate and Commercial Department at kheel Jinabhai & Associates, has 22 years post-qualification experience. His vast experience ranges from corporate and commercial law to intellectual property gained from working both for large corporates and in private practice.
His areas of expertise include transactional law, competition law, corporate restructures, private equity, capital markets, project finance, mergers & acquisitions, mining & energy, public-private partnerships & infrastructure, telecommunications and intellectual property.
Email: topiwa@aja.co.bw