South Africa is shaping up to be a prime target for crypto exchange expansion.
Showing signs of significant crypto adoption (particularly among everyday users), regulatory clarity, and ties to additional Sub-Saharan African crypto markets, South Africa offers massive opportunities for crypto exchanges that are either looking to establish an initial presence or expand their operations in this region.
Market opportunity for crypto exchanges in South Africa
As of 2022, South Africa is estimated to have around 7.7 million crypto owners, or 12.45% of the population (Triple A, 2022).
Taken as a region, Sub-Saharan Africa receives 1.7% of global cryptocurrency value with South Africa in particular leading this market territory to the tune of approximately $25B in crypto value received between July 2021 and June 2022. The region also accounts for “$100.6 billion in on-chain volume received [during the same period], which represents 2% of global activity, and 16% growth over the year prior” (Chainalysis, 2022).
But even though global comparative values seem to place Africa lower than other nations and regions, everyday user adoption is simply incredible (e.g. P2P exchanges like Paxful tout “55% year-over-year user growth of remittance users in Nigeria”). This highlights an obvious opportunity for exchanges here to provide enhanced P2P and retail frameworks that leverage existing adoption but also represent an evolutionary component that welcomes institutional investors.
- The region contains “the most well-developed cryptocurrency markets of any region.”
- Notable “penetration and integration of cryptocurrency into everyday financial activity for many users” with “outsized usage of P2P platforms [that] make it unique compared to other regions.”
- Many young people in Sub-Saharan Africa are turning to “cryptocurrency as a way to preserve and build wealth in spite of low economic opportunity.”
- Remittances could play a large role in market opportunity for new or expanding exchanges, with global, “digital cross-border remittances… projected to grow from $295 billion in 2021 to $428 billion in 2025.”
Another opportunity presents itself on the social front. By bolstering access to broader financial systems and services, exchanges could enhance existing crypto infrastructures that support industrious African youth.
South African cryptocurrency regulatory environment
While some crypto enthusiasts look at regulation with suspicion, rule-setting serves several purposes: regulation enables needed safeguards that protect investors and users against illegal acts, it hedges risk, and intelligent regulations serve to help stabilize financial environments, inviting more attention from investors, not less.
Where does South Africa stand on crypto taxation? As recently as 2018, the South African Revenue Services (SARS) commented that it would “continue to apply normal income tax rules to cryptocurrencies and will expect affected taxpayers to declare cryptocurrency gains as part of their taxable income.”
In October, 2022, South Africa issued a formal declaration that cryptocurrency will be classified as financial products, requiring them to be regulated. Further, crypto platforms will need to enter license applications “between June 1 and Nov. 20, 2023, in order to operate legally, the country’s financial conduct regulator said” (Reuters, 2022). This move is a welcome clarification for investors who look to regulated environments as more stable and ready to handle capital influx and egress.
Additionally, this clarification stands to potentially influence surrounding Sub-Saharan jurisdictions that limit crypto activity. For example, the Nigerian government “prohibited banks from transacting with cryptocurrency businesses in 2021,” although that didn’t seem to curb users’ enthusiasm. Perhaps broader economic developments in South Africa as a result of cryptocurrency market expansions might pique the interests of governments that are less-than-favorable to crypto.
Crypto tax partners make a big difference
South Africa is just one example of an economy that’s exploring and clarifying the role of crypto.
But with significant evolutions in crypto and blockchain technologies come added risks and obligations. Governments will need to work hard to understand the evolving role of crypto, properly regulate its usage, identify and prosecute bad actors, and more.
Governments are also looking for revenue on capital gains.
With users constantly moving crypto assets, it becomes very difficult for governments, exchanges, and users to keep up with an inevitable myriad of transactions, not to mention cataloging which ones are taxable and non-taxable. And given that exchanges are at the center of the crypto ecosystem, they become the logical focal point of regulation, inviting intense interest from governments looking to corroborate tax reporting.
For exchanges, it’s become a non-negotiable; they must comply with regulatory reporting pressure, and users are starting to factor tax reporting into their decisions (i.e. does this exchange provide tax reporting help?). Exchanges that can offer easy-to-use, built-in tax reporting capabilities gain competitive advantages over exchanges that push that burden back on to users and governments.
That’s why identifying a strong crypto tax software partner is critical to the success of any exchange looking to carve out territory or maintain its foothold among global markets.
By partnering with BlockSentry, exchanges can offer simple, accurate, and automated crypto tax software that delivers third party corroboration and verification, along with simplified compliance solutions for users, exchanges, and governments. Learn more about BlockSentry or schedule a demo to see the solution in action.