The race for the immutable tulip
Warren Buffet, the most successful investor of all time, calls cryptocurrency “Tulip Mania”. Cryptocurrency, the most successful investment of all time, doesn’t seem to care. Now a decade on, governments are scrambling to work out how they can get a slice of the tulip pie.
Cryptocurrency has seen more mainstream adoption in developing countries than in developed countries. In emerging markets, ordinary people turn to cryptocurrency in the face of currency inflation, for remittances, for business transactions or as an alternative to an unstable central banking system. This kills the argument that cryptocurrency isn’t a practical tool in the realm of finance and only a speculative investment asset. Cryptocurrency is here to stay. Not only that but it is about to fundamentally change the world.
How can a country like South Africa position itself to benefit from the tsunami of innovation heading our way?
South Africa needs to learn from other countries.
In June 2021, El Salvador made history by becoming the first country in the world to adopt Bitcoin as legal tender. Furthermore, President Bukele is hoping to encourage foreign investment by not charging capital gains tax on Bitcoin.
As bullish as Bukele is on Bitcoin, however, Vitalik Buterin, the brains behind Ethereum, has stated “Making it mandatory for businesses to accept a specific cryptocurrency is contrary to the ideals of freedom that are supposed to be so important to the crypto space.” El Salvadorians themselves have taken to the streets to protest what they see as a dictatorial move from Bukele. If South Africa wants to capitalize on the opportunities facing the world, they need to understand the origins and ethos of cryptocurrency as an engine of freedom through decentralisation, precisely because this is the core of the value. Bitcoin is not suited to be a good legal tender.
Cryptocurrency adoption should be a natural process driven by the needs of individuals. Different cryptocurrencies fulfil different roles and will be used in different ways by different people. The government can’t organize or predict that, but can create favourable conditions for the use of these assets to be optimised within the country.
Nigeria has one of the highest mainstream adoptions of cryptocurrency in the world. Ironically, however, the Central Bank of Nigeria has banned cryptocurrency. Despite this, adoption continues to grow in Nigeria. Nigeria happens to be the biggest user of Mysterium which they use to bypass censorship in Nigeria. Mysterium is a decentralised VPN powered by the Myst token. This is a healthy example of a grassroots use of the blockchain.
Were South Africa to learn from these approaches they would do neither. Instead of forcing Bitcoin on the people like in El Salvador, South Africa should rather allow any cryptocurrency to be used as legal tender. Let the people work out which coins, if any, lends themselves most favourably and effectively as legal tender through trial and error in this emerging technology. Nigeria’s approach is likewise flawed, because now, instead of their banks embracing the cryptocurrency revolution, they are being hurt by the parallel flourishing market.
The common Wealth Bank of Australia became the first bank in Australia to offer crypto services to retail investors in November 2021. This is a much smarter “if you can’t beat ’em, join ’em” approach.
Across continents, in Austria, when someone trades one cryptocurrency for another this is not a taxable event. This makes sense because trying to calculate the ‘would be’ tax would be highly impractical if not impossible for active traders and investors. In Austria they only charge a flat capital gains tax when converting cryptocurrencies to fiat.
South Africa could go one step further than all these countries by learning from them all and combining the good whilst eliminating the bad. Cryptocurrency to cryptocurrency trading should not be taxed like in Austria, and there should be no capital gains tax when converting cryptocurrency to fiat somewhat like in El Salvador.
This will encourage people to not only earn, transfer and trade through cryptocurrency when it is more efficient, but they will be more likely to buy Rands if there is no capital gains tax when that makes the most economic sense. South African banks should immediately be introducing services as managers of these assets and transactions.
Once South Africa has liberated cryptocurrencies as legal tender and accompanied this with a favourable tax environment, investment will flood into this country. While many countries are adopting cryptocurrency, the taxes in those countries are still a deterrent. If South Africa relaxed tax laws, people from all around the world would come here and spend in a tax friendly setting. Tourism, an industry hurt by the pandemic, would have a massive influx of opportunity.
South Africans themselves could become richer from a government encouraging but not forcing change upon them, allowing the optimal coins to be established for various utility.
When it comes to a new industry, first mover advantage is key. If the South African government moves quickly to liberate cryptocurrency to the people, the head start it gives us will be a financial boon to the country.
Just like you wish you had bought Bitcoin 10 years ago, South Africa will wish it had opened up the country to cryptocurrency 10 years from now. The results will be comparable.