The South African Reserve Bank has issued its latest financial stability report, pinpointing digital assets and stablecoins as emerging threats in the financial landscape. The increase in trading volume and user count among major crypto exchanges has raised concerns due to existing regulatory gaps.

In a report unveiled recently, the bank classified ‘crypto assets and stablecoins’ as significant risks to the evolving financial technology sector. As of July, the total number of users across the country’s three largest crypto exchanges has reached a staggering 7.8 million, with an estimated $1.5 billion being held in trust by year-end 2024.

“Because of their entirely digital nature, crypto assets can bypass the Exchange Control Regulations, which are designed to manage the flow of funds into and out of South Africa,” the report emphasized.

Total registered users across the top crypto exchanges in South Africa. Source: South African Reserve Bank

Furthermore, the Reserve Bank has observed a notable evolution in the use of stablecoins, particularly those pegged to USD, as these assets are increasingly preferred for trading on local crypto platforms due to their significantly reduced price volatility compared to traditional cryptocurrencies like Bitcoin (BTC) or Ethereum (ETH).

“Whereas Bitcoin and other popular crypto assets were the main conduit for trading crypto assets until 2022, USD-pegged stablecoins have become the preferred trading pair on South African crypto asset trading platforms…[This is] due to the notably lower price volatility of stablecoins compared to unbacked crypto assets.”

Additionally, the Financial Stability Board recently issued a report indicating that South Africa lacks a regulatory framework for global stablecoins and has only limited regulations for cryptocurrencies. The central bank warned that without suitable regulations, risks from cryptocurrencies might accumulate unnoticed, jeopardizing financial stability.

Diverging Views Within the Government on Cryptocurrencies

The Reserve Bank’s warnings reverberate similar cautionary notes voiced back in 2017 by Deputy Governor Francois Groepe, who remarked that the issuance of digital currencies could pose significant risks for the country. However, sentiments seem to be shifting within the government, leaning towards a more favorable approach.

In 2022, South Africa’s Financial Sector Conduct Authority classified cryptocurrencies as financial products, enabling licenses for crypto enterprises to operate legally.