Sound Money

The South African government is attempting to apply capital control regulations to the crypto industry. These regulations are an apartheid government relic and are difficult to apply to crypto. Bitcoin’s decentralized, permissionless and censorship resistant technology will find ways to circumvent regressive regulations. If government undertakes the large administrative burden required to execute these policies it will take a step towards the authoritarian governments of Turkey, Venezuela and China who have restricted access to this freedom loving technology. No matter the outcome, it is prudent for bitcoin holders to self-custody funds before government takes any foolish steps. Self-custody ensures access, sovereignty and encourages much-needed sound principles. These are the precise sound principles required to get South African economic policy on track. TLDR: Crypto exposes the farcical nature of exchange controls. Execution is improbable and should motivate a deeper reflection of the policy. Individuals should consider self-custody funds if they want to enhance their sovereignty from regressive regulations.

Voluntary constraints on sovereignty desirable

Sovereignty is the freedom to act as one sees fit. One who is above the rulership or control of another is sovereign. Freedom from subject-ruler relationships is a desirable goal for all of us.

Understandably we all compromise on sovereignty to be part of a bigger community. A child has rules set by the family, a family has expectations within a community, an adult has rules set by its government and a company abides by the regulations of its regulator.

Illegitimacy causes boundaries to be tested

Rules require legitimacy and logic for participants to abide by them. A child expects its parents have its best interests at heart, a family is persuaded by the values of the community, an adult should see some benefits of its government and a company should experience positive business conditions created by its regulator. If not, application to the rules wavers and boundaries are tested.

South African exchange controls are a clear example where legitimacy and logic have wavered. The boundaries were being tested well before the advent of crypto.

Think about South Africans shopping overseas for expensive designer handbags, coats and suits - are these declared as part of capital controls? Of course not! What about peer to peer purchases of foreign currency in order to avoid expensive bank forex fees - are these declared as part of capital controls? Of course not!

South African exchange controls are a clear example where legitimacy and logic have wavered. The boundaries were being tested well before the advent of crypto.

South African government’s self-serving priorities are clear

Rationalizing the logic of this apartheid government policy relic, regulators may argue that capital controls (restrictions on the amount of capital South Africans can export abroad) may encourage domestic investment, spur economic activity and support job growth. Government adherence to these goals of investment, economic growth and job growth are questionable, however.

Government adherence to the goals of investment, economic growth and job growth are questionable.

For decades advisors have recommended that government reduce the public sector wage bill, stamp out corruption, balance the budget and halt government debt growth. These policies would spur unprecedented domestic investment, spur economic activity and support job growth. Yet South Africans get enumerate broken promises, widening budget deficits, ballooning debt levels, never-ending corruption, and a bloated public service. Clearly government does not care about the economic growth, job growth and the wellbeing of South Africans as much as it cares about itself, its employees, its salaries and capturing voters.

In reality, exchange controls do very little good for the South African economy. They merely restrict movement of capital, forcing it within South African borders in the hope of control and tax. The moral justification is marketing spin.

Exchange controls restrict movement of capital, forcing it within South African borders in the hope of control and tax. The moral justification is marketing spin.

Exchange controls on crypto are ridiculous

I view the governments’ attempt to impose capital controls on crypto as the “path of least resistance”. The government is probably uncomfortable that it has limited control on the industry and views capital controls as a reasonably easy way to slap an existing regulation on the burgeoning industry.

Over and above the previous comments, this policy shift is ridiculous for a few reasons:

1. Bitcoin is code on the internet. Moving crypto to an offshore exchange is like sending an email to your uncle in Kenya. Government efforts to stop it are futile.
2. If the South African government restricts capital movement to off-shore exchanges from South African exchanges like VALR and Luno, South Africans could merely withdraw capital to personal wallets and then transfer them to off-shore exchanges thereafter.
3. If government plans to monitor large off-shore exchanges, then South African’s can utilise decentralised exchanges. I.E. Crypto is decentralised and permissionless. Attempts to contain and control are futile.
4. If government plans to ban withdrawals from exchanges altogether, then it is verging on banning bitcoin.
5. Banning bitcoin would make the South African government peers with authoritarian governments like Venezuela, Afghanistan, Turkey, and China.
6. These bans are largely ineffective and the people in those countries appreciate the value of the technology to such an extent that they tend to ignore government bans.

The true motivation for government actions and the result of their policies is uncertain, but I do not think regulators have fully thought through the implications. This ambiguity has a resemblance to the recent inward listing saga and its ramifications for regulation 28.

Self-custody is a priority

Whatever the outcome, this news dramatically raises the importance of self-custody for South Africans. I usually do not recommend new entrants self-custody straight away due to the additional complexity introduced. Plus, reputable exchanges do not present a significant security threat. But the risk of potential restrictions of movement of capital imply that the effort to execute self-custody is required. I have inserted a few links at the end of this article to walk you through the self-custody options.

Where is your breaking point?

At this stage, I am not encouraging anyone to break the law. Despite government threats it is still perfectly legitimate to self-custody.

If the South African government were to walk down the path of full illegalization of bitcoin, then you know where I will stand though – on the side of freedom and sovereignty along with the people of Nigeria, Turkey and Venezuela who need bitcoin to maintain their human rights.

I encourage you to assess your breaking point. At what point are your human rights being violated? Do government efforts to control crypto make you more or less confident in their economic policies? I think it is the wrong decision to use these government regulations as a motivation to become more cautious of crypto - the opposite response may be required.

If the South African government were to walk down the path of full illegalization of bitcoin, then you know where I will stand – on the side of freedom and sovereignty

Bitcoin imposes much-needed sound principles

Returning to the moral case for capital controls, investing in bitcoin inserts the principles of sound money, freedom, limited government, transparency and truth into society. These are exactly the principles required to force good governance, less corruption and fiscal responsibility on all governments. As bitcoin holdings grow in an economy, the potential to inflate currency through excessive monetary expansion, and rack up government debts through fiscal expansion reduces. Sound principles will support investment, economic growth and job growth. If the government were able to execute these policies itself, as they have promised for decades, then South Africans would not need bitcoin.

I have said it before and I will say it again, “if you think your government is going to ban bitcoin, then you need it more than you think.” Citizens of authoritarian governments need a censorship resistant, digital, store of value that cannot be confiscated by power hungry politicians. Fiscally irresponsible governments are prone to confiscation, and we deserve a tool to lower this risk. If the South African government makes moves to tighten capital control regulations and jump through the loopholes required to execute this regressive policy, then it is has taken another step towards its more authoritarian peers. Controls further South Africans to get their hands on the very asset being restricted.

Get on the front-foot with constructive regulations

Rather than following the path of least resistance through application of archaic capital control regulations, the South African government needs to find a regulatory framework that allows the crypto industry to flourish. The lack of clear regulations forces many South Africans to build businesses offshore rather than in South Africa, deterring domestic investment and job growth. The lack of clear regulations also fosters the conditions where scams like MTI and Africrypt flourish. If you do not create clarity for honest and legitimate people to build businesses in this industry, then expect dishonest and illegitimate people to thrive. By contrast, open competition would drive better outcomes for customers, and more tax revenue for government.

Please shout if you have any questions about these relationships or the self-custody process.

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Self-custody details

Essentially, you must download a wallet, secure your seed phrase and send the funds to that address. If a wallet does not offer you a seed phrase, then you do not have self-custody of your bitcoin. It is VERY important that you secure the seed phrase properly because no one will give you the password if you forget (incorrect password storage and loss of funds is the biggest risk for new bitcoiners). If you are securing large amounts of capital, ensure someone else in your family knows about the seed phrase and wallet.

• Basic bitcoin wallet - Mycelium
• Privacy focused bitcoin wallet - Samourai
• Hardware wallet - Trezor
• Detailed wallet breakdown from Jameson Lopp
• Bitcoin security and self-custody podcast with Nick Neuman

If you are uncomfortable with self-custody, then you could transfer to an offshore vault like XAPO but this is now illegal according to regulators so perhaps it is worthwhile taking an extra few hours to learn full self custody.