The market capitalisation of the global crypto universe is at almost $3-trillion but the National Treasury doesn’t want SA pension funds investing in an asset class worth three times the market value of the entire JSE and which has attracted everyone from Apple CEO Tim Cook to Tesla founder Elon Musk.
New draft amendments to Regulation 28 of the Pension Funds Act, published in the Government Gazette on October 29, state that no pension fund is allowed to invest directly or indirectly into crypto assets, which are defined as digital representations of values not issued by central banks that can be traded, invested or used for payment purposes. Crucially, the definition outlined in the gazette also specifically includes the distributed ledger technology, which underpins most crypto assets and is being used to develop new insuretech and mobile payment solutions.
While the Treasury is accepting public comment on the proposed amendments until November 12, its proposed blanket ban on crypto investment by pension funds has some commentators worried that it may have gone too far. David Geral, head of Bowmans’ banking and financial services regulatory practice, says the problem with broad, undefined prohibitions is that parties who have to comply with them will sensibly read them as wide as possible to avoid falling foul of the law, something he says can result in unintended consequences.
“Capricious regulation is seldom lawful — it may well be subject to challenge,” he says. “The Pension Funds Act itself does not prohibit specific assets and the regulations are intended to define and limit, not prevent, asset class exposures.”
Geral is also worried that banning pension funds from investing in crypto assets could starve the sector’s start-up ecosystem of capital at a time when distributed ledger technology is being used to rebuild the financial services world in a digital format. While such companies, of which SA has spawned a few such as Luno and VALR, could still access funding from private equity or venture capital, restricting investment in the sector could come at an opportunity cost for retirement fund members.
Regulation 28, which caps investments in certain assets at specific levels, has come under severe criticism from critics like Magnus Heystek for throttling investor returns by restricting how much can be invested in certain asset classes such as offshore funds or equities. Slapping an outright ban on crypto assets could result in further criticism for a regulation that is meant to protect investors from overexposure to higher risk assets.
Sean Sanders, CEO and founder of local crypto neo-brokerage Revix, says it is ironic that the Treasury is using Regulation 28 — it is meant to ensure investment diversification — to bar exposure to certain assets like crypto currencies.
“You would ideally like to have as many assets that are diversified and are able to generate a return over the long-term within a pension portfolio, so it just seems a bit weird that crypto is not included,” he said. “Crypto has been the top performing investible category over the past six months, 12 months, five years, 10 years. There’s no other asset category that’s even come close ... so South Africans are losing a significant amount of value in their pension funds by not having exposure to this asset class.”
However, the rest of the financial services establishment is somewhat more circumspect. The Association for Savings and Investment SA (Asisa), which represents the asset management industry, says it is still wrapping its head around the implications of the Treasury’s proposed ban.
“The Asisa Regulation 28 work group is still unpacking the implications of this,” says Sunette Mulder, a senior policy adviser at the industry body. “Therefore we have not yet formed a position on this proposed prohibition.”
Allan Gray portfolio manager Thalia Petousis said the Treasury’s stance on the crypto universe is “probably correct” given the rampant speculation that appears to be driving the asset class. She also says that even if Regulation 28 didn’t bar asset managers from investing in crypto assets, there still aren’t any sufficiently robust “valuation anchors” to assess the investment merits of Bitcoin, Ethereum and other such crypto currencies.
“If an investor wants to buy some crypto for their personal portfolio that’s a different story,” she says. “They should probably invest as much as they’d walk into a casino with.”
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