In 2009, when the pseudonymous creator of bitcoin, Satoshi Nakamoto, released version 0.1 of bitcoin software on SourceForge and launched the network by defining the genesis block of bitcoin, which had a reward of 50 bitcoins, no one anticipated the meteoric rise of cryptocurrency that followed. In 2017, at its peak, those 50 bitcoins, worth only USD0.06 a year after their inception, would have been worth USD850’000.00. Its rise should, however, have come as less of a surprise considering its impeccable timing.
Following the financial crash in 2008, people lost their trust in government institutions and banks. The sentiment was one of discontent, anger, and a yearning to break away from the old, centralised architecture of money. The answer was cryptocurrency. The Merriam Webster Dictionary defines cryptocurrency as “any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions.” Cryptocurrency is free from the regulatory scrutiny and monetary controls exercised over fiat money, and this guarantees a measure of anonymity that fiat money simply cannot.
Whilst this anonymity is appealing to many digital citizens, it has been of grave concern for governments, monetary authorities, and regulators across the globe. 2021 is hallmarked by a legion of world governments taking steps to regulate cryptocurrency and address these concerns. Seventeen states in the USA have passed laws and resolutions relating to cryptocurrency regulation. In May 2021, China barred financial institutions and payment companies from facilitating cryptocurrency transactions and providing related services. The UK imposed registration requirements on cryptocurrency firms and South Korea have installed more stringent oversight measures.
The promise of quick riches and prospects of new applications that come with cryptocurrency, have also enticed the public here at home, and an increasing number of people are exploring it as an investment. However, Namibia, not unlike most jurisdictions in the region, have been slow to make legislative attempts to regulate and formalise the cryptocurrency market. In May 2018, Namibia’s central bank, Bank of Namibia (BoN), appreciating the public’s growing interest in cryptocurrency, issued a statement regarding its position on cryptocurrency. The statement underscored that cryptocurrency does not constitute legal tender in Namibia, that it is not supported by BoN, and that members of the public who conclude cryptocurrency transactions will have “no recourse to the Bank in the event of financial loss or misfortune”. The statement briefly addressed the practice of soliciting funds from the public to invest or trade in cryptocurrencies on their behalf, vaguely warning the public that “Any person found to be in contravention of the Banking Institutions Act, 1998 (Act No.2 of 1998), as amended, with respect of conducting banking business, or illegal financial schemes will be prosecuted in accordance with the relevant laws and bylaws.” Recent investigations launched by BoN into the conduct of crypto investments schemes are indicative of the monetary authority’s unrevised position in relation to trading on the crypto market.
On or about 21 January 2022, the “founder” (founder) of a cryptocurrency investment club realised that all his bank accounts, held at NedBank and Standard Bank respectively, were put under regulatory restriction. He immediately appealed to the relevant staff members at NedBank and learned, only five days later, that BoN gave instructions to NedBank to impose the restriction on the founder’s accounts. Incapacitated from conducting his business and concluding sundry transactions, the founder urgently contacted BoN to clarify the financial malaise inflicted on him. On 27 January 2022, he received a letter under the hand of the Director of BoN advancing suspicions of a possible “illegal financial scheme” conducted by the founder as reasons for the instructions to put a regulatory restriction on his accounts.
Considering that the Banking Institutions Act (the Act) does not define “illegal financial scheme(s)”, it will be well to consider the features of the founder’s business/club and then traverse some of the provisions of the Act which BoN invoked when it sanctioned the freezing of the founder’s accounts in order to understand what exactly is implied by “illegal financial scheme” and its consequences on the cryptocurrency market in Namibia.
Members of the founder’s cryptocurrency investment club are either personally known by him or introduced to him by current members; no adverts are published in printed or online media to solicit the public to join the club. Membership commences with the conclusion of a membership agreement that is “drawn up for opportunities via arbitrage on the international crypto markets.” The member then contributes the sum of money agreed on in the contract. All funds of the club are pooled together for these arbitrage opportunities. No guarantees are given as regards the returns on the contributions. Every member earns the exact same amount of profit percentage commensurate with their contribution into the club’s pool of funds. When a member requires funds, funds are transferred from these exchanges or a bank account to a member directly. According to the founder, there are sufficient funds available in the club’s/founder’s various bank accounts, exchange accounts, and crypto wallets to service the withdrawal of capital and profits.
For the sake of lucidity, arbitrage is the simultaneous purchase and sale of the same assets in different markets in order to profit from minute differences in the assets’ listed price. It exploits transitory variations in the price of identical financial instruments in different markets. The risks of arbitrage-style trading are inherently low as the price of specific cryptocurrency has no central price, so professes the founder. He adds that the market volatility that is akin to the cryptocurrency market is bypassed as only price differences are exploited and no movement in the price of cryptocurrency has any bearing on the club’s activities.
It is also worth mentioning that membership is not contingent on acquiring new members and there are no tiers or levels within the investment club whereby some members can earn additional benefits or higher percentage gains.
It is this investments club and the transactions relating thereto that caused BoN to put the founder’s accounts under regulatory restriction and led the founder to bring an urgent application against BoN, NedBank, and Standard Bank. In authorising the freezing of the accounts, BoN relied on the provisions of section 6, read with sections 5 and 55A, of the Banking Institution Act. Section 6(2)(f) reads as follows:
(2) The Bank may, if it has reason to believe that a person is conducting banking business in contravention of section 5 or section 55A, in writing authorise an officer of the Bank to –
(f) by notice in writing delivered to a banking institution, instruct such banking institution to summarily freeze any banking account or accounts of any person referred to in this subsection with such banking institution, and to retain all moneys in any such banking account or accounts, pending the further instructions of the Bank;
It is plain from the tenor of section 55A that the founder’s investment club lacks the necessary features to be classified as a pyramid scheme. There is no incentive for existing members to introduce new members as they receive no payments on or after the introduction of other members; members are not required to acquire movable or immovable property, rights, or services; there are no tiers or different levels within the club; and no payments are received by members from funds accepted or obtained from participating members in terms of the business practice. BoN, opposing the application, nevertheless persisted in its reliance on this provision as concerns the freezing of the founder’s accounts.
The question which now arises is whether there are any merits in BoN’s arguments that the founder’s club was conducted in contravention of section 5 which regulates the prohibition of a banking business by unauthorized persons. Whilst common sense and the general understanding of “banking business” suggest that the founder’s club is not tantamount to a “banking business”, the provisions of the Banking Institutions Act were drafted rather broadly and may actually bring businesses like the founder’s under its regulatory rubric.
The following definitions contemplated in section 1 are relevant:
“banking business” means the business that consists of:
(a) the regular receiving of funds from the public; and
(b) the using of funds referred to in paragraph (a), either in whole, in part or together with other funds, for the account and at the risk of the person conducting the business –
(i) for loans or investments;
(ii) for any other purpose or activity authorised by law or by customary banking practice in terms of this Act; or
(iii) for such activities that the Minister, in consultation with the Bank has, by notice in the Gazette, determined to be an authorised manner of using funds for the purpose of conducting banking business;
“deposit”, when used as a noun, means an amount of money paid by one person to any other person, or by a customer to a banking institution, subject to an agreement in terms of which the full amount of money, or any part thereof, will, conditionally or unconditionally, and with or without interest or a premium, be repaid to such person or to the customer on demand or at a specified or unspecified date, or after a predetermined period of time, or after a predetermined period of notice of withdrawal, or subject to an agreement entered into by the parties concerned, notwithstanding that such payment is limited to a fixed amount or that a transferable or non-transferable certificate or other instrument providing for the repayment of the amount is issued in respect of such amount, but a deposit shall not include an amount of money…
“receiving funds from the public”, for the purpose of ascertaining if a person is conducting
banking business, means that the person –
(a) accepts deposits or similar funds from the public, including from employees, members, shareholders or partners of the person, as a regular feature of his or her business;
(b) solicits or advertises for deposits or similar funds;
(c) obtains, as a regular feature of his or her business, money through the sale of an asset to a person other than to a banking institution or a statutory body or other institution referred to in section 2(2), subject to an agreement in terms of which the seller undertakes to repurchase from the buyer at a future date the asset sold, or any other asset; …
or the soliciting of, or advertising for, whether directly or indirectly, money or persons for the purpose of introducing into or participating in a business practice referred to in this section…
Section 5 determines:
5. (1) No person shall –
(a) conduct banking business;
(b) receive, accept or take a deposit;
(c) by any means, including advertising or soliciting, procure or attempt to procure a deposit;
(d) pretend to be a banking institution; or
(e) subject to subsection (2), use the expression “bank” or “banking institution”, or any other expression, name, title, or symbol indicating or calculated to create the impression that the person is conducting, or is authorised to conduct, business as a banking institution,
unless such person is under this Act authorised to so conduct business as a banking institution.
It is against this statutory backdrop that BoN alleged the founder’s investment club was contrary to the provisions of the Act and that the invocation of section 6(2)(f) was proper and bona fide. The founder’s application for an order directing BoN to forthwith and in writing retract and/or cancel instructions given by it to NedBank and Standard Bank relating to the freezing of all of the founder’s bank accounts held at those two banks, was refused on 25 March 2022, Tommasi J agreeing with some of BoN’s contentions.
The judgment mostly turned on the requirements of a final interdict; the founder’s failure to show a clear right; and whether BoN’s interference was lawful. Tommasi J observed that the function of BoN is to regulate banking institutions or associates and perform such powers as may be assigned to the Bank by any other law. Tommasi J held that section 6(2) indeed confers a power on BoN to interfere (i.e. freeze accounts) and that the documentary evidence tendered by BoN, which was undisputed, established the Bank’s compliance with statutory prescripts. The founder, accordingly, “failed to persuade the court that he has a clear right which entitles him to the relief he seeks and his application must fail.”
While the judgment suggests that the conduct of a crypto investment scheme potentially gives BoN “reason to believe that a person is conducting banking business in contravention of section 5 or section 55A” it is still unclear exactly what the court’s approach to crypto investment schemes within the existing statutory frameworks is. The founder’s investment club was not explicitly evaluated in terms of the criteria framed in sections 5 and 55A. The absence of a conclusion to BoN’s investigation into the investment club only compounds the uncertainty.
Notwithstanding, it is a curiosity that BoN has calculated a crack down on crypto investment schemes by relying on the provisions of the Banking Institutions Act. The central bank’s approach is in rhyme with the warning it issued in 2018 and, to that extent, it seems inapposite that Bank had already made up its mind in 2018 how it would prosecute crypto transactions/investment schemes.
It should be borne in mind that the Banking Institutions Act was drafted in 1998 and has been subject to relatively few amendments, most of which were effected by Act 14 of 2010 — legislation drafted during a time when cryptocurrency was still exceedingly obscure. It is highly unlikely that this dated piece of legislation, which at times falls short to adequately address the technological advances seen in conventional banking, would be nuanced enough to regulate a novelty like cryptocurrency which was certainly not anticipated by the legislature at the relevant time. In addition, the objects of the Act contemplated in its preamble are telling of the statute’s unfitness as a legislative instrument to govern and regulate crypto markets. The objects of the Act are to “consolidate and amend the laws relating to banking institutions; to provide for the authorisation of a person to conduct business as a banking institution, and for the control, supervision and regulation of banking institutions; to protect the interests of persons making deposits with banking institutions; to provide for the winding-up or judicial management of banking institutions and for the cancellation of authorisations; and to provide for matters incidental thereto.”
Despite these considerations, BoN seems too impatient to wait for the legislature to give statutory guidelines as to how crypto markets are to be regulated and has recently taken it upon themselves to reign in any party who facilitates or conducts investments in cryptocurrencies. This can be criticized. The central bank does not have any law-making powers and should rather approach the court for directions in lieu of exploiting existing legislation in an attempt to discharge its mandate at all costs.
Cryptocurrency is here to stay, and more and more Namibians will invest in cryptocurrency. It is advisable that the central bank rather engage with the relevant stakeholders and create a sustainable solution to properly regulate cryptocurrency as opposed to going after bona fide schemes on questionable grounds. Notwithstanding, it advisable to refrain from conducting a crypto investment in interim, lest one attract the ire of the central bank.
The contents of this document shall not be construed as legal advice. The reader hereof takes note that the contents of the Act are subject to interpretation and such interpretation includes inherent risks as opinions might differ. Should legal advice on any specific matter pertaining to the act be required, instructions are to be given to provide a legal opinion on the relevant subject matter.