Hilton College matric student Matthew Wilson solves multi-billion dollar crypto puzzle

Written by Ciaran Ryan. Posted in Journalism

Homing in on one way in which crypto holders lost billions, he came up with a solution. From Moneyweb.

Lose the phrase that opens your crypto wallet, and you lose whatever is in the wallet – a problem that has been solved with ingenuity and elegance by Matthew Wilson. Image: Supplied
Lose the phrase that opens your crypto wallet, and you lose whatever is in the wallet – a problem that has been solved with ingenuity and elegance by Matthew Wilson. Image: Supplied

Hilton College matric student Matthew Wilson got interested in cryptos back in the great boom of 2017, but it was during the hard lockdown of the Covid-19 pandemic of 2020 that he had the time and energy to research the reasons why so many crypto holders lost billions due to lax security.

“I studied numerous examples of crypto holders losing fortunes both big and small due to ignorance and neglect regarding safe storage of their cryptos,” he says.

Read:Crooks and crypto in SAAre your cryptocurrencies stored safely?

Meet the 29-year-old South African unravelling the multi-billion-rand Africrypt theft

“An initial idea was to create a traditional insurance product aimed at protecting people against these losses. It however quickly became apparent that this would be unrealistic and not financially viable.

“This led to a more practical and viable solution that sparked multiple family discussions around the new idea.”

Last week Wilson launched CRPT Secure, which solves a problem that has haunted crypto investors for the best part of a decade and accounted for losses running to billions of dollars.

It is reckoned that up to 3.7 million bitcoin worth about $159 billion (around R2.4 trillion) – out of a total 18.5 million minted so far – are lost and probably gone forever.

How investors literally ‘lost’ their crypto

A large number of these bitcoin were lost when the owners forgot, misplaced or accidentally threw away the recovery phrases they need to access their crypto wallets.

That’s the puzzle Wilson set out to crack.

When opening a crypto wallet such as MetaMask for the first time, you are required to create a recovery phrase – a 12-word phrase that is the key to your wallet. It should be written down and stored away from your computer (in case that gets hacked).

Many people ignore that advice and assume that if they cannot remember their recovery phrase, someone will be there to help them out.

Welcome to the dangerous world of cryptos.

Until now, no one would be able to help you over that hurdle – which explains why so many billions of dollars’ worth of cryptos have been lost forever.

Simple safeguard

Wilson’s solution is simple and practical, and leans on technology already in use by the banks.

Whenever banks issue a new credit card, the new PIN is inscribed using PIN-tab technology. The computer-generated PIN is revealed when you peel back a covering sheet.

CRPT Secure provides a disaster backup recovery plan for crypto investors by storing their 12, 18 or 24-word recovery phrases in a safe and confidential format.

The recovery phrases are stored on three or four pages (depending on the number of words), which are then stored at different physical and secret locations.

These pages are retrieved from the different locations and returned to the crypto owner, ensuring that their seed phrases can never be compromised, hacked or guessed at.

That may seem like an obvious solution to the problem, but the ingenuity and elegance of CRPT Secure suggests 18-year-old Wilson has a long career ahead of him in cryptos.

“Prior to this venture I was primarily invested in bitcoin with a smattering of altcoins such as Ethereum (ETH) and Cardano (ADA) making up a small portion of my portfolio. I have used all these funds in the building of this business, and so currently do not own any cryptos myself.”

With matric around the corner, Wilson is deeply buried in books, with economics and history his favourite subjects.

National Credit Regulator accused of siding with banks in R60bn class action suit

Written by Ciaran Ryan. Posted in Journalism

By demanding the return of confidential information that purports to prove the claim that banks have been selling foreclosed properties for a song. From Moneyweb.

The NCR says accusations that it is a captured institution are ‘inflammatory’. Image: Mike Hutchings, Reuters
The NCR says accusations that it is a captured institution are ‘inflammatory’. Image: Mike Hutchings, Reuters

The National Credit Regulator (NCR) is accused of siding with the banks in a massive R60 billion class action suit brought by the Lungelo Lethu Human Rights Foundation after it demanded the return of documents that purport to show perjury by the banks and a pattern of selling foreclosed houses for a song.

In a side case to the class action suit, the NCR has applied to the Gauteng High Court to interdict Advocate Douglas Shaw, statistician Garth Zietsman and some 200 others involved in the case from disclosing confidential information obtained while Shaw and Zietsman were doing work for the NCR.

Moneyweb previously reported on the story:Evidence that banks sell repossessed houses for cents in the rand

The NCR is asking the court for an order demanding the return of any and all NCR documents, statistics and other information obtained by Shaw and Zietsman, including annexures filed by Zietsman in support of the class action suit.

The NCR says it is bound by the provisions of the National Credit Act, which obliges it to keep information confidential and to ensure that it is used for the purpose for which it was intended. Failure to return the confidential information could result in harm to the customers and banks, and could create a liability on the part of the NCR.

“This is tantamount to the police investigating a murder and finding the murder weapon and the culprit, only to be told to hand over all evidence to the culprit,” says Shaw.

“We have evidence the banks have been selling properties at a fraction of their market worth and they have been lying about it for years before the courts.

“The real harm that has been done here is to the banks’ customers whose properties have been repossessed.

“This is a national scandal and a disgrace, and we look forward to arguing this in court.”

The information obtained by Shaw and Zietsman shows repossessed properties have been sold for 50-60% of their market value through sheriffs’ auctions around the country.

Alarm bell sounded years ago

The NCR says the information was obtained in 2015 while conducting an audit and compliance check. Shaw was brought in as legal counsel, and Zeitsman as statistician.

Shaw recommended instituting legal action against certain banks (for unlawfully selling repossessed properties at below market price).

The NCR decided against pursuing legal action against the banks as the Rules Board for Courts of Law was reviewing the rules applicable to the sale in execution of repossessed properties. The Rules Board has subsequently changed the court rules to allow judges to set a reserve or floor price when granting a sale in execution order.

In his answering affidavit to the NCR, Zietsman says the court should not grant the NCR the order it is requesting because “the basic test for whether a document should be submitted is relevance and the documents are very relevant”.

He adds: “[Zietsman’s founding] affidavit reveals that the banks have been perjuring the court in this matter by pretending (a) they had no awareness that they had sold thousands of properties for much less than value and (b) that they have no methods of valuing the market value of a property which in their papers they deny. These are highly material and relevant matters.”

NCR ‘a captured institution’

Zietsman goes on to say the documents the NCR wants returned are in any event public documents available through the Deeds Registry.

“The mandate of the NCR is to protect consumers against behaviour of credit providers that is unlawful and/or unconstitutional. In this application it acts as a defender of the banks against the consumer and has therefore failed in its mandate and it is submitted that it is a captured institution and that this should be investigated by a high level commission for regulatory capture.”

There is an aspect to the demand that is absurd, adds Zietsman, in that the NCR purports to protect those named in the database – the very same people who stand to receive large amounts of money should the class action succeed.

A person cannot rightfully be ‘protected’ against their own clear interest, he argues.

Zietsman says the annexures attached to his affidavit have blanked out the names of the parties and cannot therefore be claimed to violate confidentiality. He nevertheless is asking the court to allow the original database, with full names disclosed, to be restored.

“Whatever may be said about whether the NCR is entitled to its statistics back, it certainly cannot be said that it is entitled to my affidavit which is my opinion which I have never been paid for and thus remains my confidential information and I choose to share with the applicants in this matter, and thus this court,” he deposes.

Read:Judges give banks a grilling over home repo practices

Banks slapped down over home repossessions in Joburg court case

In response to questions sent to it by Moneyweb, the NCR replies that Zietsman’s claim that the NCR is a captured institution that has failed in its mandate to serve consumers is inflammatory.

[These] accusations are indeed inflammatory and unjustified. It is unethical and unlawful for Adv Shaw and Mr Zietsman to use the information they obtained from the NCR for their own litigation. This information is protected from unlawful disclosure by the National Credit Act (sections 68(1) and 156(1)) and the Protection of Personal Information Act.

Sales in execution of immovable property [houses] are governed by the Uniform Rules of Court administered by the Department of Justice and the Rules Board for Courts of Law. In particular, Rule 46 of the Uniform Rules of Court. In a series of judgments, the National Consumer Tribunal has ruled that it has no jurisdiction to review sales in execution of immovable property.

The NCR made oral and written submissions to the Rules Board during their consultation meetings on changes to Rule 46. This consultation process resulted in changes to the Rule to offer more protection to consumers during sales in execution of their residential immovable properties. The changes include the court setting a reserve price for sales in execution.

Their claim that the NCR is captured is scurrilous and strongly denied.

Shaw and the Lungelo Lethu Human Rights Foundation have further argued that the NCR should join the class action as amicus curiae (friend of the court) in defence of consumers whose properties were repossessed at a fraction of market worth, rather than seeking – as is claimed – to run air cover for the mortgage banks by seeking to recall crucial evidence that will assist in proving wrongdoing.

The NCR replies:

The NCR is cited as a party to the class action and will determine at the appropriate time the submissions it wishes to make to the court.

Their claim that the NCR is protecting banks is also scurrilous and strongly denied. Tweet

Sars claims ‘astronomical’ R19bn in taxes from company accused of tobacco smuggling

Written by Ciaran Ryan. Posted in Journalism

Fears the company is spiriting trucks and other assets across the border to evade paying tax. From Moneyweb.

Tobacco at an auction hall in Harare. Verbena imported thousands of tons of tobacco that then ‘disappeared’ while millions flowed into its bank account. Image: Gideon Mendel/Corbis via Getty Images
Tobacco at an auction hall in Harare. Verbena imported thousands of tons of tobacco that then ‘disappeared’ while millions flowed into its bank account. Image: Gideon Mendel/Corbis via Getty Images

A recent court case brought by South African Revenue Service (Sars) against Verbena Freight and Logistics Management provides a fascinating window into the world of tobacco smuggling and its staggering impact on the fiscus.

The Pretoria High Court ordered the final winding up of Verbena after Sars claimed an amount of nearly R19 billion in unpaid taxes.

In an affidavit before the court, Pule Mantso, operations manager within the debt management department which is part of the Illicit Economy Unit at Sars, claimed Verbena owes a staggering R18.99 billion in taxes – most of this (R18.88 billion) in the form of unpaid customs duty. Also outstanding is R31.38 million in value-added tax (Vat) and R73.65 million in income tax.

Verbena is described as a company specialising in cross-border transport and customs clearing and forwarding across southern Africa. The company has its own fleet of vehicles and a sister company based in Zimbabwe.

Sars audit

Sars launched an audit of the company in 2019, and found the company had imported 8.1 million kilograms of tobacco between March 2016 and February 2019, all of this supposedly “care of” eight other entities listed on the customs form.

Mantso says the Customs Act does not provide for the import of goods “care of” a third party. Verbena also acted as clearing agent for the imported tobacco, which entered via the Beitbridge border post. In terms of the Customs Act, excise duty is payable on locally manufactured cigarettes.

Several requests were made to Verbena to provide details of the imports “care of” the third party entities, but no meaningful response was received.

In December 2020, attorneys representing Sars informed Verbena that it had been concluded that the imported goods had been removed to premises controlled by the company and had been used to manufacture illegal cigarettes.

Verbena was asked to refute these claims, which it failed to do.

In March 2021, Sars issued letters of demand for R18.88 billion in unpaid customs duties, which Verbena failed to pay.

Assets attached

Sars then obtained a judgment against Verbena, and the sheriff attached eight trucks and other assets with a total value of R2.2 million.

“This is dismally insufficient to make payment of the R18 billion due to Sars in relation to the customs debt,” deposes Mantso.

Sars also placed liens on several other assets belonging to the company, but found several of these had been unlawfully removed from the premises, which is a criminal offence.

Sars officials then tried to track down other assets in Musina in Limpopo, but three of the given addresses could not be found and a fourth was a residential address, with the occupants knowing nothing about Verbena.

Verbena’s attorney replied to Sars on July 12, saying most of the company’s vehicles were either in disrepair or had been exported out of SA, and as such it was no longer the owner of the exported vehicles. No proof of transfer of ownership or export was provided, says Sars, though eNatis documents showed that Verbena was still listed as owner of the vehicles.

Sars says it is assuming Roy Muleya and Ruth Dhliwayo are responsible for the management of the company.

Intensified investigations into illicit tobacco smuggling

Sars says it has intensified its investigations into the illicit trade in cigarettes which is reckoned to cost the fiscus billions of rands a year in lost revenue. Its investigations show large volumes of tobacco being imported to SA on the pretext of being re-exported, but in reality the tobacco is used to manufacture cigarettes that disappear into the local economy and avoid having to pay excise duty.

Read: Cigarette war goes radioactive

“Those responsible for the import, such as [Verbena], simply refuse to provide any details, documents or information regarding the whereabouts of the tobacco,” according to Mantso’s affidavit.

“When Sars then ultimately demands the duties, it is unable to recover the substantial amounts due as the transgressors have hidden or dissipated their assets. This makes recovery of the unpaid debt extremely challenging and, in most instances, impossible.”

Verbena was asked on numerous to explain to Sars what happened to the imported tobacco, but refused to do so.

What is known is that the tobacco disappeared and millions of rands flowed into the company’s hidden bank account, says Sars.

According to court papers, Verbena has been exporting trucks and other assets from SA since 2014, and Sars is asking the court for an urgent winding up order to prevent any further dissipation of assets.

‘Flagrant breach’

By acting as it did in respect of the imported tobacco, and by removing containers subject to detention in flagrant breach of the Customs Act, Verbena has demonstrated that it has scant regard for the law, says Mantso.

“Against this background there is a real risk of the respondent disposing [of] these vehicles to its Zimbabwean sibling, a step that would make it practically impossible for Sars to liquidate those assets in order to satisfy the judgment against the respondent.”

Sars holds the view “that there is a serious and emergent risk that the vehicles and possibly additional assets are being concealed or being moved across the border in order for the respondent to evade the payment of its substantial tax debt.” This explains why it was of utmost importance to grant a final liquidation order on an urgent basis.

In conducting its audit into the company, Sars says Verbena disclosed two bank accounts but withheld information about a third, an Absa bank account, on which taxable income of R68.4 million was calculated.

Sars should be ‘commended’

Fair Trade Independent Tobacco Association (Fita) chair Sinenhlanhla Mnguni says Sars, working with other law enforcement agencies, should be commended for making significant inroads in the fight against the illicit trade in cigarettes and other tobacco products.

“We have in recent times highlighted the surge in illicit cigarettes smuggled into the country via our neighbouring countries, particularly following the ill-advised, five month-long, tobacco sales ban.”

Read: Tobacco ban unconstitutional and invalid

Mnguni continues: “We continue with our plea that the relevant authorities continue to monitor the situation at our various border posts, particularly Beitbridge, as there appears to be collaboration between the criminals involved in the smuggling of these cigarettes and some on-duty officials stationed at these border posts.

“We are of the firm view that better checks and balances need to be put into place by government to ensure that the system is foolproof and incapable of being easily manipulated.”

Failure to nip this in the bud will in all likelihood lead to the eventual demise of the local legitimate tobacco industry and reduce government taxes from tax the tobacco trade, says Mnguni. “We are however very encouraged by the latest efforts from various law enforcement agencies to tackle this scourge, and we are hopeful that working together we can succeed in eradicating this menace to our society.”

‘Get this rogue importer to name its paymasters’

Says Tax Justice SA founder Yusuf Abramjee: “These actions demonstrate that a new and determined Sars team appears to be finally getting to grips with one of the world’s largest illegal cigarette markets and this is good news for all South Africans.

“The breathtaking R19 billion tax demand is double the revenue that Sars will actually collect in cigarette excise this year,” says Abramjee.

“It’s imperative that authorities get this rogue importer to name its paymasters and that a national inquiry is conducted into our tobacco trade.”

Questions were sent by email to Verbena and its attorneys, but no reply had been received at the time of publication. Moneyweb also reached out to Verbena and its attorneys by phone, to no avail.

Read: British American Tobacco asked to come clean on spying allegations

‘Damning’ high court judgment sets aside Mining Charter’s re-empowerment obligations

Written by Ciaran Ryan. Posted in Journalism

Court finds that the Mineral and Petroleum Resources Development Act does not empower the minister to make law. From Moneyweb.

The Minister of Mineral Resources and Energy, Gwede Mantashe. Image: GCIS
The Minister of Mineral Resources and Energy, Gwede Mantashe. Image: GCIS

A full bench of the Gauteng High Court this week ruled against the minister of Mineral and Energy Resources and in favour of the Minerals Council of SA, setting aside a number of key clauses within the Mining Charter III, including the re-empowerment clause which required mining rights holders to maintain black economic empowerment (BEE) ownership targets of 26% for pre-existing mining rights and 30% for new mining rights.

Also set aside were the charter’s procurement, supplier and enterprise development targets, and some of its penalty and enforcement provisions.

“The judgment vindicates my long-held view that the charter, in all its iterations, was nothing more than a socio-economic compact between government, labour and the mining industry,” says Peter Leon, global co-chair for Africa at law firm Herbert Smith Freehills. “The original charter, signed in October 2002, reflected exactly this principle. Regrettably the 2010 and 2018 versions purported to turn what was no more than a compact into a binding legislative instrument with all the associated regulatory uncertainty.

“Hopefully this carefully reasoned and strong judgment will give the DMRE cause to reflect on what has gone wrong in the last ten years and put the industry back on a much needed path of regulatory certainty and predictability.”

The case was originally brought in May 2020 by the Minerals Council against the minister and 13 other defendants, including a number of trade unions and community groups. The ruling says the question in dispute was whether the minister has the power in terms of Section 100(2) of the Mineral and Petroleum Resources Development Act (MPRDA) to make law in the form of subordinate legislation, and whether the charter constitutes law or policy.

The minister and other respondents argued that the minister did indeed have the power to make law through the charter, which would then impose binding obligations on mineral rights holders.

The Minerals Council disagreed, arguing that the charter is a formal policy document, and is only binding on holders of mining rights “to the extent that its terms have been lawfully incorporated by the minister into such mining rights.”

In response to the judgment, the Minerals Council South Africa says it welcomes the ruling that “the Mining Charter 2018 is a policy document, that the continuing consequences of previous black economic empowerment deals should be recognised and that the specific challenged provisions in the document should be removed.

“The Minerals Council and its members remain fully committed to the transformational objects of the Mineral and Petroleum Resources Development Act (MPRDA), but the objectives must create policy and regulatory certainty for long-term investment and inclusive growth in the sector.”

The minister had argued that the transformation objects of the MPRDA cannot be achieved unless the charter is binding subordinate legislation. The Gauteng High Court said the flaw in this argument is that it ignores the enforcement structure provided by the MPRDA.

The minister is able to enforce empowerment obligations through the issue of mining rights, which impose obligations on the rights holder in terms of the act, not the charter. Some of the enforcement tools available to the minister include the approval of a social and labour plan which, if violated, allow the minister to suspend or cancel the right.

The minister claimed he needed the power to make subordinate legislation in the form of the charter to advance the transformation of the mining sector – which, he said, it had failed to do despite previous charters. In support of this argument, he presented in-house studies to the court, though these were disputed by studies presented by the Minerals Council showing there had, indeed, been substantial transformation in the sector.

The minister also argued that incorporating charter provisions in mining rights would be ineffectual in achieving transformation because of the relatively short duration of mining rights.

The impact

Commenting on the judgment, Herbert Smith Freehills says the court once again confirmed the “once empowered, always empowered” principle.

This means that the Historically Disadvantaged South African (HDSA) ownership status of existing mining right holders who wish to renew or transfer their rights must automatically be recognised by the DMRE (Department of Mineral Resources and Energy).

“The judgment has a materially positive impact on the security of tenure of existing mining rights holders. As a result, existing mining right holders now know that if they previously satisfied the empowerment requirements imposed under any version of the charter, they will not be required to do so again,” says Herbert Smith Freehills.

In view of the fact that the court has determined the charter to be a policy document rather than a legally-binding instrument, mining right holders may, but are not legally obliged to, comply with the remaining requirements imposed under the charter.  This is subject to two qualifications:

  • Not all of the provisions of the charter were reviewed and set aside. For example, the clauses which concern employment equity, human resource development, mine community development, and housing and living conditions still form part of the charter. These clauses will not automatically impose obligations on the holders of existing mining rights, but may do so if such requirements are incorporated as specific terms or conditions of the mining right.
  • Second, the clauses which are set aside have now been removed from Mining Charter III. A significant example is the charter’s procurement, supplier and enterprise development requirements.

The judgment also set aside provisions in the 2018 Charter related to the Diamonds Act and Precious Metals Act to impose targets set out in the charter on licence holders under those acts.

Also removed from the charter by the judgment were provisions in the 2018 Charter related to mining companies not complying with ownership and mine community development requirement and thus being in breach of the MPRDA.

Under the previous version, this meant rights holders could potentially have their mining rights suspended or cancelled.

“The Minerals Council will continue to engage the DMRE on a constructive basis to create the necessary policy and regulatory certainty and to attract much greater investment into the exploration and mining sectors,” says the Minerals Council statement.

Cryptos take a dive as Evergrande teeters on the edge

Written by Ciaran Ryan. Posted in Journalism

All markets have been hit by debt troubles at the Chinese real estate company. From Moneyweb.

Most forms of commercial paper will be affected if Evergrande defaults on loan repayments that are due this week. Image: Bloomberg
Most forms of commercial paper will be affected if Evergrande defaults on loan repayments that are due this week. Image: Bloomberg

The troubles facing Chinese real estate company Evergrande lopped 2.5% off the Dow Jones Industrial Average and nearly 11% off Bitcoin (BTC), 15% off Solana (SOL) and 16% off Ethereum (ETH).

The question many are asking is what Evergrande has to do with cryptos to prompt this general sell-off?

The answer to that is there probably is a connection in the form of US stablecoin Tether (supposedly backed 1:1 by the US dollar).

Tether is the fourth-largest crypto with a market cap of $68 billion, and part of its backing is rumoured by be commercial paper issued by Evergrande – notwithstanding Tether’s assertions to the contrary.

Many expected to take a hit

Even if Tether does not have any direct investment in Evergrande, most forms of commercial paper will take a hit should Evergrande default on loan repayments which fall due this week.

Evergrande is a major Chinese property development company that may default on more than $300 billion in debts, likely sparking a broader financial calamity in China and across the globe due to the number of companies, banks and debt issuers with exposure to the company.

Read:Wall Street’s message on EvergrandeEvergrande tumbles further after S&P says default is likely

SA shares slide, as default risks haunt Evergrande

Tether is used as a surrogate for the US dollar and as a way for traders to park profits from crypto investing, without having to leave the crypto eco-sphere.

According to Coindesk, bitcoin’s share of crypto assets under management has fallen from 81% in January to 67% this week.

Solana’s price was hit by the general crypto sell-off and a 20-hour network outage, though this did not stop investors piling in as the crypto retreated from its recent high of $210 to around $141.

Revix says while Evergrande may be driving the global correction in asset prices, this isn’t deterring pro traders from buying the dip.

El Salvador buys the dip

Among those buying the dip over the last week was El Salvador, which announced that it had acquired another 150 BTC at below $46 000, bringing the country’s total BTC holdings to 700. El Salvador recently announced that it would accept BTC as legal tender. That got the Bitcoin crowd excited, but S&P Global warned that it would make the Central American government’s efforts to raise a $1 billion loan from the Internal Monetary Fund more problematic.

Salvadoran President Nayib Bukele tweeted: “They can never beat you if you buy the dips.” Then added: “Presidential advice.” This was clearly not intended as financial advice for the masses.

Market sell-off a sign of broader risk aversion

The crypto sell-off, prompted by a break below the S&P 500 Index 50-day moving average support, may signal a deeper downside break for risk assets, with Morgan Stanley warning of potential for a 20%+ correction for bitcoin.

The Federal Reserve’s Open Markets Committee is expected to announce the tapering of its monetary stimulus in the next two months, but should it decide to push this out to 2022, risk assets may recover their recent losses, according to Morgan Stanley.

While bitcoin has been equated to digital gold, its price behaviour more closely resembles that of other risk assets.

Read: Evergrande meltdown ensnares stocks with very little China links

FSCA’s warning on Binance is the latest salvo against crypto operators

Written by Ciaran Ryan. Posted in Journalism

Binance, the world’s largest crypto exchange, has come under regulatory scrutiny in several countries. From Moneyweb.

The company says the notice was ‘perhaps a precautionary move’ and more of ‘a warning that crypto is not regulated’. Image: Darrin Zammit Lupi/Reuters
The company says the notice was ‘perhaps a precautionary move’ and more of ‘a warning that crypto is not regulated’. Image: Darrin Zammit Lupi/Reuters

Earlier this month the Financial Sector Conduct Authority (FSCA) warned the public to be cautious in dealing with Binance, the world’s largest crypto exchange.

This follows similar warnings in the UK, Japan and Canada.

Read: UK financial regulator bars crypto exchange Binance markets

Head of enforcement at the FSCA, Brandon Topham, says Binance has engaged with the FSCA with a view to addressing the concerns raised by the regulator, though the warning still stands.

“Our concern is that Binance is offering products to South Africans for which you need a licence from the FSCA, and here we are talking about financial products such as derivatives rather than cryptos – which are unregulated.”

The notice says the FSCA received information that Binance Group, situated in Seychelles (which Binance disputes*) has a Telegram group that South Africans can join to gain access to the crypto exchange.

Read: FSCA suspends ZAR X’s exchange licence

“The FSCA would like [to] caution that in addition to this entity not being authorised to provide any financial services or business, crypto-related investments are currently not regulated by the FSCA or any other body in South Africa. As a result, if something goes wrong, you’re unlikely to get your money back and will have no recourse against anyone,” says the FSCA notice.

The regulator says Binance is not authorised to give financial advice or intermediary services in SA in terms of the Financial Advisory and Intermediary Services (Fais) Act.

Read:FSCA issues and withdraws warning on Ovex crypto exchange

FSCA apologises to Ovex, says company does not require a financial services licence

Binance grew from nothing to the world’s largest crypto exchange in four years, generating daily volumes of around $2 billion. The exchange was established in 2017 by Chaopeng Zhang, a Chinese-Canadian coder also known as CZ, who previously worked at the Tokyo Stock Exchange and Bloomberg. He also spent time as an employee of McDonald’s. According to Forbes, his net worth is around $1.9 billion, virtually all of this in the form of cryptocurrencies.

Binance timed its entry to the market in 2017 to coincide with a huge upswing in crypto adoption.

While initially limiting its offering to cryptos, it later diversified into trading forex pairs and a range of derivatives, and this is what appears to have brought it unwanted attention from regulators.

It recently announced that it would discontinue certain services in Singapore after falling under regulatory scrutiny there.

Binance says it is working with regulators across the globe to ensure it remains compliant.

Brenton Naicker, business development manager for Binance Africa, says the company has been in contact with the regulator, and the notice issued by it was perhaps a precautionary move and “was more a warning that crypto is not regulated – with specific reference to us.” The reasons for the FSCA warning were explained to customers, and has not had a negative impact on the business.

In response to the FSCA warning, Binance issued the following statement:

“We are aware of the notice published by the South Africa FSCA on September 3. At the outset, we would like to take this opportunity to clarify that Binance.com does not provide financial advice or render any intermediary services. We have clearly set this out in our terms of use, which can be found here at: https://www.binance.com/en/terms.

As the FSCA stated in its notice, cryptocurrency-related activities are currently not regulated by it or any other body in South Africa. In order to bridge the gap and to uphold our commitment to protecting our users, Binance.com has set stringent and industry-first standards. For example, Binance.com has recently implemented the Intermediate Verification requirement for all users which supports Binance’s Know Your Customer (KYC) and Anti-Money Laundering (AML) efforts. In addition, to ensure that our users are as protected as possible, since 2018, Binance.com has implemented a Secure Asset Fund for Users (SAFU) where we allocate 10% of all trading fees received into it to offer protection to our users and their funds in extreme cases.

Furthermore, Binance.com is committed to taking a collaborative approach in working with regulators and law enforcement globally, and in particular, Binance.com is continuously collaborating with the FIC (Financial Intelligence Centre), the major regulator of financial crimes in South Africa. Binance.com is registered with the FIC as a voluntary self-disclosure institution. As a member of this programme, Binance complies with the FIC Act obligations relating to establishing and verifying of clients’ identities, record keeping and reporting suspicious or unusual transactions in terms of section 29 of the FIC Act.

In the course of 2021 to date, Binance.com has collaborated with the FIC on over 462 cases, and in turn, we understand that the FIC collaborates with the FSCA for further investigations when necessary. We have reached out to the FSCA for more clarification on their statement and look forward to working with them and addressing any concerns they may have.

In terms of social media outreach, we have an official Binance South Africa Telegram community which promotes blockchain education and community announcements.

*It is not intended, nor does it provide any financial advice. This community is moderated by staff, admins and Binance ‘angels’. For completeness, we would also clarify that we do not have an associated entity named Binance Group in Seychelles.”

Komape family wins court battle seven years after their son drowned in a pit toilet

Written by Ciaran Ryan. Posted in Journalism

State must provide court with reports every six months with details of steps taken to eradicate pit toilets. From GroundUp.

James and Rosina Komape and their eldest daughter, Lydia, sit in the Limpopo High Court in November 2017. Archive photo: Ciaran Ryan
  • In 2014 five-year-old Michael Komape drowned in a pit toilet at his school outside Polokwane.
  • Earlier judgments ordered the Limpopo education department to eradicate pit toilets at schools.
  • But after the department provided a plan that would take over a decade to implement, the Komape family went back to court.
  • The Limpopo High Court handed down a judgment on Friday in favour of the family, compelling the state to provide a list of all schools with pit toilets within 90 days along with plans to eradicate them.
  • The state is to provide the court with reports every six months on progress towards eliminating pit toilets.

The Limpopo High Court handed down judgment in favour of the Komape family on Friday, with an order compelling the provincial administration to provide, within 90 days, a detailed list of all schools in the province with pit toilets along with plans to eradicate these.

The defendants in the case — the Limpopo Department of Education (LDOE) and the Department of Basic Education (DBE) — have also been ordered to show how the funds for this programme will be sourced, and to explain what interim measures will be implemented “to address schools’ urgent sanitation needs and immediate safety risks pending the delivery of permanent sanitation measures”.

Michael Komape was five years old when he drowned in a pit toilet at Mahlodumela Primacy School in Chebeng Village, outside Polokwane, on 20 January 2014. The case has attracted international notoriety, and thrown a spotlight on the LDOE and the use of pit toilets in some 1,500 schools across the province.

Read the judgment

Public sector law firm SECTION27, which provided legal support to the Komape family, welcomed Judge Gerrit Muller’s judgment.

“The judgment is a vindication of the rights of learners in Limpopo to safe and dignified sanitation. It follows a six-year legal battle to ensure that the Limpopo Department of Education and the Department of Basic Education eradicates pit toilets in that province,” says SECTION27 in a statement.

The case was first heard in the Limpopo High Court in 2017. The Komape family initially lost its claim for damages in the Limpopo court, but this was overturned in the Supreme Court of Appeal in 2019 when the family was awarded R1.4 million.

The second part of the 2017 case dealt with the family’s request for a structural order directing the DBE and LDOE to supply each school in Limpopo with safe and dignified toilets. In 2018, the Limpopo High Court ordered the state to conduct a comprehensive audit of sanitation needs – detailing the names and locations of all schools with pit toilets in the province – and provide a comprehensive plan for the installation of new toilets. Since the structural order, the LDOE and DBE have filed two affidavits with the court – on 31 August 2018 and 12 May 2020.

The LDOE and DBE proposed replacing pit toilets at 1,498 schools in the province over a period of 14 years, which the Limpopo High Court found was unduly long.

SECTION27 returned to the High Court on 6 August 2021 seeking an order declaring that the LDOE and DBE’s plans were unconstitutional and in breach of the structural order. It asked the court to direct the Member of the Executive Council in the Limpopo Department of Education to remedy the shortcomings of the plan to ensure that it is constitutionally compliant. It also asked the court to supervise the updated plan and its implementation.

In reaching his decision, the judge relied on a judgment in another case, Government of the Republic of SA and Others v Grootboom and Others, which dealt with access to adequate housing and was tasked with finding a way to achieve the progressive realisation of that right, including whether public money could be better spent in the pursuit of these rights.

While SECTION27 argued for the creation of a special task team to implement the structural order, the court said such a step was not warranted at the moment. “The defendants must be given the opportunity [to] put up a revised plan which meets the test of reasonableness,” reads the judgment. While financial constraints are a fact of life, “adequate financial provision should be put in place to address the plight of the learners in schools with pit toilets.”

The state is to provide the court with reports every six months with details of steps taken to implement the revised plan.

“We are delighted that the court has recognised the urgent need to eradicate pit toilets in our schools and directed the DBE and LDOE to fulfill the constitutional rights of learners to safe and dignified sanitation,” said Faranaaz Veriava, head of the education rights programme at SECTION27.

The order requires the state to provide a detailed inventory of schools’ sanitation needs, including a list of pit toilets across schools in the province, and how the province intends to implement the revised sanitation plan. The state is also required to provide revised deadlines for the eradication of pit toilets, along with detailed budgets.

When 10 cryptos (or 20) are better than one

Written by Ciaran Ryan. Posted in Journalism

Smaller cryptos like Ethereum, Cardano and Solana are outpacing the granddaddy of them all, Bitcoin. From Moneyweb.

Crypto volatility can be somewhat softened by investing in a crypto portfolio. Image: Bloomberg
Crypto volatility can be somewhat softened by investing in a crypto portfolio. Image: Bloomberg

Bitcoin is being outpaced by smaller crypto assets slugging it out for dominance of a new blockchain-dominated financial architecture known as decentralised finance (DeFi).

Bitcoin (BTC) might have grown by a compound average rate of 200% for the last decade, but that’s beginning to pale alongside the super-charged growth of smaller cryptos like Ethereum (ETH), Cardano (ADA), Solana (SOL) and Polkadot (DOT), all of which are contenders for dominance of the DeFi space.

ADA is up 2 456% over 12 months, ETH 895%, and SOL is up 40-fold.

ETH remains the king of DeFi for the time being, but the technology behind Solana and Cardano could unsettle this. You can already use your cryptos as collateral to lend, borrow and earn interest, but a host of new financial services and business processes, from insurance to company audits, will soon be widely available on these blockchains.

Read: Why cryptos should be a part of your financial plan

The big criticism of BTC is that it is a speculative asset, a form of digital gold, with no real business behind it. That’s not true of Ethereum and other coins battling it out for control of the emerging financial architecture called DeFi.

Read:Is bitcoin the new gold?

Crypto is no goldGold is good but Bitcoin better for $7.5bn hedge fund

Picking winners in the crypto space is never easy, but one proven way to capture some of growth in the up-and-comers is through bundled investments such as that offered by Revix, BitFund, EC10 and Blue Token.

All of these offer diversification and exposure to some of the more exciting stories in the crypto space.

These are the crypto equivalent of unit trusts in the stock market, and they all differ in how the constituents are selected and in capping the weighting placed on the constituents.

In most cases, this prevents bitcoin (which accounts for more than 50% of the crypto market cap) exercising too much dominance in the fund.

As the results below demonstrate, all these funds outperformed a direct investment in BTC over the last 12 months.

Revix

Revix’s Top 10 Bundle spreads your investment across the top 10 cryptos as measured by market cap, with a 10% weighting in each. The bundle is reweighted monthly so that the underlying cryptos maintain their 10% weighting.

Revix’s Top 10 Bundle is showing a 642% gain over 12 months, against 306% for a direct investment in Bitcoin. The Top 10 Bundle’s performance was boosted by giving 10% weightings to smaller, faster-growing coins like SOL and ADA, and placing a cap on the slower-growing BTC.

Source: Revix

EC10

EC10 spreads your investment across the top 10 cryptos measured by market cap, which means BTC makes up about 54% and ETH 25% of the portfolio.

The chart below (measured in rands) shows that an investment in EC10 would have generated a return of more than 300% over 12 months, against 256% for a Bitcoin-only investment.

Source: EC10

Blue Token

Blue Token is a digital token with 14 underlying constituents, comprising the 14 largest crypto assets (with no one crypto exceeding 25% of the total). The two largest crypto assets, BTC and ETH, account for 50% of the token’s value, with the remaining 12 crypto assets making up the remaining 50%. The minimum weighting is 2.5% for any constituent.

Blue Token achieved a return of 556% over the 12 months to September 1, powered by some strong gains by ETH, Cardano and Solana.

Blue Token is controlled by Digital Horizon, with the technology provided by Stratum.

Blue Token 12-month returns

Source: Bluetoken.io

BitFund

BitFund has a Balanced 10 and a Capped 20 portfolio – made up of the top 10 and 20 coins as measured by market cap. The Balanced 10 fund has roughly 60% exposure to BTC and 22% to ETH. The Capped 20 portfolio caps exposure to any single coin to 15%. Both funds are rebalanced weekly to maintain market cap weightings.

Says BitFund co-founder Josh Miltz: “When holding a portfolio whose constituents depend on market cap, it is important to devise a strategy that outlines when cryptos enter and exit your portfolio. For example, if you are holding the top 10 cryptos, and a new crypto enters the top 10, at what point do you sell out of one to buy the other?

“There are various things to consider here. For one, if you were to trade every time the top 10 constituents change, you could end up trading multiple times per week or even per day in a volatile market.

“In this scenario your returns can be severely affected by trading costs,” says Miltz.

“On the other hand, if you only trade once every month or less, you risk missing out on further gains that a new constituent might make if it continues on its trajectory that brought it into the top 10 in the first place. You also risk holding on to an asset for too long that might have dropped out of the top 10 due to its own downwards trajectory.”

BitFund rebalances weekly, which is frequent enough to tap into the natural performance of the market, but infrequently enough to avoid pushing trading costs up too high, says Miltz.

After fees of 2.4% a year, both portfolios significantly outperformed BTC. Over the past year, BTC has returned roughly 240%. Over the same period, the Balanced 10 performance was 315% and the Capped 20 performance was 419%. In a market where the altcoins have been performing very strongly, it is clear that the early exposure to smaller coins in the top 20 portfolio has led to greater performance.

The outperformance of smaller coins might be a feature of bull markets, but what about bear markets?

During declining markets, BTC has shown itself less volatile than smaller coins. Those funds holding fewer, but more well established cryptos, seem to hold their value better.

Bitcoin vs Capped 20 portfolio

Source: BitFund

Bitcoin vs Balanced 10 Fund

Source: BitFund

The bottom line: you cannot escape the volatility of cryptos, but you can soften it somewhat by investing in a crypto portfolio. Apart from diversification, an investment in these funds gives you exposure to some truly extraordinary crypto assets like ADA and SOL.

Will the FSCA’s R50m fine on Viceroy have a chilling effect on research?

Written by Ciaran Ryan. Posted in Journalism

Yes, says Viceroy – and that makes it less likely that the next Steinhoff will be picked up ahead of time. From Moneyweb.

The obvious intention of the law is to prevent market manipulation under cover of research, but subjectivity is an issue. Image: Shutterstock
The obvious intention of the law is to prevent market manipulation under cover of research, but subjectivity is an issue. Image: Shutterstock

Analysts and research teams focused on South African stocks will no doubt be revisiting many of their recommendations – buy or sell – in light of the Financial Sector Conduct Authority’s (FSCA) imposition of a R50 million fine on Viceroy Research last week for a series of 2018 reports on Capitec that were deemed to be false or misleading.

Among the claims made by Viceroy was that Capitec was understating its uncollectible loan book to the extent of about R10 billion, and was ‘curing’ this by issuing new loans to delinquent borrowers. This was denied by Capitec and the South African Reserve Bank, which rushed to its defence.

Read:FSCA hits Viceroy with R50m penalty for false, misleading statements on Capitec

Viceroy Research is a ‘hit squad,’ Kganyago says

The Viceroy reports caused a 23% drop in Capitec’s share price (from which it has more than recovered).

There has been some concern among analysts as to whether this fine, particularly the size of it, might have a chilling effect on research going forward.

Perhaps the more important question is: can two analysts look at the same data and come to entirely different conclusions?

Consider the case of Marvin Rothman, who predicted (correctly) that Donald Trump’s Taj Mahal casino in New Jersey would fail. Rothman was fired after his boss received a letter from Trump with a demand to apologise or argue it in court.

Or the case of Investec analyst Anthony Geard who called on former Tongaat CEO Peter Staude to resign because of the company’s ‘appalling’ financial results.

Investec issued an apology for causing any embarrassment to Staude, “with whom we have a long and fruitful relationship …” Tongaat was later found to have fudged its financial statements and Staude eventually did take the advice offered by Geard.

Steinhoff

Or consider the dozens of analysts issuing glowing recommendations on Steinhoff, weeks before it imploded in a fireball of financial fraud.

Ironically, Viceroy got this call right. The web of intricate transactions underlying the business, when aggregated, spelt trouble to the analysts at Viceroy.

There were a few analysts and fund managers in SA that were uncomfortable with Steinhoff, among them Adrian Saville, then at Cannon Asset Managers, who sold out of the stock on the grounds that it could not easily be understood, and this at a time when Steinhoff shares were on a rampage.

Shorting

Short sellers are regarded with suspicion by CEOs, because of the potential to hurt the value of company stock (and their own net worth).

Liberty founder Donald Gordon was known to rail against scrip lending when it was used to support short sales. “But the truth of the matter is that Liberty was losing direction and deserved to be downrated,” says one fund manager.

Read: ‘Shorting’ in SA

“We definitely need more interrogative research that causes us to challenge our assumptions. If we had more of this kind of research, perhaps we would have been alerted to trouble at African Bank earlier than was the case,” says Geoff Blount, investment director at TIP One fund.

“No one complains when analysts put out a strong buy signal, but you can certainly expect complaints when you put out a sell recommendation. There is a fine line here, where you don’t want to be seen to manipulate the market, at the same time you want robust research that does not necessarily go along with the consensus,” he adds.

Viceroy Research says it is appealing the FSCA fine which “seeks to shut down critical analysis of SA companies.”

The US-based research firm says it met with and provided its working papers to the FSCA, which appear to have been ignored.

Announcing the fine last week, the FSCA was at pains to emphasise that the penalty was not intended to discourage research recommending a sell on SA stocks, only that the recommendation must be based on information that is not false, misleading and deceptive. And if research is based on misleading information, it must be corrected.

Viceroy replies that the FSCA’s findings are predicated on Viceroy not publishing ‘full and frank corrections’ to its analysis, even after Capitec’s open response to its questions. In other words, it continues to stand behind the research, which the FSCA found had benefitted a financial partner who had taken a short position in Capitec shares.

Market abuse

Section 81 of the Financial Markets Act deals with market abuse, and makes it clear that once the author of a report is made aware that it contains statements that are false, misleading or deceptive, a full and frank correction must be issued without delay.

Says Peter Major, director of mining at Mergence Corporate Solutions: “We all know how hedge funds work. They pump up a stock as much as possible, any way they can, before they short the hell out of it. And they do vice versa when they want to buy it.”

Viceroy’s response to the FSCA suggests it does not feel the need to issue a full and frank correction.

The obvious intention of the law is to prevent market manipulation under cover of research. But there may be times when two analysts presented with the same facts come to entirely different views of a company.

There is an element of self-censorship infused in much of the research issued on SA stocks, and has been for decades. If you want access to management, you had probably better remain within the consensus parameters.

As one fund manager told Moneyweb, when presented with a contrarian view by an analyst, one has to test the assumptions underpinning that view. And while the consensus view is safe, this too needs to be challenged. “It keeps us on our toes,” he says.

High profile fund managers are often publicly bullish on shares they already hold in their portfolio, and are brazenly talking up their books while quietly selling into a rising market. Is that not market manipulation?

Whistleblower aspect

What about research based on whistleblower testimony that is not yet in the public domain? SA is rife with cases of whistleblowers being silenced with threats of legal action, notwithstanding the supposed armour of the Protected Disclosures Act.

Media outlets are often the last refuge for those with a dangerous story to tell. Whistleblower testimony may be wildly at odds with the official version, and may be wrong in aspects, but that should not prevent it from being tested, scrutinised and ventilated.

The penalties for launching SLAPP (strategic lawsuit against public participation) suits that are intended to intimidate and silence critics should be far more threatening than they are, and many countries now have some form of anti-SLAPP suit legislation in place. SA has yet to go down this road, and perhaps it should.

It remains to be seen whether Viceroy prevails in its appeal of the R50 million fine. Large fines issued by the FSCA against Steinhoff and Tongaat were later reduced – Steinhoff from R1.5 billion to R53 million, and Tongaat from R118 million to R20 million.

This was to spare shareholders having to take more pain than that already suffered. In October 2020, the FSCA hit former Steinhoff CEO Markus Jooste with a fine of R161 million for insider trading, after he notified three friends by SMS to sell their shares.

The broader question is what impact this will have on research going forward. That remains to be seen.