Africrypt liquidators granted additional powers to track down missing funds

Written by Ciaran Ryan. Posted in Journalism

Including the power to hold an inquiry. From Moneyweb.

Africrypt office stands vacant in Johannesburg in June 2021.Image: Bloomberg
Africrypt office stands vacant in Johannesburg in June 2021.Image: Bloomberg

The Gauteng High Court last week granted the liquidators of Africrypt additional powers to track down missing funds, and to sell assets and property belonging to the company.

Africrypt, a crypto investment scheme headed by Raees and Ameer Cajee, was supposedly hacked in April 2021 and its digital wallets emptied of more than R40 billion in bitcoin. Forensic investigator Hamilton Cheong and Darren Hanekom, the attorney representing some Africrypt clients, have raised doubts as to whether it was a hack, given the fact that funds were depleted from Africrypt-controlled wallets months earlier.

The Cajees fled South Africa after the alleged hack, claiming they feared for their lives after receiving death threats. Raees Cajee emerged from hiding in Tanzania last month to depose an affidavit opposing the final liquidation of the company, arguing that the alleged hack originated out of a Ukrainian IP (internet protocol) address, and that investors had no claim against the company and “it is in the nature of investments that they can be lost.”

A statement issued last week by the liquidators’ legal representative, Ruann Kruger, says the business model of Africrypt “required investors to deposit fiat currency with Africrypt, who used the fiat currency to purchase crypto assets on a number of asset exchanges, and promised investors exorbitant returns of up to 10 % per day on their investments.

Read:

Africrypt ‘hack’ of nearly R54bn dwarfs Mirror Trading

Lightning strikes twice for Africrypt’s Cajee brothers

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

“There is no evidence that this was indeed a hack of the Africrypt systems, and in support thereof, it seems that funds were depleted from the Africrypt wallets four months before the alleged hack.”

Africrypt was placed in provisional liquidation on April 26, 2021 after investor group Badaspex launched a liquidation application and obtained a provisional order.

The court-appointed liquidators – Eugene Januarie and Welcome Jacobs – say directors of Africrypt intentionally failed to co-operate and are intentionally hampering the investigations into the affairs of the company. An enquiry into the whereabouts of the assets must now be held to ascertain what happened to the funds and to determine what can be recovered.

“There exists a high probability that assets and funds were moved from the business of Africrypt into the names of the directors, related companies, and close corporations to the detriment of creditors and requires urgent investigation,” says the statement.

“The so-called breach occurred on April 12, 2021, causing a loss of approximately R84 million, although an amount of R200 million had been received and invested on behalf of investors.”

This raises questions as to the status of the remaining R116 million (being the difference between the claims of R200 million received and the reported loss of about R84 million), and whether this includes gains and losses from investment, as well as withdrawals.

The liquidators also want to know why no communication has been issued by Recreate Wealth (Pty) Ltd or ReaCreate Wealth Limited, the two Hong Kong-based companies that were the legal entity that contracted with Africrypt clients.

“With the liquidator’s extended powers, they will be able to investigate and interrogate the relevant parties, directors, and their related companies during the enquiry to uncover the mystery behind this ostensible ‘Bitcoin heist’”.

“The liquidator’s main objective is to track down assets, attempt to gain access to Africrypt systems and their source codes to recover Bitcoin wallets and funds invested and lost by investors.

“In this endeavour, the liquidators have further secured the services of Mahier Tayob of Tayfin Forensic Investigative Auditors to conduct forensic investigations into the affairs of Africrypt and related entities.”

JP Markets asks SCA whether regulator was right to shut it down when it wasn’t insolvent

Written by Ciaran Ryan. Posted in Journalism

Founder of the country’s largest online broker says FSCA overstepped its regulatory reach. From Moneyweb.

Justin Paulsen hopes his case sets legal precedent in SA. If he wins, a substantial damages claim is likely to eventuate. Image: Supplied
Justin Paulsen hopes his case sets legal precedent in SA. If he wins, a substantial damages claim is likely to eventuate. Image: Supplied

JP Markets was an extraordinary South African success story. Founded in 2016 by Justin Paulsen, then just 29 years old, JP Markets grew into an online broking powerhouse with more than 300 000 clients, generating annual profits running to hundreds of millions of rands.

Between 20 000 to 30 000 of these clients were active in the market on a regular basis. JP Markets offered clients the possibility to invest in a type of derivative called Contracts for Difference or CFDs, which track the price movements of actual financial instruments without having to own the underlying asset. Clients could pick from more than 500 instruments, from forex to indices and individual stocks.

We know JP Markets was hugely profitable because the company’s various bank accounts reflect a balance of R258 million, while claims against the liquidated company total around R40 million. That makes Paulsen the largest claimant against the liquidated estate.

What we also know is that Paulsen is not accused of stealing or misappropriating a cent of clients’ money.

There were complaints from customers who lost money due to a technical glitch during in a ‘trading halt’ in March 2020 when the Covid crash was in full bloom, but there were no complaints from those who made money during the same event. And even if JP Markets was to repay all clients who lost money during this event, it would account for a fraction of the company’s available cash reserves.

Read:SA currency trader to oppose liquidation bid

Behind the scenes at JP Markets

Looks like the end of the road for JP Markets

So how is it that a company this profitable was shut down in July 2020 by the Financial Sector Conduct Authority (FSCA)?

Gerhard van Deventer, head of the FSCA’s investigations unit, says the issue of JP Markets’s solvency is not the issue, rather that it was in violation of the law and its licensing obligations, and that the regulator was forced to act to protect the interests of clients.

Paulsen also asks why only he was shut down and not other online brokers doing exactly the same thing.

The FSCA replies that 16 others are being investigated, but cannot provide more details at this stage (see the full FSCA reply below).

Paulsen’s questions are about to be answered by the Supreme Court of Appeal (SCA), following an appeal lodged by JP Markets and its 100% shareholder Paulsen against the FSCA and the final liquidation order granted on September 7 by the South Gauteng High Court.

The FSCA says it took this draconian step because it believed JP Markets had contravened certain financial sector laws, “including but not limited to running an unlicensed over-the-counter derivatives provider (ODP) business”, according to an FSCA press statement issued on July 8, 2020.

FSCA’s regulatory powers in the spotlight

The SCA court filings lodged by Paulsen raise some interesting questions about the limits of the FSCA’s regulatory powers.

JP Markets had a Category 1 FSP (Financial Services Provider) licence, which allowed it to provide advisory and intermediary services in respect of derivative instruments and deposits.

Paulsen is challenging the standing of the FSCA to seek an order for its final winding up on two principal grounds:

  1. That it flies in the face of the Companies Act, which allows for the winding up of solvent companies only under strict circumstances, such as when creditors believe it is just and equitable to do so. This, says Paulsen, is clearly inapplicable in the case of JP Markets, and the FSCA does not have standing in terms of the Companies Act to take the actions that it did.
  2. The second ground for appeal is that the FSCA says it was investigating JP Markets, but had not concluded its investigation. The Financial Advisory and Intermediary Services (Fais) Act, read together with the Financial Sector Regulation (FSR) Act, makes allowance for the liquidation of a financial services provider only after an on-site inspection or an investigation.

The high court’s reading of this law was that an investigation need not be completed, it need only be underway.

The FSCA, in its heads of argument, has asked the SCA to apply a ‘purposive interpretation’ to the issue of the investigation and “interpret the section (of the act) with its clear purpose to protect the interests of clients and members of the public and to protect the integrity and stability of the financial sector”.

The FSCA’s court papers argue that the regulator must act even if an investigation is ongoing, particularly where theft of funds may be an issue.

Blindsided

The issue of the investigation, whether complete or not, is relevant to JP Markets, since Paulsen and his attorney Darren Hanekom (also involved in representing clients of the Africrypt crypto scheme) believed they were assisting the FSCA with its requests for information until they were blindsided by the rush to court for a final winding up order.

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

Paulsen says he is not entirely sure what triggered the FSCA’s sudden zeal to close it down, but suspects it had to do with a host of complaints relating to a trading halt in March 2020.

“This was at the start of the Covid-19 panic and markets around the world went into a tailspin, prompting a trading halt on most major markets. For technical reasons, JP Markets continued to trade during this trading halt, so we had people who lost money and people who made money during this period.

“This was an error on our part, and we had to go back to clients – both the winners and the losers – and inform them that trades made during that period would have to be reversed. That, of course, upset a lot of people, but we had to do it.”

A question of time

There is no question that JP Markets was issuing forex CFDs, and that it did not have a licence for this as required by the Financial Markets Act. But Paulsen argues that this was a new requirement at the time and he was endeavouring to bring himself within the ambit of the law by engaging with the FSCA, when he was suddenly shut down.

Says Van Deventer: “JPM paints a picture of a legitimate business that was doing well, but suffered from a few electronic glitches and being hampered by the lockdown regulations. Failing this, it was a healthy and legitimate operation that had business longevity.

“This is unfortunately not correct. JPM conducted the business of an ODP [over the counter derivatives provider] without having the required licence in contravention of Section 111(1) of the FSR Act, which is a criminal offence.

“One needs to appreciate the difference between an FSP licence [which JPM possessed] and an ODP licence. An FSP licence relates to advice and intermediation only. The FSP is never exposed to market risk. This means that the licence requirement for an FSP is in many ways much lower. It must be borne in mind that OTC derivatives were a significant contributor to the 2008 financial crisis. OTC derivatives are by nature high risk financial products that can easily obscure the full extent of the risk and loss.” (See the full FSCA reply below.)

The FSCA suspended JP Markets’s FSP licence in June 2020, though the company continued to trade because it believed the licence suspension precluded it from conducting new business, but not from wrapping up unconcluded trades, according to Paulsen.

Withdrawal delays

Another batch of complaints received by the FSCA apparently had to do with delays in processing requests for withdrawals.

JP Markets built its name on honouring requests for withdrawals within hours of a client making a request. This was in stark contrast to others in the same business who often processed withdrawal requests once a week or every few days. Paulsen explains the delays in March 2020 were caused by the Covid lockdowns and the shift to remote working for back office admin staff.

At its peak, JP Markets employed 78 staff, most of whom were suddenly expected to continue working from home.

“That process of moving to remote working caused some admin delays, as it did with most businesses across the world at the time,” says Paulsen.

Why CFDs are regulated

There’s a good reason why CFDs are regulated in most countries, and it has to do with the risks of things going wrong.

You can purchase CFDs on currencies, commodities, indices and individual stocks like Apple, for example.

A CFD on Apple gives you the benefit of any price movement of the stock, but you never actually own the stock, so you don’t get dividends or voting rights.

Here’s another potential problem: the exchange issuing the CFD is the counter-party. If you lose on a trade, the exchange wins, and vice versa. That means in addition to taking a bet on the direction of the stock price, you are also taking a bet on the financial soundness of the exchange.

Paulsen hopes his case sets legal precedent in SA in determining the bounds of regulatory reach. If he wins the case, a substantial damages claim is likely to eventuate. If he doesn’t, he plans on taking it all the way to the Constitutional Court.

The FSCA replies

Why the FSCA brought the application

The Authority is constrained to comment in detail due to the fact that the matter is subject to an appeal before the Supreme Court of Appeal and to be heard on 21 September 2021. Our omission to comment on all the issues raised must not be interpreted as an admission as to its correctness. It is evident that you have accessed the court judgment of the South Gauteng High Court (High Court) that was delivered in favour of the Authority. This detailed judgment sets out the facts of the matter. Further, the papers filed before the SCA clearly sets out the competing arguments. We trust the court papers will be of assistance to you.

JP Markets (“JPM”) paints a picture of a legitimate business that was doing well, but suffered from a few electronic glitches and being hampered by the lockdown regulations. Failing this, it was a healthy and legitimate operation that had business longevity.

This is unfortunately not correct. JPM conducted the business of an ODP provider without having the required licence in contravention of section 111(1) of the FSR Act, which is a criminal offence.

One needs to appreciate the difference between an FSP licence (that JPM possessed) and an ODP licence. An FSP licence relates to advice and intermediation only. The FSP is never exposed to market risk. This means that the licence requirement for an FSP is in many ways much lower. It must be borne in mind that OTC derivatives were a significant contributor to the 2008 financial crisis. OTC derivatives are by nature high risk financial products that can easily obscure the full extent of the risk and loss.

We have evidence wherein JPM requested the platform operator to assist with (fabricated) reasons why JPM do not have to pay out (legitimate) winnings of clients. The platform operator was requested to change the bid–offer spread of identified profitable clients to restrict profitability because JPM stood on the opposite side of the transaction and would benefit from this strategy. It further delayed honouring the withdrawal requests of clients without substantiation.

The FSCA took this into account when it decided to apply for the liquidation of JPM.

JPM was not insolvent

The issue of insolvency is not relevant in the present case.

The FSCA has the statutory power to apply to the High Court for a liquidation order to protect the interests of the clients of the provider. It is not about assets and liabilities, it is about protecting the public. But this power of the FSCA does not go unchecked – we still have to convince a High Court that it is the appropriate remedy. In this instance the High Court held that it was an appropriate remedy in order to protect the interests of the clients of JPM and for the integrity and stability of the financial sector.

Paulsen was not accused of misappropriating clients’ funds

I should perhaps put this in perspective – the FSCA has jurisdiction to investigate breaches of financial services laws, not fraud and theft. So we do not make findings in this regard. We can say, however, that Paulsen did not act in the best interest of his clients by inter alia preventing them profiting from their transactions.

Was it (the ODP licence) a new requirement at the time?

The requirement for an ODP licence is a relatively new part of the FSCA legislative framework, and a very necessary one.

You will note from our papers that we explain the risks of OTC derivatives and the compelling reasons to regulate it. There was extensive public consultation before the ODP regulations were brought in operation. JP Markets had sufficient time to submit an application. The Regulations in terms of the Financial Markets Act for ODPs were published in February 2018 already, but applicants were given an automatic exemption until 14 June 2019 to apply. If they applied before 14 June 2019, they were permitted to conduct business until the outcome of their application is known.

Did they allow clients to wrap up or conclude trades only?

JPM was allowed to close out existing positions but was prohibited from conducting new business. The suspension terms were clear and it was brought under the attention of the attorneys of JP Markets that their client must cease with new business. JP Markets (Paulsen) chose to ignore this and continued to conduct new business.

Why was JPM “shut down” and no other brokers?

We can do no better than to quote the High Court when it stated: “…the assertion that other unlicensed ODPs have not been pursued by the applicant cannot constitute a basis for explaining why the respondent need not be licensed or why the applicant should be excluded from pursuing what remedies may legitimately be available to it in discharging its statutory regulatory mandate”.

The prejudice or potential prejudice to clients based on complaints received required intervention. However, I should point out that at least 16 other entities are currently the subject of an investigation on the basis of possible unlicensed ODP business, details of which cannot be disclosed at this stage.

Justin Paulsen replies

We will let the SCA decide the matter based on the evidence presented to it.

The one point I would take issue with is the FSCA’s comment that it has evidence “wherein JPM requested the platform operator to assist with (fabricated) reasons why JPM do not have to pay out (legitimate) winnings of clients.”

The FSCA clearly misunderstands the information we presented to it, and your readers may gain the impression from this we were working against our own clients in the background by altering the bid-offer spread. This is certainly not the case. We had algorithms to flag suspicious trades, which is common industry practice, where we suspected a client was trying to violate the terms and conditions of using our platform, such as by collusive or risk-free prohibited trading. Most exchanges around the world battle to flag and stop this kind of abusive practice. The number of clients we flagged for this was nominal. We nevertheless paid them out in full but asked them not to trade with us in future.

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

Written by Ciaran Ryan. Posted in Journalism

Hamilton Cheong, who grew up in the Magaliesberg, is helping law enforcement authorities in several jurisdictions uncover where the money went. From Moneyweb.

Cheong’s company helps governments and organisations secure their digital assets against threats coming from ransomware and organised crime. Image: Supplied
Cheong’s company helps governments and organisations secure their digital assets against threats coming from ransomware and organised crime. Image: Supplied

There are several aspects to the Africrypt ‘hack’ – reckoned to have lost R43 billion – that have caught the attention of law enforcement authorities across the globe.

The first is the size of the reported theft at $2.9 billion or about R43 billion. It’s a figure so eye-poppingly huge that many have questioned whether this volume of money could have come out of SA.

The other aspect of the theft that has law enforcement on high alert is whether this was the result of a hack – as claimed by Raees and Ameer Cajee, the two brothers behind Africrypt – or whether it was an inside job. The Cajees fled South Africa, apparently in fear of their lives after receiving death threats immediately after the alleged hack.

Read:Trail of brothers linked to missing bitcoin stash is still murky

Africrypt’s Raees Cajee comes out of hiding in Tanzania to oppose liquidation

The man who has a better understanding than most of what happened is Hamilton Cheong, a South African-born forensic sleuth now based in the US, who has spent the last few weeks assisting law enforcement agencies around the world to unpack what happened with the Africrypt billions.

Blockchain track-and-trace

Cheong’s company, Crypto Investigation Bureau (CIB), helps governments and organisations secure their digital assets against modern-day threats coming from ransomware and organised crime.

It has developed a blockchain track-and-trace programme called God’s View to hunt down missing digital assets, and it was this programme that was used to piece together the movement of funds into and out of Africrypt wallets.

The blockchain is a detailed and immutable ledger of all bitcoin transactions, and is open to public scrutiny. The problem is linking bitcoin addresses with real-world people and organisations, though that is becoming easier through the use of software tools like God’s View, which made it possible to track every bitcoin moving into and out of Africrypt-controlled wallets.

‘Hack’ story

Cheong says the evidence does not support the story of a hack originating out of Ukraine, as claimed by Raees Cajee in an affidavit before the Gauteng High Court seeking to stop the final liquidation of Africrypt.

Under Cajee’s version of events, on April 13 hackers from Ukraine smashed through several layers of security to make off with more than R50 billion in crypto assets.

“We don’t think this is possible,” says Cheong, a certified crypto and blockchain investigator.

“If this is true, the hackers would have broken through several security layers in a matter of minutes to get to the crypto, and that is extremely unlikely. We don’t think this was a hack. One reason we say this is that four months before the alleged hack, funds were being depleted out of wallets under the control of Africrypt.”

Millions or billions lost?

Raees Cajee claims in his affidavit that the extent of funds under Africrypt control was closer to $6 million (R88.5 million) than the R54 billion claimed by attorney Darren Hanekom of Hanekom Attorneys, who is representing several Africrypt clients.

Even that low figure of $6 million is disputed, as claims totalling around R200 million in SA have mounted against Africrypt.

Cheong says Hanekom’s claim of R43 billion is closer to the truth, and hints that the actual figure could be higher – much higher – once all the wallets used by Africrypt are totalled together.

By painstakingly piecing together the web of transactions into and out of wallets used by Africrypt, Cheong hints that some of these wallets are used by operators known for ransomware attacks on business and by ‘dark web’ operatives.

“I don’t buy the hack story, and I think the Cajees were in over their heads and perhaps got mixed up with some really bad people,” says Cheong.

A better picture of what occurred awaits the release of a full forensic report by Cheong’s team.

Disturbing tie-ins

Astonishingly, he says there are some disturbing tie-ins between Africrypt and Mirror Trading International (MTI), the crypto scam headed by CEO Johann Steynberg that roped in more than 23 000 bitcoin from hundreds of thousands of investors around the world.

MTI is currently in provisional liquidation, and Steynberg remains at large, having gone awol in December 2020 when MTI members’ requests for withdrawals went unanswered.

Some of the same ‘tumblers’ used by Africrypt were also used by MTI, says Cheong.

Tumblers are used by money launderers to hide the origin of funds by effectively creating an omelette out of several bitcoin eggs. Bitcoin from several sources are mixed and broken up in these tumblers and then shipped out, usually in small quantities, to cover the tracks of the money launderers.

Cheong dedicated hundreds of hours of his own and his team’s time to unravelling the Africrypt web because he had the resources and tools to do it. He also has a deep sense of patriotism.

Africa is home, he says, but SA is earning a reputation internationally as a haven for dodgy crypto ventures.

MTI was rated by Chainalysis as the world’s biggest crypto scam of 2020, but it pales alongside what appears to have been stolen out of Africrypt-linked wallets.

Read: MTI was by far 2020’s biggest investment scam – Chainalysis

Says Cheong: “We must assume the Cajee brothers are innocent until proven guilty.

“My question to them is why have they not commissioned an incident report by professionals to clear [their] names, instead of running?

“If they are willing to provide CIB with their full app and source code, we would love to help,” he adds.

A long way from home

Cheong says he grew up in a troubled family and ended up homeless in SA for extended periods. He was passed between different households but while working at a scrapyard discovered a talent for fixing broken computers.

Forced out of necessity into entrepreneurship, he sold reconfigured computers at flea markets over weekends, and left for Israel in 2014 where he gained hands-on experience in some of the biggest tech businesses in the world.

That experience also drew him into coding and financial markets. In 2016, he created an electronic wallet for the secure storage of digital assets, and that brought him to the attention of Canadian investors who helped fund the early-stage launch of the product, called Just Wallet.

“We’re trying to replace Swift as the global system for payments,” says Cheong.

Ironically, he believes cryptos are a scam, in large measure because the boast of decentralised control is already subverted by the centralisation of control of parts of the crypto value chain in certain hands.

“We have ransomware attacks occurring on a daily basis and no one has really come up with a firewall against that.

“This is what we decided to do. You’ve got huge volumes of wealth being transmitted electronically and far too many weak points in the chain.”

When the Africrypt story is finally told, Cheong’s name will feature strongly in the credits.

Moneyweb reached out to Raees Cajee by phone without success.

Read: Lightning strikes twice for Africrypt’s Cajee brothers

Anglo Platinum hits that sweet spot at halfway stage

Written by Ciaran Ryan. Posted in Journalism

Platinum group metals production was up 28% in the first six months, with earnings shooting up 385%. From Moneyweb.

The group achieved record Ebitda of R63.3 billion – a 385% increase. Image: Philimon Bulawayo, Reuters
The group achieved record Ebitda of R63.3 billion – a 385% increase. Image: Philimon Bulawayo, Reuters

With results like these, Anglo Platinum executives must be smiling ear to ear.

This is especially true of newly appointed CEO Natascha Viljoen, who couldn’t ask for a better debut at the helm of the world’s largest PGM (platinum group metal) producer.

It helped that PGM prices, particularly rhodium and palladium, broke new all-time highs. The average achieved PGM basket price increased by 47% year-on-year to $2 884 per PGM ounce.

Listen: PGM miners making super profits

Rhodium and palladium set new all-time highs of $30 000 and $3 000 per ounce, respectively, while platinum hit a six-year high above $1 300 per ounce.

Rhodium, Palladium and Platinum prices in USD

Source: ShareMagic

Rhodium and palladium prices have eased since setting new all-time highs earlier this year, on the back of surging demand from the auto sector. Prices were nudged higher by Covid-related shutdowns earlier in 2020. Though rhodium accounts for roughly 10% of PGM production in South Africa, it now makes a huge contribution to bottom line performance for most producers.

Read: Iconic SA mines are ravaged economy’s unlikely saviour

Refined production (excluding tolling) increased by 128% to 2.3 million PGM ounces, buoyed by the recommissioning of the Anglo Converter Plant in February last year following an explosion. In December last year the group announced that the plant was up and running again, slightly ahead of schedule, and that it would take two years to clear the work-in-progress inventory accumulated as a result of the plant stoppage.

“We remain on track to refine the remaining built-up work-in-progress inventory over the next 18 months,” says the group’s interim results statement. “The rebuild of the ACP Phase B unit is making good progress and is on track to be completed in the third quarter of 2021.”

Total PGM production from Amplats’s own mines increased by 29% year-on-year to 1.4 million ounces (H1 2020: 1.08 million ounces), assisted by the relaxation of government-imposed Covid lockdowns in early 2020.

Read: Platinum giants eye solar power as green answer to blackouts

Net sales revenue increased by 155% to R107.5 billion (H1 2020: R42.2 billion), mainly driven by robust PGM prices, and higher production and sales.

PGM production forecasts for the full year range from between 4.2 million and 4.4 million PGM ounces, due to lower third-party receipts and the continuing impact of Covid-19 infection rates on production. Refined PGM production (excluding tolling) is expected to reach 4.8 million to five million ounces.

Unit costs per PGM ounce are expected to range between R12 000 and R12 500, about 9% higher than previously expected due to the continued impact of Covid-19 on operations and the sharp rise in inflationary increases experienced during the first half of the year on consumables, which is expected to continue in H2 2021.

Total capital expenditure guidance, excluding waste stripping, remains unchanged at between R7 billion and R7.5 billion.

Viljoen says among the key focus areas going forward, Anglo Platinum will explore new markets while capturing value from adjacent value chains, while building resilience to help the organisation power through major disruptions.

Africrypt’s Raees Cajee comes out of hiding in Tanzania to oppose liquidation

Written by Ciaran Ryan. Posted in Journalism

Argues that Africrypt isn’t insolvent, doesn’t owe investors anything, and that his family was forced to flee SA due to death threats. From Moneyweb.

‘It is in the nature of investments that they can be lost,’ says Cajee in his affidavit. Image: Chris Ratcliffe, Bloomberg
It is in the nature of investments that they can be lost,’ says Cajee in his affidavit. Image: Chris Ratcliffe, Bloomberg

Raees Cajee has emerged from hiding in Tanzania to oppose the final liquidation of Africrypt, the bitcoin investment scheme that was allegedly hacked and emptied of R54 billion.

Read:Africrypt ‘hack’ of nearly R54bn dwarfs Mirror Trading

Lightning strikes twice for Africrypt’s Cajee brothers

Trail of brothers linked to missing bitcoin stash is still murky

In his affidavit before the South Gauteng High Court, Cajee says nothing like R54 billion was hacked. It was closer to $6 million (R88.5 million), and hackers from a Ukraine internet address succeeded in making off with all the company’s crypto.

The affidavit was signed in Dar-es-Salaam in Tanzania on July 19, putting paid to speculation as to his whereabouts.

Africrypt investor Juan Meyer of Badaspex was granted a provisional liquidation order in April this year after claiming an amount of nearly R67 million was owed to various clients.

The case returns to the high court in September to decide whether or not final liquidation should be granted.

Family flees after threats

The application brought by Badaspex and the attendant media publicity resulted in the Cajee brothers and their family fleeing SA as they reportedly received numerous death threats, and an attempt was made in Dubai to kidnap their father.

Around May 20, Raees’s father Bilal Cajee was apparently stopped by unknown Pakistani nationals in Dubai and the family threatened with harm unless a significant sum of money was paid to a nominated bank account. Bilal Cajee was then held in a hotel in Dubai for about 12 hours, during which time these threats were made.

This is now the subject of a criminal investigation in Dubai.

The kidnapping attempt was a case of “individuals having been contracted in Dubai by disgruntled investors who no doubt intended to intimidate and harass us into making unlawful payments,” deposes Cajee.

Arguments

Raees Cajee is opposing the final liquidation, arguing that Badaspex had signed an agreement with RaeCreateWealth (RCW) in Hong Kong, and not with Africrypt, and therefore Badaspex had no contractual agreement with Africrypt. “The Respondent (Africrypt) is not indebted to the Applicant (Badaspex) as it contends or in any other amount whatsoever,” deposes Cajee.

He goes on to argue that there is no contractual relationship between Africrypt and either Meyer or Badaspex, based on the fact that Badaspex’s claim rests on an agreement that was partly oral and partly written.

The written part of this agreement was with RCW, which explicitly exonerates the company from any data breach (such as a hack) and requires any contractual disputes to be decided by the Hong Kong courts. This agreement was signed electronically by Raees Cajee on October 26, 2020, and then transmitted to Badaspex’s sole director, Adrian Pilling.

Any reliance by Badaspex on agreements purportedly made with the younger brother, Ameer Cajee, are invalid because Ameer was just 17 at the time.

Raees Cajee then goes on to argue that Meyer’s demand for repayment of money placed with Africrypt was precipitated by his questioning of Meyer’s source of funds. “I point out that I was uncomfortable dealing with Meyer as, by that stage, I had come across certain negative press reports concerning Meyer’s chequered past.”

He references a 2011 article from iOL headlined ‘Krejcir ex-partner wants millions back’ which claimed Meyer was a ‘colourful character who moves around town surrounded by a posse of bodyguards’ and who was claiming R60 million from his former business partner, the now-jailed crime boss Radovan Krejcir.

‘Unreasonable demands’ from Badaspex

Cajee wrote to Badaspex on March 19 asking for information pertaining to the source of its funds in Africrypt, and it was this questioning that resulted in Badaspex “making unreasonable demands for repayment”.

Though RCW, in terms of the agreement signed by Meyer, was entitled to hold all the capital and profits for a period of 12 months, Cajee says he acceded to repay some of the invested capital out of fear for his safety. An amount of R2 million was repaid to Badaspex in February.

Cajee also asserts that Badaspex’s attorney Gerhard Botha conceded in an email that the agreement was not between Africrypt and Badaspex, but between RCW and Badaspex.

The Badaspex funds were invested in RCWSA, a subsidiary of RCW. Cajee then discusses the volume of funds invested with Africrypt, which totalled around R200 million.

“It is implausible to think that R200 million could have been turned into R51 billion between September 2020 and April 2021.”

Cajee then says Africrypt did not have an account with FNB into which Badaspex’s funds were received. Instead, the funds were received into RCWSA’s bank account, “and accordingly the Applicant [Badaspex] has no claim against the Respondent [Africrypt].”

However Gerhard Botha, attorney for Badaspex, told Moneyweb: “We will be addressing these claims by Raees Cajee in our reply, but it is worth noting that several clients were repaid funds and made withdrawals at different times and that Africrypt, not RCWSA, was the company that clients were interacting with throughout.”

Cajee’s version of events disputed

Darren Hanekom of Hanekom Attorneys, acting for a number of investors, disputes Cajee’s version of events on the basis that the Bitcoin blockchain shows funds being shipped to a bitcoin address apparently controlled by the Cajees.

The following image shows just one of the addresses used by the Cajees, and an amount of 75 459 bitcoin, worth $2.4 billion (R36 billion) deposited into the address and subsequently withdrawn in 1 292 transactions. The address was still being used as a week ago, when around 2.3 bitcoin was deposited and withdrawn.

Source: Bitcoin.com

Claims against Africrypt so far lodged total more than R200 million, says Hanekom.

“We are not saying R51 billion came out of South Africa and into Africrypt. What we are saying is that one of the bitcoin addresses used by Africrypt show[s] an amount of more than 75 000 bitcoin moving in and out, and that’s an amount of $2.4 billion. There were other addresses used by Africrypt.

“The Cajees have not explained where this additional bitcoin came from or what was the purpose of these addresses, and how come so much money was transacted through these addresses,” adds Hanekom.

“Clients stopped receiving statements in November 2020. On inspection of the provided addresses, it was observed that the client balances were transferred out and sent to the larger pooled account. This pooled address was flagged on the blockchain for links to malware and dark web marketplaces.”

Denials

Cajee denies Africrypt had any cryptocurrency wallets in its name, and also denies he and his brother fled the country with billions of rands in cryptocurrency owing to investors.

The “media attention and misinformation” around Africrypt and the fate of the missing money resulted in law firms demanding astronomically high fees. The Cajees cycled through two sets of attorneys before securing the services of Shaheed Dollie, a Johannesburg firm of attorneys.

“I further deny that Africrypt conducted a banking account at FNB and that it invested in cryptocurrencies such as Bitcoin,” argues Cajee.

Badaspex brought the liquidation application after being informed of a hack on April 13 in which funds had been stolen.

Cajee again leans on the agreement with RCW rather than Africrypt, and says RCW is not liable for any damages.

“However, with a view to being transparent, I point out that it was discovered by me on the morning of 13 April 2021 that the hot wallets [meaning an online wallet hosted on a server] and the private keys for the cryptocurrency assets as well as the API [application programming interface] keys and programming interface were inaccessible.

“After investigating the matter, it became apparent to me that the respondent [Africrypt, being the marketing, operations and administrative entity nominated by RCW] had lost access to its server. Later investigations revealed that these devices and information was accessed and unlawfully from a Ukrainian IP [internet protocol] address, which information was disclosed to me by the Respondent’s external service provider. …It is thus clear to me that the information was unlawfully obtained and used for the benefit of individuals who had criminal intent.”

The result of this was that personal information belonging to clients such as ID documents, proof of residence, confidential banking information and other information was lost “without any prospect of any recovery”.

RCWSA is under no obligation to repay any investments made. “Indeed, these were not loans made in the ordinary course of business and it is in the nature of investments that they can be lost.”

Osino’s Namibian gold discovery looks to be a gem

Written by Ciaran Ryan. Posted in Journalism

The Canadian exploration company figured it would find gold if it searched in the vicinity of the producing Navachab Gold Mine in Namibia, and that’s exactly what happened. From Moneyweb.

The Namibian government goes the extra mile to provide ‘clear and unambiguous legislation’ and make sure investors ‘are given red carpet treatment’. Image: Carla Gottgens/Bloomberg

The Namibian government goes the extra mile to provide ‘clear and unambiguous legislation’ and make sure investors ‘are given red carpet treatment’. Image: Carla Gottgens/Bloomberg

Toronto-listed mining junior Osino Resources has just published a preliminary economic assessment (PEA) of its Twin Hills gold find in Namibia, and it’s a gem.

For CEO Heye Daun and his team, what started out as a near hunch has turned into the largest discovery of gold in southern Africa in recent years, with a potential value of $377 million (R5.5 billion) based on an assumed gold price of $1 700/oz.

“We figured that if we started searching along strike of the producing Navachab Gold Mine in Namibia, we would find a continuation of an already well proven gold resource – and that’s exactly what we found,” says Daun, a native of Namibia, though currently based in Cape Town.

Navachab Gold Mine was sold by AngloGold Ashanti in 2014 to Canadian producer QKR. Osino’s Twin Hills project is located about 25km from Navachab, and covers an area of some 7 000 square kilometres on the Karibib Fault Line, about 200km north-west of Windhoek.

Prospects

The Twin Hills PEA envisages a 1.4 million ounce mine, hitting annual production of 124 000 ounces by year two, though Daun says there is plenty room to improve on this.

What’s notable about this find is the all-in sustaining costs of $945 an ounce.

The project has an expected 15-year life of mine with a 3.5 million tonnes a year processing capacity. The pre-production capital cost of $176 million, with an additional $26 million for contingencies, allows for the full development of the mine plus processing plant.

“I think what is special about this project is the ease of access and simplicity of the project, the low technical risk, and consistent geology, which poses no significant problems,” says Daun.

“And we soon hope to have ownership of the surface rights as well as the mining rights, which will derisk the project even further.”

Great timing

The timing of the discovery and the release of the PEA could not be sweeter, coming as it does at a time when Navachab is reportedly coming up for sale. Combining it with Twin Hills to create a five- to seven-million-ounce combined resource base should be a tempting prospect for a growth-oriented larger acquiror.

This is not Daun’s first rodeo in Namibia. As Moneyweb reported in May last year, he was previously involved in the advancement and definition of the Otjikoto gold mine, also in Namibia, which he subsequently sold in 2011 to another Canadian mining group, B2Gold, for nearly $200 million (R2.9 billion).

Read: While no one was looking, a miner pulled off a major gold find

B2Gold invested nearly $300 million (R4.4 billion) to develop the mine, which last year produced 178 000 ounces, roughly 20% of the group’s total gold haul for 2020.

The Twin Hills PEA is based partly on 69 000 metres of drilling, but does not include an additional 32 000 metres of infill and expansion drilling completed since April 2020, the results of which give Daun confidence that the project has plenty of further upside.

Based on the drill programme so far, Twin Hills has a combined indicated and inferred resource of about 60 megatonne at an average gold grade of 1.0g/t at a cut-off grade of 0.3 g/t for a total of just below two million ounces in resources, of which just over 1.4 million ounces will be mined, as demonstrated in the published PEA.

“Ongoing infill, resource expansion and brownfields exploration drilling with 10 drill rigs, in addition to ongoing project optimisation, is likely to result in improved production parameters and economic outcomes to be published as part of the feasibility study which is expected to be completed during H1 of 2022,” says the PEA.

Daun has been glowing in his praise of Namibia’s mining administrators for going the extra mile to attract foreign investors.

Canadian and Australian junior miners are swarming over Namibia in search of mineral prospects, though the same cannot be said for SA. Daun has accompanied the Namibian mines minister on roadshows to Canada to highlight the benefits of investing in the country’s mining sector.

“I think what investors see in Namibia is a government that is keen to attract investment, to provide clear and unambiguous legislation that leaves no room for doubt, and to do everything in its power to make sure investors are given red carpet treatment.”

Additional opportunity

Osino is busy with several other gold prospects and targets along the Karibib Fault Line.

“We believe that we can increase recovery grades, and an improvement of even 1% will have a meaningful impact on profitability. We’re working on that already,” says Daun.

“The other feature of this mining project that excites us is that we believe we can grow the project substantially through increased drilling, an optimised mine plan and further metallurgical improvements, thereby hopefully substantially improving on the results of this PEA once we have advanced it to the next stage of feasibility.

“We have no doubt that Twin Hills will become Namibia’s next substantial gold mine and we look forward to fast-tracking the project to the development stage over the next 12 to 24 months.”

Read:Is gold set to tear even higher?Gold regains shine after central bank buying drops to decade low

The company is listed on the TSX Venture exchange in Canada.

Osino Resources (OSI) share price

Source: Market Watch

Beware of scammers promising to recover MTI bitcoin, say liquidators

Written by Ciaran Ryan. Posted in Journalism

MTI members are being contacted with fake offers to recover bitcoin. From Moneyweb.

Image: Bloomberg
Image: Bloomberg

The provisional liquidators of Mirror Trading International (MTI) have warned members to avoid being scammed a second time.

Several MTI members have been contacted by agents of a group called Basecoin, with offers to trace and recover bitcoin handed over to the failed bitcoin scheme, which was placed in provisional liquidation in December 2020 after failing to honour requests from members for withdrawals.

Read: MTI placed in final liquidation, 8 000 more bitcoin traced

MTI members are being asked to send additional bitcoin to these so-called recovery agents.

Says joint liquidator Riaan van Rooyen: “We have information that MTI members are being contacted by people purporting to be agents with access to MTI’s database. These agents are falsely claiming they can recover bitcoin deposited by members into MTI. This is clearly yet another attempt to defraud members of the MTI. Only the provisional liquidators have access to the MTI database, and only the provisional liquidators can disburse recovered bitcoin to members.”

As Moneyweb previously reported, liquidators recovered and sold 1 281 bitcoin from Belize-based broker FX Choice, generating more than R1.1 billion for the estate. A further roughly 8 000 bitcoin have been traced and is in the process of being recovered, says van Rooyen.

A forensic investigator involved in MTI reports that Basecoin agents are urging MTI members to open an account with crypto exchange Easy Crypto to receive bitcoin lost in the MTI scam. The agents are claiming to have full access to MTI wallets and claim to be able to make refunds to members.

MTI was declared by Chainalysis as the world’s biggest bitcoin scam in 2020, and roped in hundreds of thousands of members worldwide with promises of returns of up to 10% a month using a computerised trading algorithm. When the Financial Sector Conduct Authority (FSCA) investigated, it found no evidence of a computerised algorithm, nor could it find any evidence of successful trading at all. In August last year it issued a warning against MTI and advised members of the public to ask for their bitcoin back.

Read:
FSCA investigating Mirror Trading International (Aug 2020)
Joining MTI may end in tears (Aug 2020)

Despite this warning, MTI managed to grow its membership base from roughly 60 000 to an estimated 280 000 over a period of five months through a multi-level marketing scheme that rewarded members for every new member introduced.

Read: An inside look at how MTI managed to prolong an extraordinary losing streak

Van Rooyen has warned members to accept communications relating to MTI only from the joint liquidators here.

Members can lodge their claims here.

Foreign truck drivers attacked under cover of looting, demand compensation from SA

Written by Ciaran Ryan. Posted in Journalism

As neighbouring countries look to reduce supply chain reliance on SA. From Moneyweb.

A burnt-out truck pictured near Mooi River on July 10 following protests linked to former president Jacob Zuma's imprisonment. Image: Siyabonga Sishi/Reuters
A burnt-out truck pictured near Mooi River on July 10 following protests linked to former president Jacob Zuma’s imprisonment. Image: Siyabonga Sishi/Reuters

Buried in the mayhem of the last week is a story that has brought even more shame on SA: the ongoing attacks on foreign truck drivers.

Groups representing foreign drivers, such as the Zimbabwe Truckers Association and the SADC (Southern African Development Community) Truck Drivers Association, report that several of their members were attacked last week under the cover of the general looting that took place in KwaZulu-Natal and Gauteng.

Read: Vital links taken out of the supply chain by unrest and looting

“There is a danger that this situation spirals out of control, and South African drivers operating in neighbouring countries get targeted for tit-for-tat violence,” says Advocate Simba Chitando, who is representing several foreign truck drivers associations in seeking police or army protection against attackers operating on SA roads.

A complaint has been lodged with the International Criminal Court (ICC) at The Hague in the Netherlands, which says it is monitoring the situation of foreign drivers in SA, though so far has declined to open an investigation.

That was before the events of last week.

More than 200 foreign truck drivers have been murdered in SA in recent years. Foreign truckers point the finger at groups such as the All Truck Drivers’ Foundation (ATDF), which has called for a ban on foreign drivers but has publicly condemned violence against foreign truck drivers.

However, there are court judgments against the group for allegedly detaining trucks while the police looked the other way.

In 2020, the Zimbabwe Truckers Association brought an urgent case against President Cyril Ramaphosa and the ministers of transport, police and defence, calling for armed escorts for foreign truck drivers operating in SA.

This followed the murder of 25 year-old Zimbabwean truck driver Gift Msimanga, who was beaten to death in Alberton, south of Joburg, last year, allegedly by two Pakistani truck owners apparently operating under pressure from a trucking ‘mafia’.

Delays have cost lives

The government is aware of the situation with foreign drivers, but has sought to delay finding any resolution.

The consequences of that prevarication were in full display last week, says Chitando.

“The government cannot say that it was not warned what would happen. We have provided ample evidence of facts on the ground, and who is behind the attacks.

“It [government] chose not to act when it had the chance. The situation is fast spiralling out of control and has the danger to impact not just foreign drivers, but SA’s relations with Zimbabwe, arguably its closest ally in the region,” he adds.

Director of the Zimbabwe Truckers Association, Wellington Manyonda, said in an affidavit before the Gauteng High Court that there appeared to be little understanding in the presidency of the urgency of the situation.

“South Africa is currently facing rampant acts of xenophobic violence targeting Zimbabwean truck drivers on all the major roads in the country. The crisis has resulted in physical and mental trauma to our members, as well as the loss of life, often in the most heinous and gruesome acts of violence normally associated with acts of war.”

There has been a breakdown in law and order on the roads, and the police are unable to bring it under control, he argued. Part of the blame lies with senior politicians who appear to incite attacks against foreigners.

Read:Truck torchings: SA risks losing drivers and exports

Ramaphosa: SA must quell attacks on foreigners

The case was opposed by the state on technical grounds, and the acting director-general in the presidency argued that the matter was not urgent and that more time was needed to assess the situation.

Chitando says the folly of that delay is now evident for everyone to see.

“Foreign truck drivers are facing extreme danger each day they do their jobs, and the SA Constitution is supposed to provide them protection. It is well known who are the individuals behind groups [agitating for violence against foreign truckers], and if not, that is a huge failing of South African Intelligence. These people need to be arrested without delay.”

Compensation negotiations

Moneyweb understands that behind-the-scenes negotiations are underway to provide compensation for the families of murdered truck drivers, though it is still unknown whether armed escorts will be provided for foreign-driven trucks.

Glen Robbins, head of research at the Toyota Wessels Institute for Manufacturing Studies in Durban, says some foreign companies have started shifting to alternate route such as Beira and Maputo in Mozambique because of the shutdown of the N3 route to Durban last week (though the route has since reopened).

There are also reports of some companies providing armed escorts for their own trucks travelling on certain routes, such as the N3.

“Ironically, the growth in inter-African trade has increased demand for truck drivers, and South Africans have been the greatest beneficiary of this trend. So the idea that foreigners are taking away jobs from South Africans is not true,” says Robbins.

“I think the issue is that with the African Continental Free Trade Area (AfCFTA), the flow of goods across borders will only intensify. It might be true that a fair amount of the net growth in road freight has been because many of our neighbouring countries and those in the SADC region grew at rates many times faster, from a low base, than South Africa did for the last decade.

Read: SA industrial hub has found a faster route to the sea

“That means that more regional as opposed to South African freight companies have started to feature in this market and that key South African businesses have depended on growth outside South Africa to drive their freight business.

“Solutions have to be found and our economies will become more and not less integrated and seamless movement across borders will have to be part of this deal.”

The National Bargaining Council for the Road Freight and Logistics Industry, as reported in The Mercury last year, says about 85% of the more than 51 000 truck drivers in SA are local citizens. About 15% are foreign. This contradicts claims by the ATDF that about 80% of truck drivers in SA are foreign.

Neighbours look outside SA for supplies

The events of last week may have been a tipping point for many foreign truck owners and drivers. Zimbabwe is bracing itself for shortages as a result of supply disruptions after travel on the N3 highway came to a standstill for several days, and several warehouses and supply warehouses were looted and burned to the ground.

Companies in Zimbabwe are being advised to source materials outside SA, according to the Zimbabwe Mail.

South African Petroleum Refineries (Sapref) declared force majeure last week as a result of the looting and shut down its refinery, which accounts for 35% of SA’s fuel refining capacity.

The Botswana Ministry of Mineral Resources says it has enough fuel to meet expected demand, but local oil companies were sourcing supplies outside SA to “minimise any possibility of fuel shortage”.

Former opposition parliamentarian in Zimbabwe and economist Eddie Cross told Moneyweb that he expects the events of last week to have a temporary impact on Zimbabwe. “It will affect supplies to domestic markets but no long-term damage.”

The narrowing crypto arbitrage gap is a ‘passing phase’

Written by Ciaran Ryan. Posted in Journalism

Reasons cited for the dwindling gap range from the Africrypt ‘hack’ to the general slump in crypto prices. From Moneyweb.

Crypto prices in SA are likely to remain at a premium as long as exchange control regulations that limit their supply into the country are in place. Image: AdobeStock
Crypto prices in SA are likely to remain at a premium as long as exchange control regulations that limit their supply into the country are in place. Image: AdobeStock

There’s no doubt that crypto arbitrage has become a booming business in SA, attracting a growing number of providers.

It involves exploiting differences in crypto prices on different exchanges. For example, bitcoin can currently be bought on overseas exchanges at about at 2.7% less than on SA exchanges.

This is known as the crypto arbitrage gap or premium, and it varies considerably depending on supply and demand. Back in 2017, the ‘arb gap’ reached as high as 30% at times – meaning you could make a 30% profit buying bitcoin abroad and selling it on a local exchange. That gap has reduced to around 1-3% in recent weeks, an even went negative for a brief period – meaning it was cheaper to buy bitcoin in SA than abroad.

Read: Sars puts a crimp in crypto arbitrage

Moneyweb reached out to crypto arbitrage providers to explain what has happened to the ‘arb gap’ and whether the recent narrowing in price differences is permanent or a passing phase. All agree: it’s a passing phase.

Farzam Ehsani, CEO of crypto exchange VALR:

The SA crypto premium has narrowed over the last few weeks but this is something we have seen before. Recently the arbitrage gap has been at around 2% or less and on some days even negative – meaning that buying crypto is actually cheaper in SA than other parts of the world. However, the arbitrage gap has always oscillated. Earlier this year it was at the same levels as today before swinging back up to the 5% level. We’ve served several hundred clients through our VALR Arbitrage product over the last few months and only execute the trades during favourable market conditions.

Exchange control regulations in SA limit the supply of bitcoin into the country and as long as these regulations last I think we’ll always see some sort of a premium to crypto prices in SA.

We’ve found that even at these arbitrage levels our VALR Arbitrage clients are happy as they can monetise their own exchange control allowances which is literally infinitely better than not taking advantage of the arbitrage at all. And through our referral programme, clients can earn a 10% commission on VALR’s fees for all their referrals as well which is a great enhancement on their arbitrage gains.

Andrew Droussiotis, co-founder of BitInvest:

The arb gap is actually back. It has been above 3% most of [at times] last week so for our company as long as it stays in this bracket we will be trading again.

This has happened many times before and will always happen but I believe that until crypto has been regulated by our government there will always be arbitrage gaps.

There are a few factors that cause this gap: exchange rates, the price of bitcoin, and the volume of bitcoin [and cryptos in general] being bought and sold.

Chris Harmse, head of global trading at Coindirect:

We have seen the crypto arbitrage gross premium trend lower over the last few months, which has happened before and can remain low for long periods. Using a cake analogy, the arb premium is not dissimilar: lots of things go into it, but many are not identifiable.

Outside of the structural reasons (such as exchange controls, and the fact that only retail clients can do it), a couple of things drive the premium in my view:

  1. The level of retail participation in and bullishness on cryptos generally; more interest in cryptos drives the demand in SA, and given the ring-fenced nature of SA liquidity pools, this affects the premium as more rands chase fewer crypto assets.
  2. Forex and crypto volatility; higher volumes drive better arbitrage opportunities (but frustratingly that relationship doesn’t always hold).
  3. The size of the volumes doing crypto arbitrage has increased competition and this is definitely having an effect as each spike in the arb premium is quickly hammered by lots of capital waiting in the wings, ready to pounce.

It’s clear that lower arb premiums are probably here to stay but structural issues (such as exchange controls) will keep the arb open to some degree.

Crypto arbitrage will probably remain profitable, but it is important to hedge one’s forex exposure, given the lower gross premium and hence lower expected profitability on each arbitrage trade.

Lloyd Brown, head of emerging markets at Easy Crypto:

When Easy Crypto started in New Zealand in 2017, it was originally an arbitrage platform. As the markets have matured over the last four years we have seen the arbitrage opportunities reduce. This has been due to more liquidity in the market and more fiat on and off ramps, enabling more efficient market dynamics.

I expect the arbitrage opportunity to further reduce with time, except for those countries and currencies with limited liquidity options.

Once regulations are introduced which provide an SA Reserve Bank balance of payment code to remit funds offshore for purchasing digital currencies, I would expect the arbitrage gap for South Africa to reduce to almost zero.

Jon Ovadia, CEO of Ovex:

We’ve been through similar periods in the past when the arbitrage premium virtually disappeared for weeks and even months. There was a long period in 2018, for example, when the arbitrage premium ranged between zero and about 1% and 2%. The arbitrage premium will return. It always does in countries like South Africa that have exchange controls. We’re always going to pay a premium for internationally-traded assets like bitcoin and stablecoins like True USD (TUSD).

We believe the Africrypt hack, if that’s what it was, has dissuaded a number of people from participating in crypto arbitrage in the last month, and we think the extent of this hack is way overstated – and that is putting people off cryptos in general, and crypto arbitrage specifically. That said, we do expect the arb premium to widen, as it has always done in the past.

The key determinant of the arbitrage premium for bitcoin is supply and demand, and we’ve seen prices of cryptos such as bitcoin drop roughly 50% since April. This is a key contributor to the narrowing arb premium.

When volatility returns to the market, the arbitrage premium widens. And as long as we have exchange controls that place a limit on South Africans’ ability to acquire foreign exchange with which to purchase internationally-traded assets like bitcoin, we are going to have opportunities to make profits from crypto assets.

Sars puts a crimp in crypto arbitrage

Written by Ciaran Ryan. Posted in Journalism

By requiring approval for each trade in terms of the foreign investment allowance. From Moneyweb.

The change means crypto arbitrage trades can no longer be conducted on a daily basis. Image: AdobeStock
The change means crypto arbitrage trades can no longer be conducted on a daily basis. Image: AdobeStock

The South African Revenue Service (Sars) has made it more difficult for taxpayers to get approval on crypto arbitrage trades using their R10 million a year foreign investment allowance (FIA).

Crypto arbitrage has become a popular way for South Africans to profit from differences in the prices of crypto assets on local and overseas exchanges. That price difference has ranged from about zero to 3% in recent months.

To participate, South Africans are required to purchase crypto assets such as bitcoin on overseas exchanges using either their special discretionary allowance (SDA) of R1 million a year, or their FIA of R10 million a year. They then purchase cryptos abroad and ship them to SA for sale at a higher price.

No permissions are required for the SDA, but South Africans making use of their R10 million FIA require tax clearance from Sars.

Delays

Most crypto arbitrage trades are in lots of R100 000 or R200 000, requiring multiple approvals from Sars.

Until recently, those approvals could be obtained by going online and hitting a PIN ‘refresh’ button on the Sars website once the initial FIA approval had been granted. Sars would issue a new PIN each time an approval was sought.

However, Sars recently updated its eFiling system, so that each time the ‘Refresh’ button is hit, the PIN remains unchanged.

In a message sent to clients this week, crypto exchange VALR says this means local banks now have no way of telling the difference between old and refreshed PINs that are “generated to send the same capital originally applied for in an FIA application to an international beneficiary”.

It adds: “The implication of this is that refreshed FIA pins will not be accepted as valid PINs for the purposes of arbitrage trading and an entirely new FIA application will need to be made in order to conduct further arbitrage trading under FIA once the original FIA pin is exhausted.”

VALR CEO Farzam Ehsani says this means crypto arbitrage trades can no longer be conducted on a daily basis, as was the case in the past.

Clients must wait for each FIA application to be approved before trading.

The main cost to clients is the extra time in waiting for these approvals.

‘Opportunity not diminished’

Jon Ovadia, CEO of cryptocurrency prime broker Ovex, says the change to the Sars eFiling system adds time delays, but does not diminish the crypto arbitrage opportunity.

“We never used the automatic PIN renewal system as we know Sars did not like this system [even though it made it available to the public],” he says.

Ovex made FIA applications manually, without making use of the automatic application renewal system previously allowed. This meant its applications were paper-based and slower, and fewer trades could be done in a week.

Ovadia says the change to the eFiling system does little to impact its arbitrage operations, adding: “We’ve been working with Sars on a better system that they are happy with.”