• A UCT professor believes an investment in cryptocurrencies is probably the biggest financial risk South African investors can take at the moment.
  • He believes the market is being manipulated, and new regulation could lead to the collapse of cryptocurrencies.
  • Cryptocurrencies are suspected of being used for illicit activity, including funding terrorist organisations.

Investing in cryptocurrencies is probably the biggest financial risk South African investors can take at the moment, says professor Co-Pierre Georg. Georg lectures in finance at the University of Cape Town and is director of the university's Financial Innovation Lab.

Cryptocurrencies are electronic currencies that are transferred directly from person to person, without going through a bank. Thousands of computers across the world keep track of cryptocurrency ownership and payments. 

Cryptocurrencies can be created by highly powered computers solving a series of riddles, which requires a considerable amount of computing power.

The value of cryptocurrencies is determined by demand - which means the buying or selling of it on the internet can lead to massive fluctuations in values. 

Georg said the risks of cryptocurrencies for investors currently far outweighs the benefits.

“Market prices are manipulated and it is completely unclear in which way regulation will evolve in the coming years,” Georg told Business Insider South Africa.

He said that additional regulatory scrutiny, in particular in China and the US, will lead to substantial price pressure and the failure of many, even large cryptocurrencies like Ethereum and Bitcoin.

“Rather than putting their money in speculative magic beans, consumers should learn more about the technology behind it.”

The South African Reserve Bank recently released a consultation paper to start the regulation of cryptocurrencies in South Africa. The authorities want to force financial providers to provide the identities of people holding cryptocurrency. 

Using cryptocurrencies for illicit trade 

Professor Justine Olawande Daramola, a lecturer at the Cape Peninsula University of Technology’s department of information technology, said the ability of cryptocurrencies to hide the identities of individuals involved in transactions makes it attractive to criminals.

“Since it is possible for two entities to transfer cryptocurrency to one another under a secure, authenticated, and anonymous framework that does not involve a third party, it is extremely difficult for police to trace such transactions in order to establish a basis for illegality or otherwise,” Daramola told Business Insider South Africa.

“Anecdotal evidence points to the fact that cryptocurrencies have been used to perpetuate trans-border money laundering, funding of terrorist operations, and growth of illicit drug transactions through the Darknet.”

She said a well-known case is the Silk Road, which is an online black market for selling illicit drugs.

Daramola, however, believes the security of cryptocurrencies will improve as soon as regulatory laws come into effect which better equip countries and legal entities to combat illegal activity.

For more, go to Business Insider South Africa.

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