Crypto could be trouble for popular South African savings schemes

South African banks have noticed an uptick in the growth of stokvels, with groups putting their money into cryptocurrency becoming a popular option, reports the Sunday Times.

Stokvels are a type of credit union or saving scheme where individuals contribute sums of money to a pool on a fixed basis, and members receive the lump sum on a rotational basis.

The purpose of these stokvels has evolved from funding funerals and buying groceries in bulk to travel funding and investments.

Standard Bank noted more than 15% growth in stokvel deposits over the past five years, with South Africa’s stokvel industry growing to R50 billion in value.

Other banks noticed similar growth, with FNB seeing a 15% growth in net stokvel deposits and ABSA seeing a 15% year-on-year growth in stokvel accounts.

However, a study by African Response found that tailored stokvel bank accounts were far less appealing to customers than buying into cryptocurrency or just stashing the cash “under the mattress.”

This presents all kinds of risks to investors.

Every four years, Bitcoin and other cryptocurrencies experience a mania that draws millions of people around the world who hope to earn big returns on surging token prices.

Like clockwork, many of these new investors, traders, and speculators learn the hard way what Bitcoin enthusiasts mean with the mantra, “Not your keys, not your coins.”

This is because many people buy cryptocurrencies without fully understanding the risks — especially the risks associated with custody.

During the last Bitcoin boom and bust phase between 2019 and 2022, people lost billions due to exchanges and yield account providers going bankrupt.

Most notable was the collapse of FTX, which was the third-largest cryptocurrency exchange by volume at the time and had over one million users.

Other notable platforms that went under include BlockFi and Celsius.

These services effectively acted as cryptocurrency custodians and operated as savings accounts, promising customers yields by lending their deposits.

Crypto brokerage Genesis is another famous example, as it provided similar interest-generating services to crypto platforms like Gemini and Luno.

Thankfully for Luno customers, the company ensured its clients didn’t lose any money due to Genesis’ bankruptcy. Gemini customers were not so lucky.

Until very recently, those who had used its Gemini Earn savings account had lost access to their funds. Earlier this year, Gemini announced that its customers would get all their deposited crypto back, but not the promised interest.

Although South African crypto asset providers weathered the fallout from these bankruptcies, one of the country’s oldest exchanges, Ice3x, folded in April 2021.

This was at the height of the last Bitcoin boom and unrelated to the collapse that started later that year.

Regardless, anyone who had funds on Ice3x when it went under is out of pocket and will have to file a claim with the liquidators if they hope to get anything back.

“Stick with what you know”

The report encourages stokvels to use the formal savings and investment market, echoing one of Warren Buffet’s principles about investing — keep to what understand.

It has also encouraged banks to diversify their offerings to remain appealing to customers.

For instance, FNB introduced a digital stokvel account with no monthly fee in 2020, which has helped customers save over R131 million in withdrawal fees.

Standard Bank also offers an added level of convenience by allowing customers to transfer their savings directly to Makro credit.

Makro said that although it is not a financial service provider, its Stokvel savings option offers a secure and fee-free alternative to help members avoid the risks associated with carrying large sums of cash during shopping trips.

The bulk retailer said it had noticed a growing demand for key grocery items such as flour, toiletries, and cleaning products.