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Regulating crypto-assets – it’s all about principles

17 June 2021 Richard Rattue, Managing Director of Compli-Serve SA

The recent announcement by the Intergovernmental Fintech Working Group (IFWG) sheds light on its position on regulating crypto-assets through a new position paper, and several principles are at the core of the objectives of the IFWG.

The inherent risks of investing in crypto-assets are being addressed differently
The regulator will bring crypto-assets into the South African regulatory fold in ‘a phased and structured manner’, according to the paper (announced on 11 June 2021). The risks associated with this volatile asset class stand. Regardless of the status of regulation, investing in crypto-assets is risky and there is a high chance of financial loss, even though there is also a high chance of reward through great returns. Keep in mind that liquidity in the market very much matters when it comes to selling out, provided you have chosen a profitable option, so timing becomes another crucial element of getting crypto-asset investing right, and earning a profit safely.

The principles that count
The IFWG outlines six key principles as below.

1. Crypto-assets must be regulated appropriately.
2. An activities-based perspective must be maintained.
3. A risk-based approach to regulation crypto-assets must be applied.
4. The IFWG encourages a truly collaborative approach to crypto-asset regulation.
5. Digital and financial literacy must increase so consumers are aware of the inherent risks of crypto-assets.
6. A continuously proactive and dynamic approach must be taken to monitoring and maintaining the crypto marketplace, particularly in line with international best practice in real time. This could include setting up industry bodies, as an example.

The position paper seeks to provide a roadmap towards a regulatory framework that can apply to crypto-assets; that will no doubt evolve and be refined as the crypto marketplace unfolds and develops.

Recommendations on the way to regulation
The FSCA’s responsibility for market conduct supervision is to extend into the crypto-asset space, but while the IFWG has made 25 suggestions within this roadmap so far to get closer to regulation, the paper reiterates that the IFWG does not endorse this asset class. Their goal is to reduce risk through regulation and through the paper, their recommendations can be broken down into three key focus areas. These are anti-money laundering and dealing with the financing of terrorism, cross-border financial flows and the application of financial sector laws.

Current exchange control regulations do not explicitly include crypto-assets but the SARB’s Financial Surveillance Department (FinSurv) is certainly taking notice, particularly with daily crypto asset trading values in South Africa exceeding the R2 billion mark at the beginning of this year. The position paper states that ‘by gradually bringing crypto-assets into the South African regulatory purview, the most pertinent and immediate risks that have been identified around AML, cross-border financial flows and consumer protection will be addressed.’ Relevant developments through bodies like the Basel Committee on Banking Supervision have further supported the drive to regulate crypto-assets.

Crypto assets remain highly speculative at this time, and it is unlikely that this will change anytime soon, however, the regulatory wheels are turning and trying to bring this new asset class into the mainstream of the river.

For consumers who cannot wait for regulatory protection, the rules of old apply. Understanding and noting the risks and not simply focussing on the potential reward can be the first step to avoiding a crypto scam. Undertaking an appropriate due diligence remains the best start to a good crypto-asset investment decision.

This asset class is not to be ignored, but rather to be monitored closely if it piques your interest. It’s a positive step that regulation has taken note of the trend towards this exciting asset class, with more protection for investors not too distant on the horizon. Compliance officers should also look to upskilling in preparation for new compliance requirements that are sure to arise.

Quick Polls

QUESTION

The second draft amendments to Regulation 28 will allow retirement funds to allocate up to 45% of their assets to SA infrastructure, with a further 10% for rest of Africa; but the equity & offshore caps remain unchanged. What are your thoughts on the proposal?

ANSWER

Infrastructure? You mean cash returns with higher risk!?!
Infrastructure cap is way too high
Offshore limit still needs to be raised
Who cares… Reg 28 does not apply to discretionary savings
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