A smorgasbord of crypto asset regulation
The decision by South Africa’s financial sector regulators to bring crypto assets into the regulatory fold means that financial services providers (FSPs) will soon have to update their licenses before advising clients on the digital asset class. And at first glance, it seems that keeping up with the complex and continuously evolving crypto assets regulatory environment will be as difficult as staying ahead of the latest developments in cryptocurrencies, crypto exchanges and non-fungible tokens, to name a few.
An introduction to crypto asset regulation
Our latest ‘schooling’ on advice-giving in the crypto assets universe was courtesy an hour-long webinar offered under the banner: FSCA Crypto Asset Regulations Unpacked. “Join me as we unpack the regulations that have come out pertaining to crypto assets,” invited Gerry Grispos, Senior Compliance Officer at Compli-Serve SA, as he promised to ‘tell all’ on the recent regulations plus offer some suggestions on important next steps to ensure compliance. What followed was a fascinating journey through regulatory circulars and notices, and a reminder to all financial advice professionals to closely monitor the regulator’s various communication channels to stay abreast of matters.
It is not difficult to make a case for crypto asset regulation as hardly a day goes by without some or other crypto asset related scam making the headlines. Case in point South Africa’s recent international crypto asset ‘shaming’ on the back of the spectacular implosion of bitcoin-based Mirror Trading International (MTI). Towards the end of April 2023, Reuters reported on the MTI matter under the banner ‘US court orders South African firm’s CEO to pay USD3.4 billion for bitcoin fraud’, though this writer reckons you might take the quantum of the ‘award’ with a pinch of salt… The bottom line is that crypto asset regulation is inevitable given the exponential increase in the provision and utilisation of these assets domestically.
Regulatory tweaks ongoing
The decision to include crypto assets as a financial product under the Financial Advisory and Intermediary Services (FAIS) Act will lead to plenty of regulatory tweaks. And the Financial Sector Conduct Authority (FSCA) has already issued a number of communications in this regard, including General Notice 1350 of 2022; FSCA Communication 30 of 2022; FAIS Notice 90 of 2022; and FAIS Notices 24,25 and 29 of 2023. Grispos set about explaining the key impacts of these regulatory ‘moves’ with specific references to 1 June 2023, which is an important date for FSPs that offer crypto asset products or services, or advise clients on the asset class.
Let us start at the beginning. Crypto assets were declared as ‘financial products’ under section 1 of the Financial Advisory and Intermediary Services (FAIS) Act on 19 October 2022. More specifically, a crypto asset was defined as a digital representation of value that: is not issued by a central bank but is capable of being traded, transferred, or stored electronically by natural and legal persons for payment, investment, and other forms of utility; applies cryptographic techniques; and uses distributed ledger technology. “Most of this audience knows what crypto assets are; but for those who are new to the game, you cannot see it, you cannot touch it and you cannot smell it,” Grispos explained. A crypto asset is a digital representation of value or investment or form of payment that is not backed by a bank, government or other institution. It is also, from November last year, a financial product that will ‘bleed’ through into all aspects of financial advice and financial advice regulation.
FSCA Communication 30 of 2022 contained the details of the declaration of crypto assets as a financial product, including the necessary exemptions from the FAIS Act for existing crypto asset providers. FAnews readers should know by now that section 7(1) of the FAIS Act requires FSPs to be authorised and licensed for all financial products that they give advice on. “Existing providers could continue giving advice on crypto arbitrage or crypto fund of funds [or other crypto-related activities] until 1 June 2023,” Grispos said. “There were also some exemptions from the General Code of Conduct, particularly in relation to key individuals (KIs) and authorised representatives (Reps) and the qualifications they needed”.
Explaining the section 7(1) exemption
To reiterate, before 1 June 2023, persons rendering financial services in relation to crypto assets were exempted from section 7(1) of the FAIS Act. In other words, you did not need to register as a FSP with the FSCA! Post 1 June 2023, you will have to be a registered FSP and apply for the relevant FSP licence. PS, Grispos assured the audience that both existing and new FSPs had from 1 June until 30 November to comply with any licensing or registration requirements. Once the application and paperwork are submitted, the providers can continue business pending final confirmations from the FSCA. FAIS Notices 24 and 25 contain more information on these crypto asset licensing process and qualification requirements.
FAIS Notice 24 lists the qualifications required for FSPs, KIs and representatives. “If you want to be a KI or Rep in respect of crypto assets, there are certain qualifications that are required, [and] from what I have seen, the list is similar to what we would normally follow with a non-crypto asset application,” Grispos said. Essentially, FAIS Notice 24 stipulates that KIs and Reps need to have some form of financial qualification to get the crypto assets licence on their profile. This notice also added an additional six crypto-specific CPD hours to those licensed for crypto assets. FAIS Notice 25, meanwhile, exempts crypto asset providers from section 13 of the General Code of Conduct. Grispos was surprised that providers would not have to take out Professional Indemnity (PI) cover, but hazarded a guess that cover for this emerging asset class was simply uneconomical.
Is this the most important FAIS Notice for 2023?
And that leaves the 60-page FAIS Notice 29, which was described as perhaps the most important FAIS Notice in the first half of 2023. This FAIS Notice goes through the application process for crypto asset FSPs and introduces two new financial product sub-categories for crypto assets: Category 1.27 for Cat I advisers and Category 2.21 for Cat II advisers. The notice documents two sets of supporting documents, one for a new provider, and the other for existing FSPs who wish to add crypto assets to their existing licence. PS, crypto asset miners; node operators; and non-fungible tokens are currently excluded from the FAIS registration process.
To conclude, the webinar focused on some Anti-Money Laundering and Combating of the Financing of Terrorism (AML-CFT) concerns. “Crypto asset providers have been brought under the Financial Intelligence Centre (FIC) Act under schedule 1, where they are listed as accountable institutions,” Grispos said. An FSP licensed for crypto assets would therefore be considered an accountable institution per the FIC Act, if not already so. This writer closes by echoing the Compli-Serve warning: The due diligence required [from FSPs] is becoming a lot more stressful and strenuous.
Writer’s thoughts:
Local financial advisers, financial planners or financial advice practices who wish to offer financial services for crypto assets will have to do plenty of after-hours reading to ensure they are fully compliant… Do you intend adding sub-category 1.27 or 2.21 to your current FAIS license? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.
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