Regulators to the left, regulators to the right…

07 May 2024 Gareth Stokes

If you watched the 2009 flick ‘The Blind Side’ then you should be familiar with the poem ‘The Charge of the Light Brigade’ by Alfred, Lord Tennyson. The third stanza of the poem reads ‘Cannon to right of them, Cannon to left of them, Cannon in front of them, Volleyed and thundered’ … the poem documents the plight of 670 hapless British Light Cavalry Brigade conscripts who charged into a much larger force of Russian soldiers during the Crimean War.

CASPs face mounting compliance burden

This writer was reminded of this rather unsavoury situation as he watched the growing regulatory regime applicable to crypto assets, Crypto Asset Service Providers (CASPs) and the cohort of financial advisers and intermediaries prepared to give advice on the emerging asset class. The poem, he mused, might be rewritten as: “FIC to the right of them, FSCA to the left of them, SARS in front of them, Volleyed and thundered’. But instead of cannons and cannon shells, the poem would mention directives, joint standards and regulations; and instead of cavalrymen and soldiers, CASPs and crypto asset investors. 

The FSCA has been hard at work ensuring that South Africa’s CASPs are appropriately licensed. In a recent communication, it confirmed a list of institutions currently-approved or licensed as CASPs under the Financial Advisory and Intermediary Services (FAIS) Act. The authority also took steps to address misleading statements circulating in the media that the list signified some sort of ‘ranking’ of domestic CASPs or that Bitcoin and other cryptocurrencies were, in fact, currencies. “For completeness, the FSCA wishes to clarify and confirm that it has, to date, approved a total of 75 institutions to be licensed as CASPs,” they wrote. 

The licensing process for CASPs commenced on 1 June 2023, and institutions that were rendering financial services relating to crypto assets were required to submit their licence applications by 30 November 2023. “The FSCA continues to receive and consider applications from new and existing CASPs [and has to date received] 374 licence applications; we will continue to provide regular updates as these applications are processed and approved,” they wrote. In other words, the eventual list of licensed asset providers will offer far more choice than the 75 ‘names’ just published. 

Limited powers, fully applied

The FSCA also took pains to explain its supervisory role insofar crypto assets. “Our licensing powers are limited to the authorisation and supervision of CASPs only insofar as they render financial services related to crypto assets as defined under the FAIS Act,” they wrote. The authority only supervises advice, intermediary and investment management services provided by the licenced institutions. The authority also reiterated that the licensing process did not constitute “the recognition of crypto assets as legal tender or cryptocurrency” before adding that the South African Reserve Bank (SARB) did not yet recognise crypto assets or cryptocurrencies as currency. 

Your writer was debating this very issue with one of his crypto asset speculator friends over the weekend. How, he asked, could crypto asset like Bitcoin or Ethereum be considered a currency if each transaction triggered an income tax event? Under existing income tax rules, you would have to keep track of each Bitcoin transaction, and record the gain or loss that occurred when you converted that Bitcoin into rand or dollar to fund same. And at the end of each tax year, you would have to present the South African Revenue Services (SARS) with the cumulated gain from all Bitcoin sales and pay income tax at your marginal rate. 

The above is per the writer’s understanding that ‘investments’ in crypto assets will be subject to income tax rather than capital gains tax (CGT) and that SARS is not likely to soften its stance on same. Early adopters of Bitcoin and other crypto assets also face another regulatory volley thanks to the ‘travel rule’ relating to cross-border crypto asset transfers, as set out in Directive 9, issued as a consultation document by the Financial Intelligence Centre (FIC). 

The draft directive sets out the institution’s response to recommendation 16 of the Financial Action Task Force (FATF), which is aimed at “ensuring that accountable institutions that provide or engage in activities of crypto asset transfers” follow a very specific set of rules. 

Your cross-border crypto asset transfer crib sheet

Directive 9 defines a ‘cross-border crypto asset transfer’ as “a transfer where either the ordering crypto asset service provider or the receiving crypto asset service provider is located outside the Republic of South Africa; and a ‘domestic crypto asset transfer’ as “a transfer where the ordering crypto asset service provider and receiving crypto asset service provider are both located in the Republic”. For FAnews readers, it describes an ‘intermediary CASP’ as “a CASP that receives and transmits crypto assets on behalf of an ordering CASP or beneficiary CASP or another intermediary CASP…” 

Reading this directive, and other crypto asset related regulation, we bet those freshly-licensed CASPs wished they had not bothered. Per paragraph 4 of the directive, ordering CASPs must share a bunch of the originator’s personal data with the receiving CASP. “An originator of a crypto asset transfer is the client of the ordering CASP, as contemplated in the FIC Act, for the purposes of the execution of the transfer,” reads paragraph 4.2. And the information so shared “must be obtained and verified in accordance with the FIC Act and the Risk Management and Compliance Programme that the ordering CASP is required to develop, document, maintain and implement”. 

The FIA wants the ordering CASP to share information about the crypto asset wallet of the originator; the name of the beneficiary or recipient of the crypto asset transfer; and the crypto asset wallet at the destination. Fortunately, the directive proposes a R5000,00 transaction ‘level’ for cross-border transactions, below which level the information sharing standards are somewhat ‘softer’. 

An ever-expanding compliance workload

The obligations of intermediary CASPs are set out in paragraph 5 of the directive, with paragraph 5.1 requiring you to “ensure that all originator and beneficiary information that pertains to a cross-border or domestic crypto asset transfer, is transmitted to the recipient crypto asset service provider, or another intermediary crypto asset service provider in a transaction chain, as the case may be”. 

Furthermore, per paragraph 5.2, you “must take reasonable measures to identify cross-border crypto asset transfers that lack the required information referred to in” various points in paragraph four. And of course, you are reminded of your ticket to play in the CASP space being to “develop, document, maintain and implement effective risk-based policies and procedures for determining when to execute, reject or suspend a cross-border crypto asset transfer that lack any of the required information; and the appropriate follow-up action that you will take in each instance where you executes, rejects or suspends a cross-border crypto asset transfer. 

Writer’s thoughts:

The first thought when scanning Directive 9 and other crypto asset-related regulation is that any promise of financial anonymity in these products is moot. Are you prepared to enter the crypto asset advice or provider disciplines given the ever-expanding compliance burden? Please comment below, interact with us on X at @fanews_online or email us your thoughts

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