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Crypto licence approvals: What you should know

23 October 2024 Alwie Carstens, Masthead Compliance Officer
Alwie Carstens

Alwie Carstens

In April, the Financial Sector Conduct Authority (FSCA) approved licences for 75 crypto asset service providers (CASPs), marking a new era of heightened regulatory oversight in the realm of cryptocurrency.

Masthead assisted several customers with their licence applications, some of which were approved while others are still busy with the pre-licencing inspections or awaiting approval, and through this experience, some valuable lessons emerged. In this article, we explore key takeaways and address the common queries we’ve received about the application process.

Background on crypto regulation
On 19 October 2022, the FSCA designated crypto assets as financial products under the Financial Advisory and Intermediary Services (FAIS) Act. This was seen as a crucial interim measure in safeguarding consumers against the growing risks associated with crypto assets until broader regulatory developments, for example the Conduct of Financial Institutions (COFI) Bill, are finalised.

In addition, the Financial Action Task Force (FATF), which placed South Africa on its greylist in February last year, requires members to regulate “virtual asset service providers”, and the country will have to comply with the FATF’s crypto standards if it wants to exit the greylist.

What are crypto assets? The FSCA defines it as digital representations of value that are not issued by a central bank and are utilised for various purposes like purchasing, investing and more. These assets also employ cryptographic techniques for security and leverage distributed ledger technology.

In line with FSCA’s declaration, anyone providing financial services related to crypto assets must be authorised under the FAIS Act or act as a Representative of an authorised financial service provider (FSP) and adhere to FAIS Act requirements. Providing such services without a licence can result in substantial penalties: up to R10 million in fines or imprisonment for up to 10 years.

The licencing process started in June last year, with a deadline for applications set on 30 November 2023. CASPs not licenced as FSPs had to submit a full FSP licence application, whereas existing FSPs had to apply to include crypto as a category under their existing licences. The FSCA stated in April that they had received 374 licence applications, approving 75 thus far, and that they would continue to review and process remaining applications providing regular updates on their progress.

Key takeaways for applicants:
The regulator is taking a very strict approach to issuing crypto licences, so applicants must be thoroughly prepared. Detailed motivations and requirements are necessary, and applicants must convincingly demonstrate their understanding of the crypto sector and its risks. Additionally, there is some confusion regarding the application deadline.

Applicants should take note of the following:
• Applications are ongoing: The FSCA initially allowed CASPs to continue operations without a licence if they submitted their applications by 30 November 2023. These applicants were exempt from the licensing requirement until their application was either approved or declined. What does this mean for CASPs who missed the deadline? They can still apply, but the licensing exemption no longer stands. They will have to wait for approval before resuming any crypto-related financial services.
• Detailed proof of experience is crucial: Many find it challenging to meet the experience requirement. Applicants must provide sufficient evidence of their experience in the crypto sector. This includes a motivation letter from the applicant, detailing the experience in the crypto category, showcasing their relevant skills, knowledge and hands-on experience in dealing with crypto assets. Practical experience in areas like crypto exchanges, client relationship and crypto asset brokerages is essential.
• You need a detailed business plan: Your application must include a thorough business plan detailing the crypto services you intend to offer, and the FSCA may require additional policies and procedures not listed in the FSP 7 form.
• Competence requirements: Key Individuals and Representatives must comply with the FAIS Fit and Proper Requirements, including competency requirements. While existing FSPs are familiar with these regulations, new applicants, such as CASPs not previously licenced as FSPs, need to understand and meet the competency requirements. Applicants must ensure that their Key Individual possesses relevant crypto experience and hold a FSCA-approved qualification. Additionally, Key Individuals need to pass the RE1 (Regulatory Examination), but those applying specifically for crypto licences have until the end of the year to complete their RE1.
• Unlisted qualifications: Some applicants possess qualifications that are not on the FSCA’s approved list of qualifications. However, many are unaware that you can apply to have your qualification added to the list if it meets certain criteria – a process with which Masthead can assist applicants.

A new era in crypto regulation
The issuance of the first crypto licences by the FSCA marks a significant milestone in the financial services sector. This new regulatory clarity provides CASPs with a structured framework to operate within, ensuring better consumer protection against crypto scams.

For prospective licence applicants, thorough preparation is key. The FSCA is adopting a rigorous stance on issuing these licences, so applicants looking to offer crypto-related financial services must diligently meet all application requirements to ensure approval.

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