Don’t unbank the crypto industry, says the regulator

On 15 August 2022, Fundi Tshazibana, CEO of the Prudential Authority (PA), sent out a Guidance Note to all the financial institutions in South Africa. As the main regulator of all banks in the country, the PA note appeared to be saying – in my own words – “It’s time to bank crypto companies.”

At first glance, the note does not appear to have anything to do with crypto, because it’s entitled “Supervisory guidelines for matters related to the prevention of unlawful activities”.

The first line of the Executive Summary says the purpose of the note is to inform banks of practices related to the implementation of anti-money laundering and counter-financing of terrorism (AML/CFT) controls in relation to crypto assets (CAs) and crypto asset service providers (CASPs).

The remainder of the document refers to the policies and procedures banks should have in place and ends by saying that when the PA thinks a bank’s “policies, processes and procedures relating to its risk assessment are inadequate”, it may “require [that] bank to strengthen” these.

It also briefly reviews the Financial Action Task Force (FATF) guidance on risk-based approaches in banks and cites FATF Recommendation 15, which includes “identifying and assessing” AML/CFT risks in “new or developing technologies”.

The FATF, of course, is the intergovernmental organisation that was created to develop policies to combat money laundering and terrorism financing, and South Africa is one of its 39 members.

After references to applicable regulations, the Note states: “The PA is aware that certain banks in South Africa have previously opted to terminate with CASPs or discontinued banking services to CASPs.” To my knowledge, this is the first time the South African Reserve Bank, where the PA is housed, has officially acknowledged this occurrence.

It is one that happened to VALR.com. FNB unbanked us and other major crypto companies headquartered in South Africa back in 2019/2020, and we all moved across to other banking partners in the country.

The Note then adds the following, which we have argued for some time already: “Risk assessment does not necessarily imply that institutions should seek to avoid risk entirely (also referred to in banking as ‘de-risking’), for example, through wholesale termination of client relationships that may include CASPs.”

It continues: “Derisking may pose a threat to financial integrity … as it could potentially create opacity in … financial conduct, and it eliminates the possibility of treating money laundering//terrorism financing/proliferation financing (ML/TF/PF) risks.”

To me, this is the gentlest way a regulator could say to its banks: “Don’t unbank the crypto industry!”

The PA still leaves space for banks to act with discretion in this regard, by stating: “If the risk posed by a particular business or customer is too great to manage successfully, the decision to de-risk should only be made after careful due diligence and consideration.”

The remaining portion of the Note gives guidance linked to the treatment of CASPs and crypto assets “based on the application of a thorough risk-based approach”. The PA effectively guides banks to “evidence an understanding of what elements are driving or reducing ML/TF/PF risk within CASPs and crypto assets” versus having a blanket ban on banking crypto companies.

The PA states that bank policies, procedures and controls are “required to be tailored and [to] cater for the varying levels of risk that CASPs and CAs, as well as threats by customers engaging in such activity, may pose.

The Note ends with the PA asking the banks to make the Guidance Note available to its independent auditors, and requires the CEOs and said auditors of the institutions (aka the banks) to return a signed copy of an “acknowledgment of receipt”.

In my view, this is a great step forward for crypto, for South Africa and for the banks themselves. It’s particularly helpful for companies in the crypto space that are responsibly striving to protect products that serve people.

Risks and bad actors obviously still remain in the crypto industry (as they do elsewhere), and banks won’t immediately start banking all crypto companies. But this Note takes South Africa in the right direction in allowing new technologies and innovation to flourish in the country.

We still have a way to go with the entire crypto regulatory framework in South Africa, and many are working on this from within the regulators and the industry at large. Challenges to the regulatory framework still exist, but this Guidance Note gives me hope for South Africa.

Start-ups are hard. Crypto start-ups are even harder, particularly when a basic thing such as having a bank account is not a given. Well done to the SARB – this is an important and much-needed statement for the country.

To read the full Guidance Note, click here