Licence windfall as FSCA catches up with Crypto Asset FSPs
Financial services providers (FSPs) that operate in the crypto asset space will soon have to join the growing queue of firms applying for FAIS licences issued by the Financial Sector Conduct Authority (FSCA). This follows a 19 October 2022 ‘Declaration of a crypto asset as a financial product under the Financial Advisory and Intermediary Services (FAIS) Act’ announcement, published in Government Gazette: General Notice 1350 of 2022. And that’s quite a mouthful for what turns out to be a one-page decree.
The regulator has spoken
The declaration, which followed almost a year after a draft version was published, back in November 2021, offers a broad definition of a crypto asset as “a digital representation of value that- (a) is not issued by a central bank but is capable of being traded, transferred or stored electronically by natural and legal persons for the purpose of payment, investment and other forms of utility; (b) applies cryptographic techniques; and (c) uses distributed ledger technology”. It is important to note that the declaration does not mean that crypto assets will be seen as a form of legal tender. Additionally, the declaration does not affect financial services in relation to crypto assets derivatives, which are already subject to provisions in both the Financial Markets Act (FMA) and FAIS Act.
The regulatory intervention has been a long time coming and was informed, initially by work by the Intergovernmental Fintech Working Group (IFWG) in 2016, and more recently by the Crypto Assets Regulatory Working Group (CARWG), which published a ‘Consultation Paper on Crypto Assets’ and a ‘Draft Position Paper on Crypto Assets’ in recent years. The resulting crypto asset regulatory framework is built around six central principles that were developed from these interactions, and are described in more detail in a recent FAnews piece titled ‘Calls for a cautious approach to crypto asset investing…’
A ‘new’ licensing and regulatory regime
In a media round table hosted by the FSCA, FSCA Commissioner Unathi Kamlana said that the declaration would introduce a licencing and regulatory regime for Crypto Asset FSPs (CAFSPs) in South Africa. “The case for regulatory intervention in the crypto assets space is well made; the approach that we advocate for is an all-encompassing and comprehensive approach to regulation,” he said, before shortlisting anti-money laundering (AFL); combating of the financing of terrorism (CMT); cross-border remittances; exchange control considerations; and market conduct risks as among the regulator’s main concerns in this area. So, what does the declaration mean for CAFSPs and financial consumers?
“Many of the use cases that have to do with crypto assets are financial in nature [and as such, we must proceed in line with] the principle of same activity, same risk, same regulation,” the Commissioner said. As such, CAFSPs will have to fall in line with other financial institutions by complying with the FAIS Act and its accompanying Codes, and being regulated on the basis of the financial activities they engage in. According to the FSCA, the declaration will have two specific outcomes for CAFSPs: first, they will have to comply with a FAIS licensing regime, and second, they will be subject to the financial services sector’s regulatory and supervisory regime.
On exemptions and transitional arrangements
Licensing must take place between 1 June 2023 and 30 November 2023, with further guidance on the process expected shortly. A general exemption from section 7(1) of the FAIS Act will apply for all CAFSPs, while firms involved in mining node activities; conducting business as node operators; or offering activities related to non-fungible tokens (NFTs) will be totally exempted from licensing requirements. But subsequent to 30 November 2023, normal licensing requirements will apply, meaning no licence, no business! Once licensed, CAFSPs will have to comply with all the requirements of the FAIS Act, subject to another general exemption.
Further comment on the proposed exemptions is warranted. First of all, CAFSPs will be exempted from section 7(1) of the FAIS Act via a general exemption that will be in place until end-November 2023. To qualify for this exemption, they must apply to be licensed within the time period already mentioned; meet the honesty and integrity and ‘good standing’ requirements in the regulations; and comply with section 2 of the General Code of Conduct by “rendering financial services honestly, fairly and with due skill, care and diligence, and in the interest of clients and the integrity of the financial services industry”.
The second draft exemption, which is out for public comment until December this year, is explained in a press release issued 19 October, in which the FSCA said: “This draft exemption proposes to exempt licensed CAFSPs and their key individuals and representatives from certain requirements of, amongst others, the General Code of Conduct for Authorised Financial Services Providers and their Representatives and the Determination of Fit and Proper Requirements, 2017”.
Beware complex, risky and volatile cryptos
Financial consumers, meanwhile, will benefit from the protections that the regulatory framework introduces, with some caveats. “There are limitations to what regulators can deliver in terms of consumer protection, and financial consumers need to be mindful of the risks that they face from this complex, risky and volatile asset class,” warned Kamlana. In this writer’s experience, regulation offers little protection for South Africa’s return-obsessed lay investors who tend to rush headlong into the crypto asset project (sic) offering the craziest profits, backed by the fanciest ‘bells and whistles’ social media marketing campaign. And unfortunately, those running these schemes often exist just outside of the regulator’s remit, escaping the regulatory oversight that applies to legitimate players.
Of course, this does not mean that regulators can rest easy. Kamlana noted that the global Financial Stability Board (FSB) recently published a paper with over 900 recommendations for crypto asset regulation. “There is agreement on the need to have effective regulatory powers and tools in the crypto asset space, and to apply the relevant general regulatory frameworks as appropriate, as well,” he concluded. “There must be a comprehensive approach to the regulation of crypto asset service providers with multiple functions … with the overarching principle of same activity, same risk, same regulation”. The FSCA has already identified five areas for future regulatory interventions in the crypto asset context.
Many more interventions to follow
Some of these initiatives, such as the proposal to offer regulatory and supervisory guidance, are aimed at assisting crypto asset institutions with navigating the inevitably complex compliance environment. Another proposal is for the conduct authority to implement tools “to promote understanding of the FSCA expectation and support good customer and market outcomes”. Aspects such as the regulatory treatment of stable coins and investments in crypto assets by firms in the collective investment schemes (CIS) and retirement fund industries will also get attention. Watch this space – FAnews will keep you posted as the crypto asset regulatory framework evolves.
Writer’s thoughts:
It is quite fascinating how the most complex and risky areas of financial markets are the last to fall under regulatory scrutiny. We are all for the inclusion of crypto assets as a financial product, but there are plenty of questions, including: Has the regulator added quickly enough to bring CAFSPs into the regulatory fold; and does the current intervention do enough to protect consumers from unethical crypto asset / fintech outfits? ? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
