If you buy and sell Bitcoin and Ethereum like there’s no tomorrow, or if you offer a cryptocurrency or crypto asset exchange, platform or service, then what follows will be of interest to you. You see, the crypto news that South African financial institutions and investors have long been waiting for has finally been announced, by its publication in the Government Gazette: General Notice 1350 of 2022. In this notice, the Financial Sector Conduct Authority (FSCA) confirms that crypto assets will be considered a financial product under the Financial Advisory and Intermediary Services (FAIS) Act, effective from 19 October 2022, and regulated accordingly.
Hark at this glorious and long-winded title
You will love the matter-of-fact approach taken by the regulator in announcing the change, as they christened the notice: ‘The declaration of a crypto asset as a financial product under the Financial Advisory and Intermediary Services Act’. This article will henceforth simply refer to ‘the declaration’. Assuming you get past the rather lengthy descriptor, you will find the authority’s definition of crypto asset to be quite enlightening. A crypto asset, they say, is “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 the purpose of payment, investment and other forms of utility; applies cryptographic techniques; and uses distributed ledger technology”.
This writer attended a Media Round Table hosted by the FSCA immediately following the declaration, in which FSCA Commissioner Unathi Kamlana shared the major developments insofar as crypto asset regulation, the principles that apply to the regulation of crypto asset financial service providers (CAFSPs) and the implications of the declaration on both CAFSPs and financial consumers. “You cannot have a situation where you have entities operating outside the regulatory framework, it is not ideal, and certainly not in the public interest,” said Kamlana. From a layperson’s perspective, the hope is that the formalisation of the asset class through regulation will contribute to the widespread adoption of block chain, cryptocurrencies and distributed ledger technologies, among others. And that this, in turn, will contribute to the development of financial products and services that increase access to financial services and lower the cost of financial transactions for all.
Pay attention, six more principles to adhere to
The crypto asset regulatory framework is built around six central principles that developed from the Crypto Assets Regulatory Working Group (CARWG) ‘Consultation Paper on Crypto Assets’ and ‘Draft Position Paper on Crypto Assets’. Principle one requires that CAFSPs be regulated appropriately. Next, per principles two through four, regulators must apply an activities-based approach; apply proportional regulations commensurate with the risks posed; and maintain a collaborative and joint approach to regulation. Principle five requires the proactive monitoring of the crypto assets market while principle six deals with consumer education, through increased digital and digital financial literacy. These principles were also considered in light of the implementation of South Africa’s anti-money laundering (AML) and combatting the financing of terrorism (CFT) framework.
This writer had a chance to ask the Commissioner whether the declaration would possibly help South Africa to convince the global Financial Action Task Force (FATF) not to grey list the country when the FATF decides on the matter in February 2023. “As I have mentioned earlier, there was a specific finding that South Africa did not have any licensing regime for virtual asset service providers; and then certainly no other regulatory requirements from an AML/CFT perspective,” said Kamlana. “It is important to mention the motivation for the determination was not just to comply with the issues around potential grey listing, but we do think that on that specific finding, and the recommendation by FATF, the determination does go a long way towards addressing that concern”.
Still not legal tender, for now
The most important snippet shared by the Commissioner and his team during the media briefing was that the declaration of crypto assets as a financial product “does not mean that crypto assets were seen as a form of legal tender”. Also important, the declaration did not affect financial services in relation to crypto assets derivatives, which were already subject to provisions in both the Financial Markets Act (FMA) and FAIS Act. The declaration means that crypto assets, as broadly defined earlier in this piece, become a financial product that will be regulated in the same way as any other financial product under the FAIS Act. And, per the FSCA, the overarching aim is to “protect financial consumers while supporting a responsible and sustainable crypto asset sector”.
As for CAFSPs, they are in for close scrutiny. First and foremost, the declaration requires that they approach the conduct authority for a FAIS license, which is a requirement in the FAIS Act. This application will have to be made within the prescribed period of 1 June 2023 and 30 November 2023. Aside from the transitional period which will allow existing firms enough time to comply, the FSCA also announced a general exemption from section 7 of the FAIS Act for “certain crypto asset related activities”. Most notably, these include mining node activities and node operators as well as activities related to non-fungible tokens (NFTs).
FAIS compliance, with exemptions aplenty
Licensed entities will then have to comply with all the requirement of the FAIS Act, or face enforcement action. Fortunately, further exemptions apply here. In a press release issued 19 October, the FSCA said: “The 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”.
There is a huge need for financial education to bring South African consumers up-to-speed on crypto assets. “Educating consumers on crypto assets is critical to ensure that they are in a position to make informed decisions surrounding investments in this asset class,” noted the FSCA, during its round table presentation, adding that they would soon initiate a crypto asset focussed consumer education campaign. But the talk also included an important warning to consumers to handle crypto assets with care. The authority said that there were many risks inherent in this asset class due to its complexity and the volatility of underlying instruments…
More interventions in the pipeline
The FSCA has identified five areas for future regulatory interventions in the crypto asset context. 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. One 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 investment in crypto assets by firms in the collective investment schemes (CIS) and retirement fund industries will also get attention.
Whatever the regulators do, you can be sure South Africa’s return-obsessed lay investors will rush headlong into the crypto asset project with the fanciest ‘bells and whistles’ social media marketing campaign. Sadly, as is often the case, these providers will exist just outside of the regulatory remit – and thus escape the regulatory oversight that applies to the legitimate players. How else to end this piece than with the age-old “buyer beware”. If something sounds too good to be true, then it usually is!
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