Crypto regulation has arrived in South Africa, with the Financial Sector Conduct Authority (FSCA) declaring that crypto assets are financial products.
Crypto service providers must apply for licences between 1 June and 20 November 2023 – or risk criminal conviction and a R10 million fine.
Anyone rendering crypto services or selling crypto assets must be licensed as financial service providers (FSPs).
Consumers can now report complaints to the Financial Advisory and Intermediary Services (Fais) Ombud.
Addressing the media on Thursday, FSCA Commissioner Unathi Kamlana said a key reason for the introduction of regulations was to protect consumers from the troubling number of crypto scams that have proliferated in recent years.
There has been aggressive marketing of cryptos by bad actors and controls are needed to improve the quality of advice being given to consumers. “The result of this is [a] very high risk of mis-selling [of cryptos]. There are wide-ranging allegations of fraud and scams. The case for regulatory intervention is well made,” said Kamlana.
Not legal tender
The definition of a crypto asset, gazetted by the FSCA on Wednesday 19 October, is one that uses cryptography and distributed ledger technology, and “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.”
This does not mean that crypto assets are legal tender, as this is a something that only the SA Reserve Bank (Sarb) can determine.
There’s a high bar for this [declaring cryptos legal tender],” said Kamlana.
“We are not calling them cryptocurrency, because in our view they do not meet the four criteria for currency or legal tender: being a store of value, unit of account, general acceptance and medium of exchange.”
Eugene du Toit, head of the regulatory frameworks department at the FSCA, said the regulations do not affect crypto derivatives, which are already subject to Financial Market Act and Fais Act.
“The space is currently unregulated and the objective is to protect financial customers better and result in a more responsible and sustainable crypto asset sector,” added Du Toit.
Also excluded from the regulations are mining node activities and node operators, as these are not offering services to the general public, and non-fungible tokens (NFTs), which are digital certificates of ownership of art and other properties.
“Purchasing digital art is not much different from purchasing a painting. They are excluded for now but will be monitored going forward,” said Du Toit.
‘Honesty and integrity’ required
Crypto companies have been given until November 2023 to apply for FSP licences, which is sufficient time for the industry to transition to the new arrangements.
This means they must immediately comply with the Fais General Code of Conduct relating to honesty and integrity, and they must be in good standing. They are also expected to render financial services “honestly, fairly and with due skill, care and diligence.”
The new regulations must be read in conjunction with other statutes and regulations, such as the SA Reserve Bank rules on the export of capital, and the annual limits placed on South Africans investing abroad. Similarly, as mentioned above, crypto derivatives are covered by the Financial Markets Act.
Cryptos are still prohibited for retirement and pension funds, which are covered by Regulation 28 of the Pension Funds Act.
The level of protection for crypto investors is now the same as for unit trusts and other financial products.
“This declaration means we can clamp down on scams in a more significant way,” said Kamlana. When it comes to crypto scams, this is difficult to regulate or police. “We will still struggle to provide protection [for] people who fall for schemes where people are promised that they will double their money in a matter of weeks.”
Charl Geel, head of anti-money laundering and counter-terrorism financing at the FSCA, said the crypto declaration is a positive step from SA’s point of view and should ameliorate the threat of greylisting by the Financial Action Task Force’s (FATF), which could lead to disinvestment due to the perceived risk of dealing with SA.
Fais is quite general in nature, and further regulations are under consideration to better protect consumers. This may mean moving cryptos outside of the Fais Act at some point in the future.
These include regulating stablecoins and crypto assets that resemble securities: such as security tokens (such as fractional ownership of shares, property or art, issued in token form). Also under consideration are investments by financial institutions into crypto assets, adopting a holistic approach to crypto regulation through the Conduct of Financial Institutions Bill, and possible regulatory and supervisory guidance under the FSCA.