Now that the Financial Sector Conduct Authority (FSCA) has declared crypto assets as financial products, this emerging asset class can step out from the twilight world occupied by scammers and opportunists.
Crypto asset service providers (Casps) have until November 2023 to apply to be licensed financial services providers (FSPs) under the Financial Advisory and Intermediary (Fais) Act.
In case you missed it, this came by way of a ‘declaration’ by the FSCA, which provides the first step towards a transparent legislative framework that could assist other local governmental agencies – the South African Revenue Service (Sars), the South African Reserve Bank and the Financial Intelligence Centre – in fostering a progressive sentiment to both domestic and international crypto asset market participants.
The FSCA’s first draft of the declaration was published in November 2020. The current definition of crypto assets now includes reference to the applicability of cryptographic techniques and the use of distributed ledger technology.
An explicit exclusion appears to have been made to digital representations of fiat currencies (otherwise known as stablecoins). Also excluded are crypto derivatives, which are covered by the Financial Markets Act.
The Fais Act definition of financial products includes securities, debentures, money-market instruments, participatory interests, long-term or short-term insurance, pension benefits, foreign currency denominated investments and health service benefits. The act is a rather blunt instrument which also includes a general provision that allows the registrar, after consultation with the Fais Advisory Committee, to include in the definition products similar to those already defined.
That means crypto assets can now be recognised as financial products, without having their own category under Fais, subject to the various exemptions as detailed in the FSCA’s supporting policy documents published together with the final declaration.
In terms of the FSCA’s declaration and supporting policy document, a general temporary exemption from licensing will be applied on condition that an application is made by aspirant crypto asset FSPs between 1 June 2023 and 30 November 2023.
Notwithstanding the temporary exemption, an immediate application of the ‘fit and proper’ requirements as set out in the Fais General Code of Conduct will be observed.
This includes the general duty of rendering financial services honestly and fairly, management of conflicts of interest, disclosure requirements, requirements relating to advice and marketing, inclusion of complaints management processes, fair contractual dealing and the implementation of risk management and internal system controls.
Investor peace of mind
This immediate applicability of the Fais General Code of Conduct affords financial customers a degree of protection, as the Fais Ombud would now have jurisdiction to hear crypto-related complaints, though up to a monetary cap of R800 000.
Considering the risk in the industry, the FSCA will not require aspirate crypto FSPs to take out professional indemnity or fidelity insurance cover, though the matter will be further investigated.
Certain crypto activities will fall outside the purview of the FSCA, including mining nodes, node operators and non-fungible token (NFT) services.
It is noteworthy that the FSCA’s policy document references the Financial Markets Act (FMA) and Fais interchangeably in relation to derivative instruments. Crypto asset derivatives fall under the FMA, similar to over-the-counter derivatives providers (ODPs).
This raises further questions as to how crypto derivative providers are to regularise their operations in the absence of any transitional framework.
No definition is provided as to what would classify as crypto contracts-for-differences (CFDs).
This is a bold and positive move by the FSCA, which recognises the inevitability of crypto assets and has intelligently framed its regulations in that light. This should make it far more difficult for another ‘Mirror Trading International’ to appear, since the presence or absence of an FSP licence will immediately signal to the potential customer the wisdom of doing business with a crypto company.
To give effect to the draft exemptions, industry participants are invited to comment by no later than 1 December 2022. It is envisaged by the FSCA that the final exemptions will be published in early 2023.
* Darren Hanekom is a director of Hanekom Attorneys Inc.