The SA Reserve Bank says foreign-exchange controls will soon apply to crypto currencies such as bitcoin, while all crypto asset service providers will need to apply for a special licence from the Financial Sector Conduct Authority (FSCA).
These pending new requirements form part of the second phase of the Bank’s blockchain case study for central banking, dubbed Project Khokha, which began after the establishment of the bank’s fintech unit in August 2017. The first phase of the project began in 2018 and included seven SA banks — Absa, Capitec, Discovery Bank, FirstRand, Investec, Nedbank and Standard Bank — which simulated a real-world trial of a blockchain-based wholesale payment system.
“Responsibility for complying with the proposed regulations will, in the main, be imposed on the crypto asset service provider. For example, if they want to do cross-border remittances using crypto assets, they will have to be appointed for that purpose by the financial surveillance department of the SA Reserve Bank,” said Herco Steyn, a senior fintech specialist at the Reserve Bank.
“The requirements in this regard will, for the most part, be imposed on the crypto exchange to verify that individuals do not send crypto assets abroad, or in other words, expropriate value from SA in contravention of the exchange control regulations via crypto assets.”
Crypto currencies — digital assets that act as a medium of exchange that aren't issued by a single authority such as a central bank — are experiencing a wave of new investor interest after their combined market value surpassed $1-trillion (R15-trillion) earlier in January. They are increasingly attracting the attention of policymakers with concern that they could usurp central banks’ main tool in setting policy — controlling the supply of money.
There’s also been concern about the use of cryptocurrencies in illicit activities from funding terrorism to money laundering, with European Central Bank (ECB) president Christine Lagarde recently describing bitcoin as “a highly speculative asset”. The Covid-19 pandemic and the acceleration of the use of alternatives to physical cash is spurring central banks across the world to speed up investigations into the viability of central-bank-issued digital currencies.
Steyn said it had been a challenge to figure out how to reconcile crypto assets, which are by their nature digital, borderless and not tied to any particular country, with SA’s foreign-exchange control regulations. Nevertheless, he says, the bank now has “a very sound idea of how to amend the existing exchange-control regulations and associated manuals to appropriately cater to crypto assets”.
The Intergovernmental Fintech Working Group (IFWG) — a regulatory collective that includes the Reserve Bank, Treasury, the Financial Intelligence Centre, the Financial Sector Conduct Authority (FSCA), the National Credit Regulator, the SA Reserve Bank and the Competition Commission — has produced a position paper that makes recommendations across three broad categories on how to regulate crypto assets.
These recommendations cover anti-money-laundering action and combating terrorist financing; exchange controls; and the legal designation of crypto assets. Once this paper is finalised, a mandate will be given to the various financial sector regulators to give effect to the recommendations, Steyn said.
The recommendations include amending schedule 1 of the Financial Intelligence Centre (FIC) Act to include crypto asset service providers as accountable institutions, and designating crypto assets as a financial product under the Financial Advisory and Intermediary Services (FAIS) Act. Steyn said while some recommendations would be implemented in the near-term as soon as financial regulators were given a formal mandate, other recommendations were “between six and 24 months away from implementation”.
Among the recommendations are that all crypto asset service providers will be required to obtain a dedicated crypto asset financial service provider licence from the FSCA, while all such service providers would be designated as accountable institutions, as per schedule 1 of the FIC Act.
The Reserve Bank also continues to test the feasibility of a digital or tokenised rand and how it might be used in both the wholesale and retail environments, as well as the implications for SA’s policy and regulatory framework. This Central Bank Digital Currency (CBDC) project is being done in conjunction with the IFWG.
“What we’re going to be doing is testing, for example, a digital rand that’s issued on one distributed ledger network with a debenture on another, and how we actually achieve real-time settlement of both and what the challenges may be from a legal or policy or regulatory perspective,” said Arif Ismail, head of fintech at the Reserve Bank.
Ismail said the Reserve Bank should be in a position to provide a report on the wholesale element of the digital currency project by July or August.
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