Crypto asset service providers will have to be licensed after SA authorities designated digital assets as financial products to bring them under regulatory control and offer better protection to customers who dabble in the virtual tokens.
The Financial Sector Conduct Authority (FSCA), one of SA’s two main financial regulators along with the Prudential Authority (PA), declared crypto assets as financial products under the Financial Advisory and Intermediary Services (FAIS) Act in a notice published in the government gazette on Wednesday. Though the declaration, which was signed by FSCA commissioner Unathi Kamlana, took effect on the date of publication an exemption period will apply.
The general exemptions will allow crypto asset service providers to continue their business, provided they apply for a licence between June 1 and November 30, 2023. They will still be required to render financial services honestly and fairly in the interim. As part of the general exemption, crypto service providers will also be expected to immediately comply with any information requested by financial regulators.
“You cannot have a situation where you continue to have these platforms and other entities in the ecosystem operating outside the regulatory measures,” Kamlana told a media briefing on Thursday. “It’s not ideal and it’s certainly not in the public interest in our assessment. This is a market that’s growing and people are choosing, for whatever reason, to have an exposure to crypto and therefore given our role and our mandate as a regulator in the financial sector we have to be responsive.”
Crypto assets are subject to some form of regulatory oversight in most international jurisdictions, though the degree to which financial authorities are able to apply existing regulations to the digital assets varies by country. The FSCA said its declaration of crypto assets as financial products was an initial, interim step to better police the sector, and said further regulatory developments are being considered.
“The licensing requirements that will flow from this classification will drive high standards in the industry, particularly in relation to consumer protection, with potential investors easily able to identify those providers that satisfy regulatory requirements,” said Marius Reitz, GM for Africa at cryptocurrency platform Luno. “Another key benefit is that it should allow financial advisers to formally advise their clients on crypto investments. Until now, financial advisers could not provide advice on unregulated investment opportunities.”
Broad definition
The FSCA, which defines crypto assets as any digital representation of value not issued by a central bank, said it has purposely used as wide a definition as possible to ensure no digital assets are left out of its regulatory net. Nevertheless, node operators that focus on mining crypto assets will be exempt from the licensing requirements as they are not client-facing. Activities such as the production of non-fungible tokens (digital art) are also excluded from regulatory oversight. Even so, the FSCA warned that an unlicensed crypto service provider will be in contravention of the FAIS Act, with transgressors liable for a fine of as much as R10m, 10 years imprisonment or both.
“Regulations will provide the level of trust the market needs,” said Paul Casarin, CEO of Pet Rock Investments, which provides investors with access to crypto markets via fund structures. “Financial advisers are looking for exposure to this asset class but are fundamentally concerned with its volatility and inherent technical risks.”
Possible future regulatory developments may result in a more holistic crypto asset oversight framework that includes stable coins and investments into such digital assets by retirement funds and unit trusts. Authorities are also considering whether crypto assets that resemble securities (for example, security tokens) should fall under the ambit of the Financial Markets Act.
The regulation of crypto assets comes as SA faces the prospect of being added to a greylist of countries with poor anti-money laundering (AML) and combating of financing of terrorism (CFT) measures. A recent report commissioned by Business Leadership SA (BLSA) said there was an 85% chance the Paris-based Financial Action Task Force (FATF) would add SA to its financial greylist in February 2023.
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