Big week for crypto in South Africa

This week, the Financial Sector Conduct Authority (FSCA) declared cryptocurrency assets as a financial product under the Financial Advisory and Intermediary Services (FAIS) Act.

This declaration makes it easier for regulators to monitor the market and help to safeguard consumers.

The Financial Sector Conduct Authority defined a crypto asset as a digital representation of value that:

• Is not issued by a central bank but can be traded, transferred, or stored electronically by natural and legal persons for payment, investment, and other forms of utility.
• Applies cryptographic techniques.
• Uses distributed ledger technology.

The FSCA said the reason for the declaration was the mounting risk in the crypto asset environment.

There is a rapid increase in the provision of crypto assets in South Africa and, coinciding with that, the growth in interest in using crypto assets for investment purposes.

“These risks were further exacerbated by a significant increase in scams and fraudulent activities positioned as providing crypto asset-related investment opportunities,” the FSCA said.

The South African Reserve Bank (SARB) has been working with other regulators to recognize cryptocurrencies as financial products to make them easier to monitor from a money-laundering and terror-financing perspective.

Farzam Ehsani, CEO of South African crypto asset exchange VALR, said the action was partly to comply with a Financial Action Task Force (FATF) deadline for the remediation of recommendations for South Africa.

The country is at risk of being greylisted by the FATF, which will require financial firms worldwide, including banks, to apply enhanced due diligence to any South African client.

It would mean a more invasive and extensive process of assessing the source of funds and the integrity of clients.

To avoid greylisting, South Africa must have adequate anti-money laundering and counter-financing of terrorism controls relating to crypto assets and crypto asset service providers.

The FSCA’s declaration is, therefore, likely to be a response to the FATF’s requirements.

Ehsani explained that South African crypto asset service providers (CASPs) could continue operating but must:

• Apply for a license under the FAIS Act between 1 June 2023 and 30 November 2023.

• Comply with a fit and proper code of conduct and other requirements of licensed financial service providers (FSPs).

Crypto asset service providers must also provide the FSCA with any information it requests that is relevant to the financial services or similar activities rendered by such person.

Crypto miners, node operators, and NFT platforms are currently exempted from the FSCA’s declaration.

“Overall, this is a positive step for the crypto industry and South Africa in general,” Ehsani said.

“The declaration will open the door to many of the large traditional financial institutions in South Africa to start providing crypto products and services.”

“We’re still in the very early stages of understanding how crypto is going to transform the global financial system, and today’s declaration is an important milestone in this journey.”

Marius Reitz, Luno’s GM for Africa, said that the classification of crypto as a financial product would help provide regulatory clarity to investors and crypto asset service providers.

“The licensing requirements that will flow from this classification will drive high standards in the industry, particularly concerning consumer protection,” he said.

“Potential investors will now be able to identify those providers that satisfy regulatory requirements.”

Another key benefit is that it should allow financial advisors to formally advise their clients on crypto investments.

“Until now, financial advisors could not provide advice on unregulated investment opportunities,” he said.