Byline: Hannah Parker
South Africa has made a giant leap in declaring cryptocurrency assets as financial products, which comes at the end of a long-awaited process of regulating crypto assets in the country. For the first time in South Africa, cryptocurrency will be subject to new rules to increase its industry oversight, making it easier for regulators to monitor the market and safeguard consumers. Using crypto assets can provide cheaper, faster payments, enhance financial inclusion, and improve resilience and competition amongst payment providers.
The Financial Sector Conduct Authority (FSCA), South Africa’s financial regulator, declared crypto assets as financial products in a gazette notice published on October 19th 2022. According to an expert at Bitcoineer, the notice states that crypto assets are digital representations of value that are not issued by a central bank but can be traded, transferred or stored electronically for payment, investment or other forms of utility. It has to do with cryptographic techniques and uses distributed ledger technology. The declaration takes effect immediately and also includes the definition of crypto assets. For several months, such a decision had been expected to bring crypto assets under regulation for the first time in S.A.
This declaration comes after a public consultation after a published draft declaration of crypto assets as a financial product bill by FSCA back in November 2020. There is a need for improved disclosures to customers highlighting the increased risks in investing in crypto assets and ensuring a more robust advice process (including proper risk assessments) when intermediaries advise customers to purchase crypto assets. In June 2021, a roadmap was created for a regulatory framework by a national working group.
The FSCA published a policy document that shed light on the declaration’s effect, including transitional provisions and an overview of the consultation process followed when making the declaration. The policy aims to establish a regulatory and licensing framework that would pertain to Financial Service Providers (FSPs) that provide crypto assets services. According to FSCA’s Head of regulatory frameworks, Eugene Du Toit, the move does not mean that cryptocurrencies are now legal tender in South Africa. During a press conference, Du Toit said, “We are not legitimising crypto assets.” He added that “we are not giving credence to crypto assets.”
The FCSA released a press release on October 20th 2022, in which the transition arrangements states that a person may continue to render crypto asset service assets without a licence, provided that they apply for a licence between June 1st 2023 and November 30th 2023. In the declaration, it is stated that crypto asset miners and node operators performing functions in respect of the security and health of the network, as well as persons rendering financial services concerning non-fungible tokens, will be exempted from abiding by the FAIS (Financial Advisory and Financial Intermediary Services) Act.
According to Marius Reitz, general manager for Africa at crypto company Luno, the licensing requirements will flow from this classification. They will drive high standards in the industry, especially concerning consumer protection, with potential investors undoubtedly able to identify those providers that meet the regulatory requirements.” The Head of Legal Brent Peterson at Easy Crypto, a crypto exchange platform said that “the announcement is the first legal step required to bring the crypto asset industry within the South African legal framework.” The declaration comes as governments worldwide push to regulate cryptocurrencies to protect users from turbulent digital coins and fraudsters. The South African Reserve Bank has been working with other regulators to recognise crypto assets as financial products, making them easier to monitor from a money laundering and terror financing perspective. Deputy Governor of South Africa’s central bank Kuben Naidoo said: “This summer, the bank had come to view cryptocurrency as a financial asset and was looking into regulating the sector.”
South African digital asset investors have been calling for regulations for years. The country’s appetite for digital assets has been growing steadily, and the designation has been welcomed by some players in South Africa’s crypto industry. Farzam Ehsani, Co-founder and CEO of VALR.com, offered his perspective on what he thinks prompted this move. He took to Twitter to post about the news, saying, “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.” Ehsani further noted that the reason for the declaration was cited due to the “mounting risk in the crypto asset environment”, but it also looks like this action was done to comply with a Financial Action Task Force (FATF) deadline for remediation of recommendations for South Africa. Recommendations not fully remediated or significantly progressed by October 2022 can lead South Africa to be placed on the FATF grey list, which could have negative consequences for the country’s economy.
With all that being said, this project does come with risks and disadvantages. Still, it also offers users advantages and security measures, plus the bonus that opens up business opportunities for various industries. Now that the asset class is a regulated financial product in South Africa, it’s paramount that investors educate themselves to understand the technology and how cryptocurrencies work. Do note that this article is for information purposes and does not serve as a piece of legal advice.