Crypto assets have been on the radar of the South African Regulators for quite some time.
"Our view has changed and we now do regard [cryptocurrency] as a financial asset and we hope to regulate it as a financial asset," said South African Reserve Bank ("SARB") deputy governor Kuben Naidoo on 13 July 2022 during a webinar.
Three changes were proposed, namely:
- an amendment to the Exchange Control Regulations to clarify the position on crypto-assets as capital within the purview of those regulations;
- the inclusion of cryptos as a financial product for purposes of the Financial Advisory and Intermediary Services Act, 2002 ("FAIS"); and
- the inclusion of all crypto asset service providers as "accountable institutions" in terms of Schedule 1 to the Financial Intelligence Centre Act, 2001 ("FICA").
The first of these amendments was to FAIS and after much deliberation, the Financial Sector Conduct Authority ("FSCA") has finally declared crypto-assets as a financial product (the "Declaration"), as defined under FAIS.
What is FAIS and what does it govern?
FAIS governs the rendering of financial services (advice and/or intermediary services), as those terms are defined in FAIS, in respect of financial products in South Africa.
"Financial product" is defined to include a share, insurance policy, debenture, note or other security, and a "deposit", as that term is defined in section 1(1) of the Banks Act, 1990. Crypto-assets will now be included in this definition.
What is considered to be a crypto-asset by the FSCA?
"Crypto-asset" has been defined as "a digital representation of value that:
- is not issued by a central bank, but is capable of being traded, transferred or stored electronically by natural and legal persons for the purpose of payment, investment and other forms of utility;
- applies cryptographic techniques; and
- used distributed ledger technology."
It is worth noting that crypto-assets are the only financial product where there is no central issuer. Further, the term is broadly defined and could include utility tokens – which would not in the ordinary sense be regarded as financial products. This broad definition may also capture specific types of crypto-assets, such as those in respect of non-fungible tokens ("NFTs") and mining nodes and node operators. However, the FSCA has acknowledged by means of a separate general exemption that at this stage, the inclusion of financial services related to NFTs and node operations is not appropriate and should not be subject to the FSCA's oversight. Nonetheless, the reach of the definition is sure to raise many questions as to whether a certain product is included or not.
What is the effect of the Declaration?
Persons rendering financial services in respect of crypto-assets must:
- apply for a licence under FAIS between 1 June 2023 and 30 November 2023;
- immediately comply with certain provisions of the Determination of Fit and Proper Requirements for Financial Services Providers, 2017 (relating to honesty and integrity) and the General Code of Conduct for Authorised Financial Services Providers and Representatives, 2003 ("General CoC") (relating to rendering financial services honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry);
- comply with the remaining provisions of the General CoC by 1 December 2023; and
- provide the FSCA with any information which it requests that is relevant to the financial services or activities rendered by such person.
In addition, the FSCA published a further draft exemption aimed at easing transition of providers into the regulated space. Comments on the draft exemption are due on 1 December 2022.
The Declaration means that providers of financial services in respect of crypto assets will have to consider how to comply with FAIS and related legislation that applies to FSPs – including FICA.
What are the requirements under FICA?
Although Schedule 1 to FICA has not yet been amended to include crypto-asset service providers as accountable institutions, FSPs under FAIS are accountable institutions for the purpose of the Schedule. As such, any person who renders a financial service in respect of crypto assets (and who is therefore required to be licenced as an FSP) will also have to comply with FICA.
FICA places numerous obligations on accountable institutions, which go beyond mere "Know Your Customer" ("KYC") obligations. These include:
- registration with the Financial Intelligence Centre;
- conducting customer due diligence;
- record-keeping of prescribed client information and transaction records;
- developing, documenting, maintaining and implementing a Risk Management and Compliance Programme ("RMCP");
- ongoing training of employees on FICA and the institution's RMCP;
- appointment of a compliance officer; and
- reporting obligations, such as the submission of cash threshold reports, suspicious transaction reports and terrorist property reports.
Lingering uncertainty
It remains to be seen whether there will be a specific code for crypto-asset providers, and what qualifications and practice requirements will be implemented. Will crypto-asset service providers providing financial services be permitted to amend their license categories, or will they have to make new applications?
More has to be going forward with ensuring that all entities operate within this new regulatory framework and our Fintech and Banking and Finance regulatory teams can assist with all your compliance requirements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
