South Africa's Financial Sector Conduct Authority (FSCA) published the Declaration of Crypto Assets as a Financial Product under the Financial Advisory & Intermediary Services (FAIS) Act 2002 on 19 October 2022.
The Declaration puts in place a regulatory and licencing regime for Financial Services Providers (FSPs) that provide financial services in relation to crypto assets, which is seen as a critical interim step towards protecting customers in the crypto asset environment.
In its 2019 Mutual Evaluation Report on South Africa, the Financial Action Task Force (FATF) identified the lack of requirement for VASPS (Virtual Asset Service Providers) to be licensed or registered and the lack of supervision in respect of anti-money laundering and countering of terrorist financing (AML/CFT) as major deficiencies.
If South Africa fails to fully remedy or significantly progress the FATF's recommendations by October 2022, it is at risk of being placed on the FATF list of 'Jurisdictions under Increased Monitoring', the so-called 'grey list'. This could have materially negative consequences for the country as a whole.
The Declaration defines a 'crypto asset' as "a digital representation of value that: (a) 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; (b) applies cryptographic techniques; and (c) uses distributed ledger technology."
Any person who, as a regular feature of their business, renders financial services in relation to crypto assets, must either be authorised as a financial services provider (FSP) under section 8 of the FAIS Act or be appointed as a representative of an authorised FSP under s13 of the FAIS Act, and must comply with the requirements of the FAIS Act and its subordinate legislation.
Under s7(1) of the FAIS Act, any person in contravention of these requirements will be committing an offence under s36(a) of the FAIS Act and, if convicted, will be liable to a fine not exceeding ZAR10 million or imprisonment for a period not exceeding 10 years, or both.
To facilitate transitional arrangements for existing providers of financial services – advice and/or intermediary services – in relation to crypto assets, the FSCA also published a temporary general exemption from the requirement to be licenced that applies on the condition that such a person must apply for a licence under s8 of the FAIS Act between 1 June 2023 and 30 November 2023.
This exemption will remain valid until the person's licence application has been approved or rejected. If a person does not submit a licence application within the stipulated period, the exemption lapses. Any person providing financial services in relation to crypto assets under the exemption must also:
- Comply immediately with Chapter 2 of the Determination of Fit and Proper Requirements for Financial Services Providers, published under FAIS Board Notice 194 of 2017
- Comply immediately with section 2 of the General Code of Conduct for Authorised Financial Services Providers and Representatives 2003 (and must comply with the rest of the General Code by 1 December 2023)
- Provide any information that the FSCA requests that it is in the possession of, or under control of, the person, that is relevant to the financial services and/or similar activities being rendered.
Certain crypto asset 'ecosystem participants' are exempted from the FAIS Act. These are '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 in relation to non-fungible tokens.
To facilitate the application of an appropriate regulatory framework for Crypto Asset FSPs once licensed, the FSCA also put out for consultation a 'Draft Exemption of Persons rendering Financial Services in relation to Crypto Assets from Certain Requirements'. This draft proposes to exempt licensed Crypto Asset FSPs and their key individuals and representatives from certain requirements of, amongst others, the General Code and the Fit and Proper requirements. The consultation closes on 1 December 2022.
The South African government is taking steps to avoid being grey listed by introducing amendments to the financial regulatory system. National Treasury tabled, on 29 August, the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Bill, which seeks to fully satisfy least 14 of the 20 technical compliance deficiencies identified by the FATF, including an appropriate enhancement of powers and procedures for regulatory authorities, through the proposed amendment of five pieces of primary legislation.
A separate Bill, the Protection of Constitutional Democracy against Terrorist and Related Activities Amendment Bill 2022, deals with two further technical deficiencies. The outstanding four deficient recommendations will be dealt with via policy processes and mechanisms to be developed by October/November 2022.
National Treasury said it should be noted, however, that aside from successfully addressing all or most of the 20 technical deficiencies by the end of the year, South Africa will have the harder task of demonstrating the effectiveness of its AML/CFT laws and frameworks, including demonstrating that the country has credible national risk assessments to deal with money laundering and terror financing, that its supervisory authorities in both the financial sector and in non-financial sectors like the legal profession, gambling sector, estate agents all have appropriate risk-based approaches, and most importantly, that the country's investigative and prosecuting authorities are able to demonstrate speedy investigations, prosecutions and asset forfeitures for financial crimes and corruption.
"The effectiveness of an AML/CFT framework is measured via 11 Immediate Outcomes. It is imperative that the country demonstrates in the next six months that it has made significant progress in addressing the deficiencies in FATF," it said.
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