Described as a watershed moment for cryptos in SA, industry leaders say it will allow for mass adoption, including from institutional players, while making it easier to snuff out scams. From Moneyweb.
‘Overwhelmingly positive’ is the reaction of crypto industry players to the announcement on 19 October 2022 by the Financial Sector Conduct Authority (FSCA) that crypto assets will now be deemed financial products and fall under the Financial Advisory and Intermediary Services (Fais) Act.
Cryptos have languished in a legal no-man’s land for a decade, but that has now changed.
Some parts of the crypto landscape fell under a variety of pre-existing laws. For example, if you move cryptos outside SA, this falls under SA Reserve Bank (Sarb) jurisdiction and exchange control limitations. You have to pay tax on crypto profits in terms of the Income Tax Act. Crypto derivatives fall under the definition of derivatives in the Financial Markets Act.
See all our crypto-related content and podcasts here.
And, of course, crypto scammers are subject to a variety of criminal laws, but that’s proven almost impossible to enforce, in part because there was no clear definition of a crypto.
That lacuna has now been remedied. The definition of a crypto asset, gazetted by the FSCA on Wednesday 19 October, is one that uses cryptography and distributed ledger technology, and “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.”
Read: D-day for crypto assets has arrived, as FSCA targets scams
A crypto asset is further defined as “a digital representation of value”.
In practical terms, it means all crypto asset service providers (Casps) must apply to become financial services providers (FSPs) by 20 November 2023 and will be subject to the reporting requirements and monitoring controls of the FSCA.
Anyone planning on purchasing cryptos will then be able to check whether they are dealing with a licensed and credible crypto provider.
Weeding out the scammers should become easier, but don’t expect them to disappear. The FSCA has already warned that there is not much it can do if people fall for a get-rich-quick sales pitch. This is why it is embarking on an education drive to enlighten the public about the risks and potential benefits of cryptos. That should help.
It also means institutions, until now hesitant to embrace cryptos in light of the lack of regulation, will start paying more serious attention. They’ve been waiting for the FSCA to pull the regulatory trigger.
Richard de Sousa, founder and CEO of Altcoin Trader, says this is a historic moment for cryptos in SA and should see the start of mass adoption.
Farzam Ehsani, CEO of crypto exchange VALR, points out that the FSCA was clearly moved to act by the threat of SA being “greylisted” by the Financial Action Task Force (FATF), which could lead to disinvestment from SA due to the perceived financial risks
“South African crypto asset service providers like VALR.com can continue operating but must apply for a license under the Fais Act between 1 June 2023 and 30 November 2023, and comply with the ‘Fit and Proper’ and other requirements of the act,” tweeted Ehsani.
The good and the bad
As with all regulations, there’s the good and the bad. Crypto asset service providers must also provide the FSCA “with any information the FSCA requests that is in the possession of, or under the control of, the person, that is relevant to the financial services and/or similar activities rendered by such person.”
De Sousa points out that regulators can now approach Casps and ask for information on a particular customer, “and we are legally obliged to hand that over”.
That may disappoint some, but the same rules are being applied elsewhere in the world. The FSCA’s intention is to protect the public from crypto scammers and exchanges that pop up and do not abide by the law.
Says Ehsani: “This declaration will open the door to many of the large traditional financial institutions (TradFi) in South Africa to start providing crypto products and services. TradFi has been hesitant to enter crypto in South Africa because of the lack of regulatory clarity in the country. This has been said to me by nearly all of the TradFi players. This declaration now provides the regulatory clarity.
“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.”
Other reactions
Marius Reitz, Africa general manager for Luno: Classification of crypto as a financial product, which was anticipated following the publication of the Intergovernmental Fintech Working Group (IFWG) initial position paper, will help provide regulatory clarity to both investors and crypto asset service providers. 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.
We’re delighted to see the development of the regulatory framework in South Africa progressing, and we look forward to further progress in the near future.
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.
Omer Iqbal, CEO of crypto company FiveWest: Fivewest welcomes the FSCA amendment to include crypto assets as a financial product. It will ensure that South African citizens are protected against unscrupulous selling and inappropriate crypto asset advice. Regulations that ensure that crypto asset providers operate in a more professional and responsible manner can only be a good thing for the industry as a whole.
Jon Ovadia, CEO of OVEX: We’re incredibly excited for this regulation as it expands the crypto market to large institutional investors in South Africa. We’ve been waiting a long time for the crypto market to mature to this stage.
Jonty Sacks, partner at alternative investment company Jaltech: The introduction of regulations is a welcome relief to the financial services industry particularly for financial advisors who will now be able to advise clients on crypto investments. The regulations will now require financial advisors to upskill on their crypto knowledge which will likely result in greater adoption by the South African investor market.
Paul Casarin, CEO of Pet Rock Investments: The notice defines 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 or legal persons for the purpose of payment, investment and other forms of utility. The notice takes effect immediately and falls under the Financial Advisory and Intermediary Services Act. With this introduction, South Africa becomes one of the leading countries to embrace cryptocurrencies, unlocking immediate benefits and potential across the financial services industry.
According to a recent survey by Pet Rock Investments, advisors see crypto being a key part of future planning in the next 12 months, with 72% of advisors already planning to allocate crypto in client accounts. Financial advisors are looking for exposure to this asset class but are fundamentally concerned with its volatility and inherent technical risks, especially custody. Regulations will provide the level of trust the market needs – especially this year. However, advisors see other risks which are paramount to understand before allocating any crypto to an investment portfolio.
Richard de Sousa, CEO of Altcoin Trader: This is a positive step though we are not sure what the final regulations will be. If we want to see the mass adoption of cryptos, we do need the government to recognise it, regulate it and classify it. We think it will bring a lot of attention to the crypto space.
If I was a financial advisor, which I am not, I would be able to give you financial advice regarding crypto. This (declaration) will make it easier for regulators to monitor the industry and that is a good thing. It gives cryptos the right to be seen as a serious investment.
The downside is that it allows the government full transparency into customers’ crypto transactions.
It’s only a matter of time before the big players will be offering cryptos through ATMs, online and through their platforms.
It will allow crypto to go mainstream.
Dean Joffe, co-founder of BitFund: Arguably, this hastily (announced) move comes off the back of South Africa scrambling to comply with remediation recommendations issued by the Financial Action Task Force, in order to avoid being greylisted, which would have materially negative consequences for the country as a whole.
While regulation is a step in the right direction towards legitimising crypto assets amongst institutional investors, many questions, comments and arguments remain open, valid, and up for debate – some of which have been published by the FSCA in their response matrix to the draft declaration of crypto assets as a financial product.
Whilst we welcome the regulations which will further open the doors between the traditional finance sectors (which are currently regulated) and the crypto asset service providers (like BitFund, which are yet to become fully regulated), we stress the importance of having the FSCA guide Casps through the licensing process. Regulation is a balancing act between stifling innovation and protecting consumers – a balance which the regulator may be prematurely embarking upon, without fully engaging with, or responding to, industry concerns. Nevertheless, we hope that declaring crypto assets as financial products will not only achieve what the regulators set out to do, but open further opportunities for Casps in the traditional finance sector.
