The Financial Sector Conduct Authority (“FSCA”) published for comment the Draft Declaration of crypto assets as a financial product in terms of the Financial Advisory and Intermediary Services Act, 37 of 2002 (“FAIS”) on 20 November 2020. The FSCA also published a Statement in support of the Draft Declaration. The underlying basis for the Declaration and Statement stems from the urgent need:
- for improved disclosures to customers that highlight the increased risks involved in investing in crypto assets; and
- to ensure that a more robust advice process is adopted (including proper risk assessments) when intermediaries advise customers to purchase crypto assets.
We look at the Draft Declaration and the FSCA’s opening move towards the regulation of crypto assets in South Africa.
What are Crypto Assets?
The Draft Declaration defines crypto assets in the same way that “virtual assets” are defined in the Financial Action Task Force (FATF) Recommendations. The FATF is an intergovernmental policy-making body which monitors global money laundering and terrorist financing.
“Crypto assets” is defined as:
“any digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes, but excluding digital representations of fiat currencies or securities that already fall within the definition of financial product.”
While the definition of crypto assets includes well-known cryptocurrencies such as Bitcoin, Ether and Litecoin, stablecoins and utility tokens also fall within the definition of crypto assets.
The Blockchain Boom
Crypto assets have enjoyed an exponential rise in popularity over the past decade. With increased interest from retail investors, regulators around the world have grappled with the challenges associated with the regulation of crypto assets.
South Africa is no different. The Position Paper on Crypto Assets by the Crypto Assets Regulatory Working Group states that there are approximately twelve different crypto asset trading platforms in South Africa with a market capitalisation value of approximately R6.5 billion. South African regulators have taken steps towards regulation of crypto assets since 2004:
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2004 |
Publication of the initial public statement on crypto assets by the National Treasury (“NT”). |
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2014 |
Publication of the Position Paper on virtual currencies by the South African Reserve Bank (“SARB”) National Payment System Department. |
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2016 |
Establishment of the Intergovernmental Fintech Working Group (“IFWG”):
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2019 |
Formation of the Crypo Assets Regulatory Working Group under the IFWG
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2020 |
Publication of the Position Paper on Crypto Assets by the Crypto Assets Regulatory Working Group. The Position Paper addressed the various uses of crypto assets, including:
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The Position Paper sets out the challenges inherent in regulating crypto assets and makes policy recommendations designed to address these challenges. The Draft Declaration seeks to give effect to two recommendations:
- Specific services rendered in respect of crypto assets must be included in the definition of ‘financial services’ in the Financial Sector Regulation Act 9 of 2017 (“FSR Act”) and that services related to the buying and selling of crypto assets must be included in the licensed activities under the Conduct of Financial Institutions (“COFI”) Bill (Recommendation 9).
- The FSCA should become the responsible authority for the licensing of services related to the buying and selling of crypto assets. Specific conduct standards should be developed for these services (Recommendation 10).
The Draft Declaration
In the FAIS Act, “financial product” includes products similar in nature to the listed financial products and such product may be included as a financial product upon declaration by the FSCA. The FSCA has indicated that, in its view, a crypto asset is similar to other financial products and through the Draft Declaration, the FSCA proposes to declare crypto assets as financial products in the FAIS Act. This is believed to be a more expeditious approach to that proposed in Recommendation 9.
Transitional arrangements have been provided for in the Draft Declaration to provide existing crypto asset service providers (“CASPs”) an opportunity to apply for authorisation as a Financial Services Provider within four months of the effective date of the final Declaration. CASPs may continue rendering financial services in relation to crypto assets until the application period has expired without submission of an application.
The Effect
If crypto assets are included in the definition of a financial product under the FAIS Act:
- any person furnishing advice or rendering intermediary services regarding crypto assets must be authorised under the FAIS Act as a financial services provider (“FSP”); and
- any authorised person (or their representative) must comply with the relevant FAIS requirements, such as compliance with the General Code of Conduct for Authorised Financial Services Providers and Representatives, 2003, and the Determination of Fit and Proper Requirements, 2017.
The effects of the inclusion of crypto assets as a financial product are limited in scope and do not cover all activities of CASPs. Rather, this is an interim, initial step aimed at providing adequate protection for consumers who are advised to purchase these products.
The Way Forward
The FSCA has indicated that the COFI Bill is expected to give further effect to the regulation of the activities of CASPs by including these activities as a licensed activity. Additionally, if the COFI Bill repeals the FAIS Act, as indicated in the second draft of the COFI Bill, the Declaration will fall within the COFI Bill framework. For these reasons, the FSCA has motivated that the Draft Declaration will contribute towards the gradual implementation of existing proposals and does not pre-empt broader policy developments regarding crypto assets.
Stakeholders are invited to comment on the Draft Declaration by 28 January 2021. The FSCA has highlighted the request for comments in relation to the scope of the proposed definition of crypto assets.
This bulletin was prepared by partner Bianca Da Costa, associate Catherine Stark and candidate attorney Emma Alimohammadi.
