South Africa declares cryptocurrency a financial product

Written by Jan Vermeulen

Crypto assets are to be treated as financial products in South Africa to make it easier for regulators to monitor the market and help to safeguard consumers.

The Financial Sector Conduct Authority (FSCA) defined crypto assets as “a digital representation of value” in a gazette notice published on Wednesday.

A crypto asset isn’t issued by the central bank, but can be traded, transferred or stored electronically for purposes of payment, investment or other forms of utility, according to the announcement.

In an accompanying statement, the FSCA said the reason for the declaration was “mounting risk in the crypto asset environment.”

This was due to an exponential increase in the provision of crypto assets in South Africa and, coinciding with that, the rapid growth in interest in the use of crypto assets for investment purposes, the FSCA said.

“These risks were further exacerbated by a significant increase in scams and fraudulent activities positioned as providing crypto asset related investment opportunities.”

However, Farzam Ehsani, CEO of South African crypto asset exchange VALR, said the country’s potential greylisting was likely another driving factor.

“It also looks this action was done to comply with a Financial Action Task Force (FATF) deadline for remediation of recommendations for South Africa,” Ehsani said.

Unathi Kamlana, FSCA Commissioner

The FSCA highlights that, in 2019, the FATF conducted a country review of South Africa and made findings and accompanying recommendations to be remediated in its Mutual Evaluation Report (MER).

“Recommendations not fully remediated or significantly progressed by October 2022 can lead South Africa to be placed on the FATF greylist, which could have materially negative consequences for the country as a whole,” the FSCA said.

In its report, the FATF highlighted that South Africa had imposed no regulations on crypto asset service providers for anti-money laundering or countering the financing of terrorism measures — commonly known as “Fica” in South Africa.

Fica gets its name from the Financial Intelligence Centre Act of 2001, which sets out requirements for financial institutions to obtain and validate personal information about clients.

“Virtual asset service providers are not required to take AML/CFT measures beyond the reporting obligation (which is addressed to all businesses), and are not subject to licensing or registration, nor supervised. These are major deficiencies,” the FATF warned in its report.

The FSCA said when its declaration is made final, it will put a regulatory and licensing regime in place for crypto asset financial service providers.

“Having the effect that these FSPs will be required to be licensed and consequently be subject to regulatory oversight and supervision. This substantially addresses the FATF MER finding referred to above,” the FSCA predicts.

The FSCA has put a temporary exemption in place to allow a transition period for crypto asset service providers to obtain their licences.

Crypto exchanges and other service providers can continue operating provided they apply for a licence under section 8 of the Financial Advisory and Intermediary Services Act between 1 June 2023 and 30 November 2023.

Currently, the declaration exempts node operators, mining nodes, and NFTs and NFT platforms from requiring a licence.

Farzam Ehsani, VALR co-founder and CEO

“Overall, this is a positive step for the crypto industry and South Africa in general. This declaration will open the door to many of the large traditional financial (TradFi) institutions in South Africa to start providing crypto products and services,” Ehsani said.

“TradFi has been hesitant to enter crypto in South Africa because of the lack of regulatory clarity in SA. This has been said to me by nearly all of the TradFi players. This declaration now provides the regulatory clarity.”

Ehsani said the FSCA’s declaration was an important milestone.

“We’re still in the very early stages of understanding how crypto is going to transform the global financial system,” he said.

“This day was always going to come. It is now here. I’m very excited to see what the future brings with it.”

Marius Reitz, General Manager for Africa at Luno

The announcement is the first legal step that was required to bring the crypto-asset industry within the South African legal framework, said Brent Peterson, head of legal at Easy Crypto Ltd., a crypto exchange.

The declaration, which takes effect immediately, comes as governments around the world push to regulate cryptocurrencies to protect users from turbulent digital coins and fraudsters.

US regulators and lawmakers are studying ways to guide the operation of stablecoins.

“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,” Marius Reitz, general manager for Africa at crypto platform Luno, said in an emailed statement.

“Another key benefit is that it should allow financial advisers to formally advise their clients on crypto investments.”

In South Africa, where Global Web Index estimates about 15% of the population invested in Bitcoin in 2020, the nascent industry already saw collapses, including the demise of Mirror Trading International last year with losses totaling about $1.2 billion

The South African Reserve Bank has been working with other regulators to recognize the coins as financial products in order to make them easier to monitor from a money-laundering and terror-financing perspective.

“This step would aid clarity, user protection and much-needed confidence in the ecosystem,” said Hannes Wessels, country head for cryptocurrency exchange Binance South Africa.