It’s been a long time coming, but it looks like the sheriff has finally arrived to the Wild West that is the crypto market in South Africa.

On Friday, the Financial Sector Conduct Authority (FSCA) published a “draft declaration” that defines crypto assets as a financial product under the Financial Advisory and Intermediary Services (Fais) Act.

This means that anyone giving advice or acting as an intermediary – such as a crypto exchange – would have to register as a financial services provider and comply with the requirements of the Fais Act.

This will include crypto asset exchanges and platforms, as well as brokers and advisors.

The FSCA declaration proposes improved disclosure to customers to highlight the “high risks in investing in crypto assets”. Those involved in crypto assets will have to adopt a more robust advice system, including proper risk assessments, when giving advice to purchase crypto assets such as bitcoin.

Crypto exchanges and other crypto intermediaries will henceforth be licensed as financial services providers. This licensing process will also improve the quality of data for policymakers and regulators about the crypto environment, “and to consider whether there is a need for further regulatory interventions”, according to a FSCA statement.

‘Interim step’

“The draft declaration in no way impacts the status of crypto assets in the context of other laws such as exchange control regulations, requirements under the Pension Funds Act, Collective Investment Schemes Act and so forth, nor does it attempt to regulate, legitimise or give credence to crypto assets.

“The draft declaration is merely intended to be an interim step in mitigating certain immediate risks in the crypto assets environment, pending the outcome of broader developments currently taking place through the Crypto Assets Regulatory Working Group (CAR WG), which will inform future policy interventions to be implemented across a variety of regulators and laws.”

Virtually all crypto exchanges in South Africa, anticipating such regulation was on its way, pre-emptively adopted Fais-type standards, including “know your customer” (KYC) processes prior to on-boarding new customers.

The Intergovernmental Fintech Working Group, involving government, regulators and industry players, published a position paper in May 2020 to develop a regulatory framework for crypto assets, focusing on areas such as:

The implementation of an anti-money laundering and counter-terrorism financing regime;
A licensing and supervisory regime from a conduct of business perspective; and
A regulatory regime for the monitoring of cross-border financial flows.

The FSCA’s latest declaration on crypto assets gives partial effect to some of the recommendations contained in the May 2020 position paper.

“The FSCA acknowledges the impact that the draft declaration will have on businesses that are currently furnishing financial services in relation to crypto assets, and more specifically the fact that such business would not be able to operate legally unless they have obtained a FSP licence in terms of section 8 of the Fais Act,” says the FSCA. For this reason, various “transitional arrangements” for businesses already operating in this space will be put in place before publication of the final declaration.

Commenting on the proposed regulations, Jon Ovadia, founder and CEO of crypto company Ovex, said this will have a beneficial effect on the crypto sector

“We’re not surprised by this, as we knew it was coming. We’re excited by it. A big hurdle for us is not being regulated by the FSCA, which has deterred many people from getting involved in this sector. I think regulations will help bring credibility to the crypto sector and help weed out those involved in crypto scams,” said Ovadia.

“At present there is no sure way of knowing who is legitimate and who is operating a scam, and the people are understandably confused by this, so we see this as a positive development.”

‘Always welcome’

Farzam Ehsani, co-founder of crypto exchange VALR, said: “VALR will always welcome prudent and appropriate regulation, particularly as it relates to consumer protection. We have been working with the South African regulators for many years to inform a regulatory framework that does exactly this. It is important to note, though, that today’s draft declaration of crypto assets as a financial product under the Fais Act by the FSCA was not one of the 30 recommendations in the Position Paper on Crypto Assets that was published by the regulators in April this year.

“Furthermore, all of the products in the Fais Act have a central issuer and crypto assets such as bitcoin do not. Gold, for instance, is not classified as a financial product under the Fais Act. We look forward to engaging fully with the FSCA during the comment period to ensure a fair, relevant and appropriate regulatory position for the benefit of all South Africans.”

The public has until 28 January 2021 to comment on the draft regulations.