On or about 20 November 2020 the Financial Sector Conduct Authority (“FSCA”) took its first meaningful strides towards incorporating crypto assets into the South African legal framework by publishing a draft declaration (“Draft Declaration”) which declared crypto assets as a “financial product” in terms of the Financial Advisory and Intermediary Services Act No. 37 of 2002 (“FAIS Act”). Shortly after the publication of the Draft Declaration, the FSCA requested that further submissions be made in writing to the FSCA on or before 28 January 2021. This article serves as an update on the recent regulatory developments of the South African crypto asset regulations which followed the aforementioned publication, considers the early effects of these developments and considers whether regulation of crypto assets is indeed the best way forward.
Declaration of crypto assets as a financial product:
On or about 19 October 2022, the FSCA cemented its view on crypto assets by publishing a new declaration titled “Declaration of a Crypto Asset as a financial product under the Financial Advisory and Intermediary Services Act” (“Declaration”). The Declaration mirrored the Draft Declaration and declared that crypto assets are now officially deemed “financial products” in terms of paragraph (h) of the definition of financial product as contained in section 1 of the FAIS Act. The Declaration went a step further and also defined a crypto asset as a digital representation of value that:
- 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;
- applies cryptographic techniques; and
- uses distributed ledger technology,
(collectively referred to as a “Crypto Asset”).
As a result of the Declaration, all cryptocurrency service providers (“CSP”) operating within the South African market are now required to apply for licensing as a financial services provider under the FAIS Act in order to ensure that they operate legally within the South African legislative framework.
To facilitate the transitional arrangements for existing CSP’s and in order to ensure that their business activities are not unduly disrupted, the FSCA published a general exemption which stipulates that CSP’s may continue to render financial services in relation to Crypto Assets without contravening the FAIS Act, provided that a license application is submitted between 1 June 2023 and 30 November 2023. If a CSP does not submit a license application within the stipulated period, the exemption lapses and should a CSP render financial services without the appropriate license, the CSP will be in breach of the FAIS Act.
Penalties for breach:
CSP’s who, as a regular feature of their business, render financial services in relation to Crypto Assets without obtaining the required licenses will be in contravention of the FAIS Act, unless exempted. A contravention of the FAIS Act constitutes an offence and any person or entity found guilty of such an offence is, on conviction, liable to a fine not exceeding R10 million or imprisonment for a period not exceeding 10 years, or both such fine and such imprisonment.
In line with these recent developments, the Advertising Regulatory Board (“ARB”) decided that it would be appropriate to amend the Code of Advertising Practice to specifically cater for Crypto Assets in an attempt to protect consumers from misleading information. The new section provides that, amongst other things, advertisements relating to Crypto Assets must expressly and clearly state that investing in Crypto Assets may result in the loss of capital as the value is variable and can go up as well as down. Individuals and entities that regularly promote and advertise Crypto Assets are therefore advised to abide by these provisions of the Code of Advertising Practice as failing to adhere to the terms thereof can result in a determination by the ARB that its members withdraw such advertisement from their platforms and close off distribution to non-compliant parties.
Prior to the publication of the Declaration consumers where exposed to a significant increase in scams and fraudulent activities which were positioned as crypto asset-related investment opportunities. These recent regulatory developments in the South African Crypto Assets regulations can therefore be viewed as good news by South Africans as it is a further step in the direction of formalising Crypto Asset regulation in South Africa. The new licensing requirements will ensure a higher standard of conduct from the CSP’s, particularly in relation to consumer protection, with new and potential investors now easily able to identify which CSP’s satisfy regulatory requirements. The next important milestone to analyse is how traditional finance companies and banks are going to view the regulations and if they are going to support the new classification of financial products.
VDMA will continue to monitor further developments in the Crypto Assets regulatory environment and we remain at your disposal for any assistance you or your business may require in the Crypto Assets space and the financial services sector as a whole.
Published 30 January 2023