On 19 October 2022 the FSCA declared a crypto asset as a financial product. This comes after the consultation process which started on 20 November 2020, when the FSCA published the draft Declaration of a Crypto Asset as a Financial Product under the FAIS Act for public comment.
The declaration defines a crypto asset as a digital representation of value that:
a) Is not issued by a central bank, but is capable of being traded, transferred or stored electronically by natural and legal persons for the purposes of payment, investment and other forms of utility;
b) Applies cryptographic techniques; and
c) Uses distributed ledger technology.
Why the need for regulation?
The FSCA’s policy document explains that there was mounting risk in the crypto asset environment due to an exponential increase in the provision of crypto assets in South Africa and, the rapid growth in interest in the use of crypto assets for investment purposes. These risks were further exacerbated by a significant increase in scams and fraudulent activities positioned as providing crypto asset related investment opportunities. Declaring crypto assets as a financial product under the FAIS Act was therefore viewed as a critical interim step towards protecting customers in the crypto asset environment, pending the conclusion of broader developments surrounding crypto assets through, for example, the Conduct of Financial Institutions (COFI) Bill.
In addition, the FATF’s findings and recommendations also led to regulating the crypto sector. The FATF conducted a country review of South Africa during 2019, in the context of the FATF Recommendations and made findings and accompanying recommendations to be remediated in its Mutual Evaluation Report (MER). Without significant progress to fully remediated FATF Recommendations by October 2022, South Africa could be placed on the FATF greylist, which could have significant negative consequences for the country.
One of the key findings in the MER related to major deficiencies regarding Virtual Asset Service Providers (Crypto Asset Providers) not being subject to licensing and supervision requirements. The final declaration for Crypto Assets now puts in place a licensing and regulatory regime for Crypto Asset Providers as FSPs.
This means that Crypto Asset FSPs will be required to be licensed and consequently be subject to regulatory oversight and supervision by the FSCA, financial advisers will now be able to advise clients on crypto investments, and consumers will be able to report the mis-selling of crypto assets to the FAIS Ombud.
A licence is required
The Declaration has the effect that any person who, as a regular feature of the business of such person, renders financial services (as defined in section 1 of the FAIS Act) in relation to crypto assets, as defined in the Declaration, must –
- either be authorised under section 8 of the FAIS Act as an FSP or be appointed as a representative of an authorised FSP under section 13 of the FAIS Act; and
- comply with the requirements of the FAIS Act and its subordinate legislation.
Any person who, as a regular feature of the business of such person, renders financial services in relation to crypto assets without a licence will be in contravention of section 7(1) of the FAIS Act, unless exempted. In addition, in terms of section 36(a) of the FAIS Act, a contravention of section 7(1) of the FAIS Act constitutes an offence and a person 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.
Exemptions
To facilitate transition to this new requirement of being licensed, the FSCA published a temporary general exemption from section 7(1) of the FAIS Act (i.e. the requirement to be licensed).
A person who as a regular feature of the business of such person renders a financial service in relation to crypto assets, is exempted from section 7(1) of the Act insofar it relates to the rendering of a financial service in relation to crypto assets, subject to the following conditions:
That such person must –
- Apply for a licence under section 8 of the FAIS Act between 1 June 2023 and 30 November 2023.
- This means that a person rendering financial services in relation to crypto assets currently can continue to do so without contravening the FAIS Act, provided that a licence application is submitted within the stipulated period above. The exemption will remain valid until the person’s licence application has been approved or rejected. If a person does not submit a licence application within the stipulated period, the exemption lapses.
- Licence applications will only open from 1 June 2023. The FSCA still needs to amend the existing FSP licence application forms to make provision for a crypto asset product category;
- Immediately comply with Chapter 2 of Board Notice 194 of 2017 i.e. the Honesty, Integrity and Good Standing requirements;
- Immediately comply with section 2 of the General Code of Conduct as if it is a licensed FSP, i.e. an FSP must at all times render financial services honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry;
- Comply with the rest of the FAIS GCOC by 1 December 2023; and
- 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.
Exemption of persons rendering certain types of crypto asset financial services
The FSCA acknowledges that in the case of specific types of crypto asset financial services rendered, these should not at this stage be subject to the oversight of the FSCA. These participants are crypto asset miners and node operators performing functions in respect of the security and health of the network, as well as persons only rendering financial services in relation to non-fungible tokens.
Crypto Asset derivatives
The Declaration does not apply to or affect financial services rendered in relation to crypto asset derivatives. FSPs providing financial services in relation to crypto asset derivatives are already subject to the requirements of the FAIS Act and are not subject to the general exemption discussed above. Further, providers of crypto asset derivatives remain subject to the Financial Markets Act.
Draft Exemption
The FSCA also published a Draft Exemption of Persons rendering Financial Services in relation to Crypto Assets from Certain Requirements for public comment. The draft exemption proposes to exempt licensed Crypto Asset FSPs and their key individuals and representatives from certain requirements of, amongst others, the General Code of Conduct and the Determination of Fit and Proper Requirements (Board Notice 194 of 2017). Deadline for comments is 1 December 2022.
Regulatory Framework
The following will apply to Crypto Asset FSPs (some exemptions are still in draft proposal stage):
- The FAIS Act.
- The General Code of Conduct, with the exception of section 13 (Guarantees or professional indemnity or fidelity insurance cover). Board Notice 123 of 2009, which deals with guarantees or professional indemnity, or fidelity insurance cover will also not apply. It is proposed that a general exemption from section 13 of the General Code of Conduct and Board Notice 123 of 2009 be issued.
- The Fit and Proper Requirements will apply to Crypto Asset FSPs, with the exception of, amongst others, the following (noting that certain exemptions will be temporary):
– Qualification requirements: To be exempted, subject to condition that FSP etc. have adequate and appropriate academic credentials pertaining to crypto assets.
– Regulatory examinations: Temporary exemption of FSPs etc. from the regulatory examinations (i.e. 18 months).
– Class of business training: not applicable as requirements are set out per class of business as defined, and the definition does not include crypto assets.
– CPD: To be exempted, subject to condition that FSP complete a minimum of 6 hours of CPD activities relating to crypto assets per CPD cycle.
Click here to access the FSCA publications.
If you provide financial services related to crypto assets, let us assist you to become appropriately licensed. Call your closest Masthead regional office or send us a message.
We have a team of experienced compliance officers and practice management consultants who can assist you with a GAP analysis and understanding of the FAIS Act requirements to ensure that you are successful in this next phase of your business journey. We also offer a variety of compliance solutions for larger organisations such as compliance training, online CPD, seminars and webinars and a central competence register, to help you with your compliance needs.