The Financial Sector Conduct Authority (FSCA) recently published a draft Declaration of crypto assets as a financial product under the FAIS Act.
The manner in which crypto assets can be regulated has been under consideration by the National Treasury and relevant authorities for a number of years. In 2020, the Crypto Assets Regulatory Working Group (CAR WG) which resorts under the Intergovernmental Fintech Working Group (IFWG) and comprises members of the National Treasury, South African Reserve Bank and Prudential Authority, FSCA, Financial Intelligence Centre, National Credit Regulator and South African Revenue Services, published a Position Paper which made a variety of recommendations pertaining to the regulation of crypto assets. The draft Declaration is intended to give partial effect to some of the recommendations contained in the Position Paper by declaring crypto assets as a financial product under the FAIS Act.
A Statement in support of the draft Declaration sets out the conduct regulatory framework and impact of declaring crypto assets as a financial product, stating that:
- Any person that provides advice and/or intermediary services in relation to crypto assets must be authorised under the FAIS Act as a financial services provider (FSP) and must comply with the requirements of the FAIS Act. This will include crypto asset exchanges and platforms, as well as brokers and advisors.
- In acknowledging the inherent types of risk brought about by crypto assets, and the fact that there are some differences between crypto assets and other financial products, the FSCA is in the process of considering whether the requirements contained in the General Code of Conduct and Fit and Proper Requirements are, in all respects, appropriate in the context of crypto assets. To the extent that specific requirements are found to be inappropriate in the context of crypto assets, a general exemption from these requirements might be issued.
- The FSCA is also considering to what extent it is necessary to develop a specific code of conduct in the context of crypto assets.
- Further communication regarding the proposed framework for regulating crypto assets under the FAIS Act, whether this will entail a separate code of conduct or a combination of leveraging on existing legislation and issuing exemptions, will follow in due course.
The Statement supporting the draft Declaration further states that the intention behind the Declaration is to immediately capture intermediaries that advise on or sell crypto assets to consumers, to provide adequate protection for consumers that are advised to purchase these products. These protections should at least result in improved disclosures to customers that more effectively highlight the risks involved in investing in crypto assets and should ensure that a more robust advice process is adopted (including proper risk assessments) when intermediaries decide to advise customers to purchase crypto assets.
The draft Declaration does not impact the status of crypto assets in the context of other laws such as exchange control regulations, requirements under the Pension Funds Act and Collective Investment Schemes Act, etc 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 CAR WG which will inform future policy interventions to be implemented across a variety of regulators and laws.
Transitional Arrangements
Businesses that are currently furnishing financial services in relation to crypto assets must submit an application for authorisation as an FSP under section 8 of the FAIS Act within 4 months of the effective date of the final Declaration. The business will be allowed to continue its operations until its application for a licence has been granted or declined. If such business fails to submit an application within 4 months, it must cease its operations.
Any new business that wants to start furnishing financial services in relation to crypto assets after the effective date of the final Declaration will have to obtain an FSP licence before it can start furnishing such services.
Interested parties are invited to submit comments on the draft Declaration to the FSCA using the Submission Template by 28 January 2021 at FSCA.RFDStandards@fsca.co.za
To read the related documents, click on the links below:
- Draft Declaration of Crypto Assets as a Financial Product
- Statement in support of the draft Declaration
- Download the Submission Template