The Intergovernmental Fintech Working Group (IFWG), through the Crypto Asset Regulatory Working Group (CAR WG), published the latest version of the Position Paper on Crypto Assets in June 2021. The paper confirms that crypto assets will be brought into the South African Regulatory purview in a phased and structured manner.
The initial South African public statement on crypto assets was issued in 2014. The latest position paper provides background information detailing the developments since 2014 based on previous public statements, consultation and position papers. In April 2020, the IFWG drafted a revised position paper on crypto assets, which followed a consultative process, that provided specific recommendations for the development of a regulatory framework to crypto assets, as well as suggestions on the required regulatory changes to be implemented. The comments on the 2020 position paper were considered and incorporated in the latest version, which provides 25 recommendations, some of which are already in the process of being implemented, on how to bring crypto assets into the South African regulatory scope across three main areas, namely:
- Implementation of an anti-money laundering and counter terrorism financing framework;
- A framework for monitoring cross-border financial flows; and
- The application of financial sector laws.
The position paper provides the South African policy position on crypto assets. The intention is therefore not to regulate the actual crypto assets and associated products, but rather the entities that provide services in relation to such products. The South African regulators therefore intend to regulate crypto assets by regulating Crypto Asset Service Providers (CASPs).
Members of the IFWG currently include the Financial Intelligence Centre (FIC), the Financial Sector Conduct Authority (FSCA), the National Credit Regulator (NCR), National Treasury (NT), the South African Revenue Service (SARS), the South African Reserve Bank (SARB), and the Competition Commission. These members have agreed on the following six high-level principles that will guide the approach on regulating CASPs in South Africa:
- Principle 1: Crypto assets must be regulated appropriately.
- Principle 2: An activities-based perspective must be maintained, and the principle of ‘same activity, same risk, same regulations’, must continue to apply and inform the regulatory approach.
- Principle 3: Application of proportionate regulations that are commensurate with the risks posed (i.e. a risk-based approach).
- Principle 4: A collaborative and joint approach to crypto asset regulation must be maintained.
- Principle 5: Continue to proactively monitor the dynamic development of the crypto assets market, including maintaining knowledge on emerging international best practices.
- Principle 6: Digital literacy and digital financial literacy levels must be increased amongst consumers and potential consumers of crypto assets.
In addition to providing a roadmap for the implementation of a framework for regulating CASPs, the policy paper also serves to initiate the process for the individual financial sector regulators to implement the recommendations contained in the paper. The 25 recommendations have also been categorised with short-, medium-, and long-term objectives for implementation. There is, however, a need to continually refine, amend and make additions to the position paper, given the evolutionary nature of the subject matter.
Some of the short-term objective recommendations are positioned to be implemented within the next 12 months:
- Entities providing crypto asset services, as defined, will be regarded as CASPs.
- Schedule 1 of the FIC Act is to be amended by adding CASPs to the list of accountable institutions. This means that once Schedule 1 of the FIC Act is amended, CASPs would have to adhere to all the relevant provisions within the FIC Act, which includes registration with the Financial Intelligence Centre.
- Crypto assets to be declared by the FSCA as a “financial product”. In November 2020, the FSCA published a draft declaration of crypto assets as a financial product under the FAIS Act.
- Specified services related to crypto assets to be included in the relevant licensing activities under the CoFI Bill and should be included in the definition of “financial service” in the Financial Sector Regulation Act (FSRA).
- The pooling of crypto assets for onward distribution to the public should be regarded as constituting an alternative investment fund which should be incorporated within the relevant licensing activities in terms of the CoFI Bill. The stance remains that collective investment schemes and pension funds should not be allowed to have exposure to crypto assets. Further, the issuing and listing of derivative instruments or other securities that reference crypto assets as the underlying assets should not be permitted until further notice.
The paper further defines and classifies crypto assets and provides details on generic and specific risks posed by crypto assets, as well as the challenges of, and the objectives of regulating crypto assets and CASPs. The paper provides insights to the principles on which the South African regulatory response is underpinned.
The IFWG also warns, in line with previous updates, that amending the South African regulatory stance on crypto assets (i.e. by agreeing that crypto assets can no longer remain outside of the regulatory remit, and by making recommendations for bringing crypto assets into the South African regulatory environment in a phased and structured manner), should not be interpreted as any type of endorsement of crypto assets by the government, South African Regulators, or individual IFWG members. Crypto assets remain highly volatile and inherently risky given their decentralised and disintermediated value proposition.
To read more, click on the links below:
- Previous article: Position Papers on Crypto Assets 2020
- Document: Frequently asked questions about crypto assets
- Press Release: Crypto assets to be brought into South African regulatory purview