There is no specific legislation or regulation that currently exists in South Africa for the use of crypto assets, which means that there is no legal protection or recourse offered to users of, or investors in, crypto assets. As the use of crypto assets continues to grow and evolve, a deeper collective understanding of this area is emerging, and regulators across the globe are formulating regulatory approaches that are proportionate to, and appropriate for, the benefits and risks of crypto assets.
A group of South African financial sector regulators have drafted a policy position paper on crypto assets through the Intergovernmental Fintech Working Group (IFWG). Members of the IFWG 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) and the South African Reserve Bank (SARB).
The position paper, which was released in April 2020, provides specific recommendations for the development of a regulatory framework for crypto assets including suggestions on the required regulatory changes to be implemented. The position paper recommends, among other aspects:
- The implementation of an anti-money laundering and counter-terrorism financing regime
- A licensing and supervisory regime from a conduct of business perspective
- A regulatory regime for the monitoring of cross-border financial flows
The position paper builds on the feedback received from a consultation paper on crypto assets that was issued by the IFWG in January 2019 which highlighted the perceived benefits and risks of crypto asset-related activities, as well as policy proposals for a regulatory framework.
The latest position paper provides, inter alia, background information detailing the developments on crypto assets from 2014 based on previous public statements and consultation papers. The paper also looks at defining and classifying crypto assets with the following definition now being adopted by the regulatory authorities, through the IFWG:
A crypto asset is a digital representation of value that is not issued by a central bank, but is traded, transferred and stored electronically by natural and legal persons for the purpose of payment, investment and other forms of utility, and applies cryptography techniques in the underlying technology.
However, this definition of crypto assets does not include digital representations of sovereign currencies and is therefore not regarded as legal tender or public money.
The paper further explores the risks of crypto assets as well as developing a regulatory response to crypto assets in South Africa. It also sets out the objectives and principles for regulating crypto assets and includes the description and policy position relating to the different ways in which crypto assets can be used.
Some of the policy positions and recommendations made in relation to crypto assets will mean that entities that offer certain services in relation to crypto assets will be offering a financial service requiring them to be licenced in terms of the CoFI Bill and to register as an accountable institution with the Financial Intelligence Centre. We have listed a few of the recommendations below:
- Any entity that provides crypto asset services will be regarded as a crypto asset service provider (CASP). The paper goes into detail about the types of entities and activities that would be classified as a CASP.
- Schedule 1 to the FIC Act is to be amended to add CASPs to the list of accountable institutions, which would require them to register with the Financial Intelligence Centre and to comply with the relevant provisions of the FIC Act, following a risk-based approach. It is proposed that the FIC should supervise CASPs and ensure that they adhere to the relevant requirements imposed on them by the FIC Act.
- Specific services relating to the buying and selling of crypto assets should be classified as a financial service and should be supervised and regulated from a conduct-of-business perspective. As such it would need to be included in the definition of a “financial service” in the Financial Sector Regulation Act and be included in the licensing activities under the CoFI Bill. It is also proposed that the FSCA should be the responsible Authority for the licencing of these types of services.
- The pooling of crypto assets should be regarded as constituting an alternative investment fund which would be a licenced activity in terms of the CoFI Bill. It is however, proposed that collective investment scheme portfolios should not be allowed to include crypto assets in their portfolios.
Financial services providers or other entities who have any dealings with crypto assets may in the future need to be licenced for the services which they provide in relation to crypto assets, amongst other things.
The position paper is published by all the regulatory authorities, which includes NT in its role as policymaker. Stakeholders and interested parties are invited to forward their comments on this position paper to the IFWG at the email address: innovation@ifwg.co.za.
The position paper follows a consultative process, and all comments on this document should be submitted by 15 May 2020.
To read our previous article on the 2019 Consultation Paper, click here.