Unregulated products, such as virtual currencies, are becoming increasingly popular. This is often because the financial rewards appear to be lucrative causing prospective investors to be less cautious in their approach than normal. However, the risks associated with unregulated products can be great and the consequences thereof can be detrimental to the financial well-being of clients.
Virtual currencies do not fall within the Financial Advisory and Intermediary Services Act definition of a financial product, and therefore are not regulated by the FAIS Act. In fact, virtual currencies are not regulated at all in South Africa. This means that investors in virtual or crypto currencies are not protected against losing their money, and will not be able to seek any recourse in the event of loss from any South African authority.
The National Treasury, South African Reserve Bank, Financial Services Board, South African Revenue Service and the Financial Intelligence Centre have sent out a warning advising users to exercise extreme caution when participating in virtual currency transactions. This unregulated ‘open source’ currency is not controlled and there are no barriers preventing people from using it.
Bitcoin is an example of virtual currency. Bitcoin is a decentralised peer-to-peer payment network with no central authority or middlemen.[1] It is an independent digital coin in an international payment network. This means no financial body or central bank stands behind the coin and no one is controlling its distribution and production. The bitcoin does not appear in a physical form, only on a computer and is stored in digital addresses across the web.
“As the uptake of Bitcoin and other cryptocurrencies increases, it is possible that the South African authorities will adopt the approach taken in many other jurisdictions and explore ways in which the regulatory regime could be amended or revised. The global cryptocurrency team has produced a guide to legal and regulatory framework within which cryptocurrencies operate.”[2] To read more on Regulation of Cryptocurrencies, click here.
Advisors have a duty of care to provide sound financial advice, and to ensure that the advice given to clients is suitable and takes the client’s situation and circumstances into consideration.
Extreme caution should be exercised by any person looking to provide advice or sell any unregulated product, including virtual currencies. The risks are very high and the potential loss to clients could be significant, resulting in financial stress to clients and reputational damage to the FSP.
Click here to read the User Alert published by the National Treasury.