Declaration of a crypto asset as a financial product under the Financial Advisory and Intermediary Services Act

On 19 October 2022, the Financial Sector Conduct Authority (FSCA) published General Notice 1350 of 2022 in Government Gazette 47334 (Notice), wherein “crypto assets” were declared ‘financial products’ under section 1 of the Financial Advisory and Intermediary Services Act No. 37 of 2002 (FAIS Act).

The manner in which crypto assets can be regulated has been under consideration by the National Treasury (NT) 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 increased risk of harm to consumers purchasing/investing in crypto assets coupled with the exponential increase in the provision and use of crypto assets in South Africa has given further urgency to the need to start regulating the selling or intermediating of crypto assets in South Africa, and giving effect to the above recommendations.

The regulation of crypto assets has been under consideration by the National Treasury (NT) and relevant authorities for a number of years. In 2004 the National Treasury (NT), as a joint initiative with the South African Reserve Bank (SARB), the Financial Services Board (now the Financial Sector Conduct Authority (FSCA)), the South African Revenue Service (SARS) and the Financial Intelligence Centre (FIC), published an initial public statement on crypto assets. The public statement was followed by a position paper on virtual currencies that was published in 2014 by the South African Reserve Bank’s National Payment System Department (NPSD).

Below is the relevant Gazette’s wording.

“FINANCIAL SECTOR CONDUCT AUTHORITY
GENERAL NOTICE OF 2022 FINANCIAL ADVISORY AND INTERMEDIARY SERVICES ACT, 2002 DECLARATION OF A CRYPTO ASSET AS A FINANCIAL PRODUCT UNDER THE FINANCIAL ADVISORY AND INTERMEDIARY SERVICES ACT”

  1. Definitions

In this Notice, “the Act” means the Financial Advisory and Intermediary Services Act, 2002 (Act No. 37 of 2002), any word or expression to which a meaning is assigned in the Act shall have that meaning, and “crypto asset” means 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 purpose of payment, investment and other forms of utility;
(b) applies cryptographic techniques; and
(c) uses distributed ledger technology.

  1. Declaration

The Authority, under paragraph (h) of the definition of “financial product” as defined in section 1 of the Act, hereby declares a crypto asset as a financial product for purpose of that definition.

  1. Short title and commencement
    (1) This Notice is called the Declaration of a crypto asset as a financial product under the Financial Advisory and Intermediary Services Act, 2022.
    (2) This Declaration takes effect on the date of publication.

In terms of the Notice and for purposes of the FAIS Act, a “crypto asset” is a digital representation of value that:

  1. is not issued by a central bank but is capable of being traded, transferred, or stored electronically by natural and legal persons for payment, investment, and other forms of utility;
  2. applies cryptographic techniques; and
  3. uses distributed ledger technology.

The FSCA, in its press conference on 20 October 2022 stated that that the regulation and licensing of crypto assets is intended to protect consumers from crypto scams and empower the authorities to take action against such crypto scammers. Even though the FSCA supports the Notice, it deliberately referred to crypto assets as opposed to cryptocurrencies, as the FSCA does not believe that cryptocurrency meets the criteria for currency.

The FSCA reiterated that currency (or legal tender) must (i) store value, (ii) have a unit of account, (iii) have general acceptance and (iv) be a medium of exchange.

Further additional information about crypto-related matters can be found on our website under the “news blog” section in the following articles:

The tax effects of your crypto assets

Cryptocurrencies and tax
The Financial Sector Conduct Authority’s proposal to make crypto assets a financial product.

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