Crypto currency

The Financial Sector Conduct Authority’s proposal to make crypto assets a financial product

Reference documents:

Press Release – Draft Declaration of Crypto Assets as a Financial Product by the FSCA, dated 20 November 2020
Statement in support of the Draft Declaration of Crypto Assets as a Financial Product under the Financial Advisory and Intermediary Services Act dated 20 November 2020
Notice of publication – Draft Declaration of Crypto Assets as a Financial Product dated 20 November 2020
Financial Advisory and Intermediary Services Act, 2002 (Act No. 37 of 2002)

The FSCA published a draft declaration of crypto assets as a financial product under the Financial Advisory and Intermediary Services Act on 20 November 2020. This declaration was provided to the public for comment with a due date of 28 January 2021.

Crypto assets are currently not regulated by the FSCA in South Africa. It is estimated that the number of crypto asset platforms operating in South Africa is 800 000 registered South Africans controlling 80–90 percent of the market with a R6,5 billion asset value.

The regulatory concern is of an investment nature. Investment in crypto assets is on the increase but the volatility of the currencies linked to crypto assets is a cause for concern as investors in such platforms do not have any meaningful form of protection. This is the intention of the FSCA’s draft paper; to bring forth some form of protection to the investor.

Whilst this is admirable, the investor should naturally be aware of the fact future tax obligations may come to the fore at some stage. All investments eventually have a taxable outcome in one way or another.

What is a crypto asset?

The Draft Declaration defines a crypto asset as “any digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes, but excluding digital representations of fiat currencies or securities that already fall within the definition of financial product.

The Draft Declaration’s intention is to classify crypto assets as a financial product under the FAIS Act to provide greater protection to South Africans who invest in crypto assets.

What does this mean to the miner of currencies and investor in such currencies?

For the miner of currencies: no change. If crypto assets are classified as financial products, then only persons who are authorised under the FAIS Act to provide advice and/or intermediary services in respect of financial products will be permitted to market, offer and/or sell crypto assets and the same consequences for any failure to comply with the FAIS Act will be applicable to Financial Service Providers who make the asset class available to investors.

The service provider (as a licensed FSP) and its authorised representatives will be required to comply with the General Code of Conduct for Authorised Financial Service Providers and Representatives, 2003 and the Determination of Fit and Proper Requirements, 2017.

Timelines?

The Declaration makes provision for transitional arrangements and plans a four month period within which crypto asset service providers are required to submit their applications for authorisation to act as a FSP. The transitional period will commence on the date on which the Declaration is promulgated. 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.

After consideration of all submissions received on the draft Declaration, the FSCA will make a decision regarding the publication of the final Declaration in the Government Gazette as required in terms of paragraph (h) of the definition of a financial product in the FAIS Act.

Some background info

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.

It is envisaged that implementation of the draft Declaration will result in improved disclosures to customers that more effectively highlight the high risks involved in investing in crypto assets and should also 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 in no way impacts 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 and so forth, nor does it attempt to regulate, legitimise or give credence to crypto assets.

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).

The main objective of the CAR WG was to formulate a coherent and comprehensive policy stance on crypto assets, while ensuring the continued integrity and efficient functioning of financial markets, maintaining financial stability, protecting the rights and interests of customers and investors, and combating illegitimate cross-border financial flows, money laundering and terrorist financing.

One specific area currently under consideration includes CASP (crypto asset services providers) activities in the context of exchange control regulations as this could have a knock-on effect on how CAPS activities are
treated in other financial sector laws as the broader work unfolds.

Broader developments surrounding crypto assets, and in particular CASP activities, will likely be given effect through the COFI Bill (Conduct of Financial Institutions Bill) which will constitute the future consolidated legal framework governing the conduct of financial institutions. The COFI Bill adopts an activity based approach to licensing and it is probable that a variety of CASP activities will be reasonably captured under the COFI Bill as licensed activities. It is also proposed that the COFI Bill will repeal the FAIS Act, meaning that the Declaration, if made, will ultimately be collapsed into the COFI Bill framework.

Author Craig Tonkin

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