The Financial Sector Conduct Authority has published the first of what will be a series of regulations to manage crypto assets and their providers.
By Dawid de Villiers, partner, Lerato Lamola, of counsel, and Analisa Ndebele, associate from Webber Wentzel
Following its initial proposal on 20 November 2020, the Financial Sector Conduct Authority (FSCA) has declared crypto assets to be a financial product in terms of section 1(h) of the Financial Advisory and Intermediary Services Act (FAIS Act), with effect from 19 October 2022 (Declaration).
The Declaration comes at an opportune time when South Africa is grappling with a potential grey-listing. The lack of crypto asset regulation was identified as a major anti-money laundering and counter-financing terrorism (AML/CFT) deficiency by the Financial Action Task Force (FATF).
In July, the Deputy Governor of the South African Reserve Bank, Kuben Naidoo, hinted that crypto asset regulations would be coming soon. On 19 October 2022, the FSCA published the first of these impending regulations.
The FSCA views the Declaration as a critical interim step towards protecting customers in the crypto asset environment, pending the enactment of the highly anticipated Conduct of Financial Institutions (COFI) Bill.
According to the Declaration, any person who, as a regular feature of their business, furnishes advice or renders intermediary services in relation to crypto assets (crypto asset provider), must be authorised as a financial services provider (FSP) or be appointed as a representative of an authorised FSP (representative) under sections 8 and 13 the FAIS Act, respectively.
A crypto asset, as envisaged under the FAIS Act, is defined as a digital representation of value that:
- is not issued by a central bank, but may be traded, transferred or stored electronically by natural and legal persons for the purpose of payment, investment and other forms of utility;
- applies cryptographic techniques; and
- uses distributed ledger technology.
Consequently, all prospective crypto asset providers will need to apply to the FSCA, in the form and manner prescribed on the FSCA’s website.
Once authorisation is granted, the crypto asset FSP or representatives will fall under the regulatory oversight and supervision of the FSCA and must meet the obligations imposed on FSPs, including the reporting, disclosure and fit and proper requirements.
To minimise potential disruptions to the operations of prospective crypto asset FSPs, the FSCA has formulated a comprehensive exemption framework published in FSCA FAIS Notice 90 of 2022 (Exemption). In terms of the Exemption, existing crypto asset providers are currently exempt from having to apply as a FSP under FAIS, provided that the crypto asset provider applies for a FSP licence during the designated six-month application period, which will run from 1 June 2023 to 30 November 2023.
Applicants will be allowed to continue rendering crypto-related services while their applications are considered by the FSCA, but this requires that they submit their application within the designated application period and immediately comply with specified provisions of the General Code of Conduct for Authorised FSPs and Representatives, 2003 (General Code) and the Determination of Fit and Proper Requirements for FSPs, 2017 (Fit and Proper Requirements). Failure to comply with the requirements of the Exemption will result in a person losing those protections.
The FSCA has also published a draft for comment a draft exemption dealing with certain exemptions for crypto asset FSPs from certain sections of the General Code and certain provisions of the Fit and Proper Requirements. Members of the public may comment on this draft by 1 December 2022.
[1] See alert published on 28 September 2022 on the impending crypto asset regulation available at: https://www.webberwentzel.com/News/Pages/impending-regulation-of-crypto-assets-and-crypto-asset-service-providers.aspx
[2] https://www.fsca.co.za/Regulated%20Entities/Pages/LR-FAIS-New-Applications.aspx