Cryptocurrencies are still not recognised as legal in South Africa, but dealing in or advising on them has now been declared a financial service requiring a license in the country. In a landmark move, the Financial Sector Conduct Authority (FSCA), the authority in South Africa in charge of regulating the market conduct of financial institutions that provide financial products and financial services, has issued a draft declaration classifying crypto assets as a financial product under the Financial Advisory and Intermediary Services (FAIS) Act. This is coming after similar moves by Mauritius and Nigeria.
“This Declaration is called the Declaration of crypto assets as a financial product, 2021,” the Declaration reads.
“This Declaration comes into effect on the date of [its] publication…on the website of the Authority,” it adds.
“Any person who, immediately before [the]…date of this Declaration…renders financial services in relation to crypto assets — (a) must submit an application for authorisation as a financial services provider…within 4 months of ….this Declaration; and
(b) [Such person] may continue rendering financial services in relation to crypto assets UNTIL— (i) the period to submit an application…has expired,” it further reads.
What Does This Declaration Mean In Summary?
Declaring crypto assets as a financial service means that any person that provides advice and/or intermediary services in relation to crypto assets must be licensed under the FAIS Act in South Africa. It also means that such person must comply with all of the requirements under the FAIS Act, the requirements of the General Code of Conduct for Authorised Financial Services Providers and Representatives, 2003 (General Code), the Determination of Fit and Proper Requirements, 2017 (F&P Requirements), etc.
“The intention behind the Declaration is to immediately capture intermediaries that advise on or sell crypto assets to consumers so as to provide adequate protection for consumers that are advised to purchase these products,” the FSCA states in an explanatory memo to the Declaration. “These protections should at least result in improved disclosures to customers that more effectively highlight the risks involved in investing in crypto assets and should ensure that a more robust advice process is adopted (including proper risk assessments) when intermediaries decide to advise customers to purchase crypto assets. Licensing of intermediaries is also necessary to improve the quality of data for policymakers and regulators about the crypto asset environment, and to consider whether there is a need for further regulatory interventions.”
Does This Mean That Cryptos Are Now Legally Recognized In South Africa?
The explanatory memorandum to the Declaration says no.
“The Declaration in no way legitimises or gives credence to crypto assets, but is merely attempting to regulate intermediaries that are selling and advising customers to invest in crypto assets,” the explanatory memo reads. “It is envisaged that this will either result in customers making more informed decisions when purchasing crypto assets or potentially in a decline in intermediaries attempting to advise on and/or sell crypto assets. It will also reduce instances of fraudulent activity where players purport to be selling investments in crypto assets but are in reality absconding with customer funds.”
How Would Affected Crypto Businesses Cope In The Meantime Before Obtaining The Required Licenses?
The FSCA states that acknowledges the impact that the draft declaration will have on businesses that are currently furnishing financial services in relation to crypto assets, and more specifically the fact that such business would not be able to operate legally unless they have obtained a FSP licence in terms of section 8 of the FAIS Act.
“For this reason, various “transitional arrangements” for businesses already operating in this space will be put in place before publication of the final declaration,” the FSCA states.
The transitional arrangements entail that such a business may continue its operations, but it must submit an application for authorisation as an FSP under section 8 of the FAIS Act within 4 months of the effective date of the final Declaration.
“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,” the authority further states.
According to the FSCA, any new business that wants to start furnishing financial services in relation to crypto assets after the effective date of the final Declaration will have to obtain an Financial Service Provider (FSP) licence before it can start furnishing such services.
Cryptocurrencies South Africa license Cryptocurrencies South Africa license
Read also: Security Token Trading In Mauritius Now Eligible For Licensing Under New Regulation
Is This The Final Declaration Of FSCA On This Or Is There Any More Thing?
No. This is an interim declaration. Hence, the FSCA invites the general public to comment on the draft regulations on or before 28 January 2021.
“Submissions on the draft Declaration must be made in writing on or before 28 January 2021 to the FSCA at FSCA.RFDStandards@fsca.co.za, using the submission template available on the FSCA’s website [at www.fsca.co.za],” the memo to the declaration states.
The Implication Of These For Crypto Startups And Traders In South Africa
Those who will be most affected by the new rules are established South Africa-based crypto platforms and exchanges offering crypto-related services in the country. However, there is still ambiguity around the rules as the declaration state that crypto assets are neither legitimised nor given credence to in the country. In any case, while the latest declaration may be a huge benefit to platforms that are able to append the badge of legitimacy from Financial Services Board of South Africa (FSB), now renamed to Financial Sector Conduct Authority (FSCA), nobody is really sure of how the government wants to wield its new cudgel.
“We’re not surprised by this, as we knew it was coming. We’re excited by it. A big hurdle for us is not being regulated by the FSCA, which has deterred many people from getting involved in this sector. I think regulations will help bring credibility to the crypto sector and help weed out those involved in crypto scams,” said Jon Ovadia, founder and CEO of crypto company Ovex. “At present there is no sure way of knowing who is legitimate and who is operating a scam, and the people are understandably confused by this, so we see this as a positive development.”
“VALR will always welcome prudent and appropriate regulation, particularly as it relates to consumer protection,” says VALR CEO Farzam Ehsani. “We have been working with the South African regulators for many years to inform a regulatory framework that does exactly this. It is important to note, though, that today’s draft declaration of crypto assets as a financial product under the Fais Act by the FSCA was not one of the 30 recommendations in the Position Paper on Crypto Assets that was published by the regulators in April this year.”
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based lawyer who has advised startups across Africa on issues such as startup funding (Venture Capital, Debt financing, private equity, angel investing etc), taxation, strategies, etc. He also has special focus on the protection of business or brands’ intellectual property rights ( such as trademark, patent or design) across Africa and other foreign jurisdictions.
He is well versed on issues of ESG (sustainability), media and entertainment law, corporate finance and governance.
He is also an award-winning writer