On 20 November 2020 the South African Financial Sector Conduct Authority (FSCA) published a draft declaration relating to crypto assets (including cryptocurrencies like Bitcoin and Ethereum). In terms of this draft declaration, crypto assets would be regarded as a ‘‘financial product‘‘ in terms of the Financial Advisory and Intermediary Services Act, 2002 (FAIS Act). The looming question is whether the draft declaration will be adopted and if so, what the consequences will be for participants in the growing crypto trading market.
Will the declaration be adopted in 2021?
The FSCA published the draft declaration for comments from the public. All comments had to be submitted to the FSCA by 28 January 2021. Market participants now await either an amended declaration taking into account the comments received or promulgation of the declaration in its current form. The FSCA recently advised in off the record discussions that the declaration will likely be amended and promulgated in 2021.
The purpose behind the declaration
It is somewhat of a myth that crypto assets are currently unregulated in South Africa. This myth stems from the fact that there is no single, over-arching piece of legislation that regulates all aspects of the crypto asset market. However, South Africa does already have various laws on the statute books that impose legal obligations in respect of crypto assets and the owners thereof, such as the Income Tax Act, 1962 (Income Tax Act) and the Exchange Control Regulations, 1961 published in terms of the Currency and Exchanges Act, 1933 (Exchange Control Regulations).
Nevertheless, the legislature and local regulators are attempting to pass tighter restrictions on crypto assets and in particular on the platforms, custodians, intermediaries and other service providers who assist South African investors to trade crypto assets. At this stage it seems that the South African legislature will broaden existing laws to extend their application to crypto assets.
What could this mean for crypto asset service providers?
By publishing the draft declaration, the FSCA is attempting to tweak the application of the FAIS Act so that it now applies to crypto assets in the same way as it would apply to shares, derivatives and other financial products.
The purpose of the FAIS Act is to regulate the rendering of financial advisory and intermediary services to clients. Financial institutions may not render services to clients unless they obtain a licence in terms of the FAIS Act. If the FAIS Act were to be extended to crypto assets the effect would be two-fold:
- any person who furnishes advice or renders intermediary services in relation to crypto assets must be licensed under the FAIS Act as a financial services provider (FSP); and
- any FSP, including its representatives, must comply with the relevant FAIS requirements such as the General Code of Conduct for Authorised Financial Services Providers and Representatives and the Determination of Fit and Proper Requirements.
In essence, the application of the FAIS Act will regulate the suppliers of crypto assets but will not directly regulate investors who trade crypto assets (although investors remain subject to the Income Tax Act and Exchange Control Regulations). For example, any platform or company that provides services related to the buying and selling of crypto assets would have to register with the FSCA in terms of the FAIS Act.
The FSCA have advised that it is currently finalising the licensing and regulatory framework that would apply to crypto asset service providers under the FAIS Act.
The draft declaration on crypto assets is intended to be a step towards protecting crypto asset investors. The FSCA stated in their statement in support of the draft declaration that more robust legislation and regulations will potentially follow which will more fully regulate crypto assets and crypto asset service providers. Consumers and service providers should brace for new laws and regulations that will regulate crypto asset trading and investment in South Africa in the near future.