South Africa’s financial regulator, the Financial Sector Conduct Authority (FSCA) recently declared crypto assets to be financial products, and will require all crypto companies to apply for financial services provider (FSP) licences by November 2023.

This comes shortly after the South African Reserve Bank urged commercial banks to relax their traditional hostility to cryptos after most of them terminated banking relationships with crypto exchanges.

The FSCA defines a crypto asset as “a digital representation of value” that uses cryptography and distributed ledger technology, and “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.”

South Africa appears to be setting the tone for the rest of the continent, which has been less than accommodating to this new asset type and the technology on which it rests.

There was a sense of urgency behind the crypto regulation, coming just days before the deadline set by the Financial Action Task Force (FATF), which threatened to grey-list South Africa unless it pushed through certain financial reforms. The declaration of cryptos as financial products will remove some of the sting from the grey-listing threat, which research group Intellidex warned could cost the economy 1% of its GDP.

The FSCA is under pressure to bring some order to a regulatory vacuum that has allowed crypto scams to proliferate, including South Africa’s native-born Mirror Trading International.

Going forward, South Africans will be able to check whether a crypto company is licensed, which should eliminate most of the scams. Licensed crypto companies will be subject to the FSCA’s reporting and monitoring requirements, which will give customers comfort that this new asset type has the blessing of the regulator.

It’s also a giant leap forward for institutions who have been watching the erratic and often exhilarating progress of cryptos with some jealousy. They have been waiting for the regulator’s imprimatur to enter the fray.

Cryptos will be regulated under the Financial Services and Intermediary Services (Fais) Act, allowing the public to lodge complaints with the Fais Ombud. Crypto asset service providers (Casps) have anticipated regulation for years, and have subjected clients to Know Your Customer (KYC) and Anti-Money Laundering regulations already applied in the banking sector.

Casps will now be required to adhere to the Fais General Code of Conduct, and are expected to render financial services “honestly, fairly and with due skill, care and diligence.”

Though cryptos have, until now, been unregulated, they have been subject to other financial regulations and statutes. The SA Reserve Bank regulates the export of capital, and the Financial Markets Act governs financial products such as derivatives (crypto derivatives do not yet have their own specific legislation).Stablecoins – crypto equivalents of assets such as the US dollar, rand and gold – are also not covered by this new declaration. 

It is anticipated that further regulation will follow as required.

Ciaran Ryan is editor of Moneyweb Crypto.

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