Bontle Litheko – Attorney and Jason Hunter – Candidate Attorney
In Government Notice 1350 in Government Gazette 47334, on 19 October 2022, the FSCA has now declared “crypto assets” as ‘financial products’ under s1 of FAIS Act.
In terms of the Notice and for purposes of the FAIS Act, a “crypto asset” is a digital representation of value that –
1. is not issued by a central bank but is capable of being traded, transferred, or stored electronically by natural and legal persons for payment, investment, and other forms of utility;
2. applies cryptographic techniques; and
3. uses distributed ledger technology.
The declaration specifies that crypto assets, which so far have fallen outside financial regulation in South Africa, are now defined as financial products under the Financial Advisory and Intermediary Services (FAIS) Act, offering considerable protection to consumers buying or investing in them.
The FSCA says this is a first step in bringing crypto assets and other financial innovations within the regulatory framework, and it was based largely on the recommendations of the regulator’s Crypto Asset Regulatory Working Group, established in 2019.
It also addresses certain concerns about cryptocurrencies raised by the global Financial Action Task Force in response to the threatened greylisting of South Africa for non-compliance with anti-money laundering and counter-terrorism requirements.
The declaration effectively means that providers of crypto assets, such as crypto exchanges, are bound by the same laws that apply to financial advisers and give consumers recourse through the FAIS Ombud if the advice they receive on purchasing these assets fails standards set by the act.
As with other financial products, such as insurance or investment policies, the adviser or intermediary must be licensed by the FSCA to sell that particular product.
New providers will have to register between June 1 and November 30 2023, while existing providers may carry on operating, but will need to have registered by the end of November 2023. However, existing providers are, with immediate effect and save for certain exceptions, subject to the provisions of the FAIS Act, including complying with the fit and proper requirements (regarding honesty, integrity and good standing) and the general code of conduct to which all financial advisers must adhere.
At this stage, crypto mining has not been considered in the legislation, and neither have non-fungible tokens (NFTs). Legislation has also failed to address the status of cryptocurrencies as legal tender– an issue that would fall under the jurisdiction of the South African Reserve Bank.
Marius Reitz, Luno’s general manager for Africa, commenting on the classification of crypto as a financial product, said “The licensing requirements that will flow from this classification will drive high standards in the industry, particularly in relation to consumer protection, with potential investors easily able to identify those providers that satisfy regulatory requirements”.
The licensing requirements that should flow from this classification will likely drive high standards in the industry, particularly in relation to consumer protection, with potential investors easily able to identify those providers that satisfy regulatory requirements.
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