In a recent article by MoneyWeb, the lack of regulation over cryptocurrency (“crypto”) was brought to light. This is due to the recent crypto crashes which has caused substantial losses to those who have invested in the industry.
The Intergovernmental Fintech Working Group (“IFWG”) is a collaboration between various financial regulators in South Africa including, but not limited to, the National Treasury, the South African Revenue Service (“SARS”), the Financial Intelligence Centre (“FIC), Financial Sector Conduct Authority (“FSCA”) and more. The IFWG published a paper in June 2021 which contained twenty-five recommendations that have been made for the implementation of regulations over crypto in South Africa, with specific reference to the various crypto exchanges opening in South Africa, such as Luno.
While some of these recommendations are in the process of being implemented, such as a draft declaration on crypto assets being a financial product under the Financial Advisory and Intermediary Services Act (“FAIS”) they are not yet in force. The FAIS Act recommendation would require Crypto Asset exchanges, trading platforms, brokers and advisors be authorised under the FAIS Act as financial services providers.
However, as MoneyWeb quite correctly points out, internal regulations of exchanges/trading platforms through banks and financial institutions leaves many holes in these operations, which are being filled by Decentralised Finance (“DeFi”). In very broad strokes, DeFi are a series of decentralised and unowned applications which provide a blockchain system for peer-to-peer transactions, in which the blockchain acts as a ledger which is timestamped for certain pre-arranged transactions, known as smart contracts, which self-execute among participants. This decentralised system therefore surpasses many of the incoming regulations on financial institutions and reporting, while offering higher returns and interest than banking institutions. This does come with its own set of drawbacks in that it is still vulnerable to market volatility, theft, and scams.
South Africa, however, already has one possible solution in place for DeFi, at least for South African citizens. This is because in terms of the Financial Markets Act (“FMA”), a “derivative instrument” is any “financial instrument or contract that creates rights and obligations and whose value depends on or is derived from the value of one or more underlying asset, rate or index, on a measure of economic value or on a default event”. Therefore, crypto asset derivatives, being agreements between buyers and sellers for the future price of digital assets, fall within the scope of the FMA. While this may regulate some DeFi transactions within the Republic, there are still no firm international regulations.
It remains to be seen however, the effect that regulations will have on crypto and trading. In theory, more regulations mean better oversight and stability, but how does this apply to a market designed to transcend regulations? Will this bring less market volatility and therefore promote more DeFi transactions, or will this push financial institutions to open their own DeFi platforms?
Naturally, many of these questions will be answered in time, but remain open for debate as many of the IFWG recommendations are exactly that, recommendations. Until such a time as they are implemented and enacted, uncertainty will reign.
We will however, endeavour to provide updates as these matters progress.
Tel: 011 784 8984