At over 11 (eleven) years since the creation of Bitcoin, the world’s largest crypto currency by market capitalisation, many countries have implemented a policy position on crypto assets and/or enacted legislation in relation to the regulation of crypto assets.
South Africa was no exception and in 2014 National Treasury issued a statement regarding the risks associated with crypto assets. In 2014 the South African Reserve Bank (“SARB”) also issued a position paper on crypto assets stating that all activities related to the acquisition, trading and/or use of crypto assets were done at the end users’ sole and independent risk, with no recourse to SARB.
In 2016 the Intergovernmental Fintech Working Group (“IFWG”) was established with the aim of developing a common understanding amongst regulators and policymakers of financial technology developments as well as the regulatory and policy implications for the financial sector and the economy as a whole. The IFWG comprises of national treasury, SARB, the financial sector conduct authority, and the financial intelligence centre.
On 14 April 2020 the IFWG released a position paper on crypto assets which contains various recommendations for the development of a regulatory framework for crypto assets in South Africa (“Position Paper”). The Position Paper sets out, inter alia, the current policy position for crypto assets in South Africa and recommends the implementation of an anti-money laundering and counter-terrorism regime, a licensing and supervisory regime regulating the conducting of business relating to crypto assets and a regulatory regime for the monitoring of cross-border financial flows.
What follows is a condensed overview of the Position Paper outlining the current position regarding the regulation of crypto assets in South Africa.
Crypto asset service providers:
The Position Paper recommends that entities which provide crypto asset services are placed under one umbrella definition, namely that of crypto asset service provider (“CASP”) which will encompass the following –
- trading platforms providing:
- intermediary services for buying and selling of crypto assets;
- trading, conversion or exchange from fiat currency (government-issued currency which isn’t backed by a commodity such as gold) or other value into crypto assets and vice versa;
- trading, conversion or exchange from crypto assets into other crypto assets; and
- remittance services using crypto assets as a means of facilitating credit transfers,
- vending machine providers providing intermediary services for buying and selling of crypto assets;
- token issuers:
- conducting initial coin offerings;
- conducting issuing of stablecoins;
- conducting issuing of global stablecoins; and
- participating in, and providing financial services relating to the issuing or selling of crypto assets,
- investment fund or derivative service providers with crypto assets as the underlying asset;
- digital wallet providers providing software solutions for the safekeeping of private and public keys which enable the holder of crypto assets (“Holder”) to exercise control thereon by means of sending crypto assets, receiving crypto assets and allowing the Holder to monitor crypto asset balances; and
- safe custody service providers which safeguard, store, hold or maintain custody of another party’s crypto assets.
Proposed anti-money laundering and counter-terrorism regime:
The Financial Intelligence Centre Act No. 38 of 2001 (“FICA”) establishes a financial intelligence center to ensure compliance with FICA and combat money laundering activities and financing of terrorist related activities.
The Position Paper recommends inserting CASP into the list of accountable institutions contained in schedule 1 of FICA. This insertion would cause FICA to become applicable to all CASP thereby requiring all CASP to comply with a number of requirements, including customer identification and verification requirements, customer due diligence, keeping of records, monitoring suspicious and/or unusual transactions, reporting cash transactions over a threshold determined from time to time (currently set at R25 000 (twenty five thousand Rand)) and reporting the control of property that may be linked to terrorist activity or organisations. It is envisaged that the financial intelligence centre would fulfil a supervisory role in respect of CASP and administrative penalties and criminal sanctions would be applicable to CASP which fail to comply with FICA.
Licensing and supervisory regime:
The crypto asset regulatory working group, whose objective is to formulate a coherent and comprehensive policy stance on crypto assets, suggests that the buying and selling of crypto assets should fall under the current twin peaks regulatory framework consisting of a prudential authority and a financial sector conduct authority.
The Position Paper suggests that the prudential authority considers the appropriate supervisory and regulatory approach for the treatment of crypto assets including reporting on exposure to crypto assets and prudential and accounting practices for crypto assets. As well as that the financial sector conduct authority becomes the responsible authority for the licensing of services related to the buying and selling of crypto assets and the development of conduct standards to be complied with by the providers of such services.
As part of the twin peaks regulatory framework (which has recently been adopted in South Africa) the Conduct of Financial Institutions Bill has been drafted and published for public comment (“CoFi Bill”). The CoFi Bill seeks to streamline the conduct requirements of financial institutions. One way the CoFi Bill seeks to achieve this streamlined approach is to provide for licensing of financial institutions for each activity identified therein. It has been proposed that services relating to buying and selling of crypto assets, initial coin offering, pooling of crypto assets and the offering of digital wallet and custodial services are to be included as identified activities and licensed in terms of the CoFi Bill.
The Position Paper also takes note that the National Payments System Act No. 78 of 1998 is currently being reviewed and suggests that a provision enabling the use of crypto assets for domestic payments be included. A sandbox approach is suggested for payments by means of crypto assets allowing for the benefits and risks of this addition to be evaluated under a controlled environment.
Initial coin offerings as a manner of raising capital are also to be aligned as far as possible with the regulation of issuing of securities or over-the-counter financial instruments. Specific conduct standards, licensing, and disclosure requirements relating to initial coin offerings, similar to those required for initial public offerings for listed companies, are also recommended.
The Position Paper recommends classifying the pooling of crypto assets as constituting an alternative investment fund thereby requiring licensing. A collective investment scheme should not be allowed to contain crypto assets in its portfolios. Institutions that issue over the counter instruments with crypto assets as the underlying asset should be licensed and settlement of crypto asset derivative instruments are to be settled in cash or fiat currency.
CASP which provide services relating to digital wallet services or safe custody services of crypto assets are to be considered to be providing financial services in terms of the Financial Sector Regulation Act No. 09 of 2017 and should therefore be included in the licensing activities under the CoFi Bill.
It is suggested that the crypto assets regulatory working group continues to monitor crypto assets with a specific focus on the monitoring of crypto asset market capitalisation, number and client base of crypto asset trading platforms based in South Africa, payment service providers and number of merchants and/or retailers accepting crypto currency, the volume of crypto assets purchased and sold via crypto asset vending machines and cross-border flows.
It is important to note that despite the above-mentioned regulatory framework, the Position Paper recommends that crypto assets are not recognised as legal tender, are not recognised as electronic money and may not be utilised for the conduct of money settlements in financial market infrastructures.
Cross border financial flows:
The Position Paper envisages that SARB plays a part in supervising and regulating crypto asset services and in particular cross border financial flows, with the following functions to be assumed by SARB –
- monitoring of illegitimate cross border financial flows in respect of crypto asset services;
- requesting an amendment to the exchange control regulations to include crypto assets and allowing individuals to purchase crypto assets within the single discretionary allowance and the foreign capital allowance;
- amending the authorised dealers’ manual to facilitate and report cross border crypto asset transactions and the creation of a balance of payments category specific thereto; and
- expanding the authorised dealer in foreign exchange with limited authority framework to allow for the appointment of crypto asset trading platforms.
In addition to the above, it is suggested that crypto asset trading platforms are allowed to purchase crypto assets offshore for the purpose of selling them in South Africa and are required to report crypto asset transactions to SARB’s financial surveillance department.
The way forward:
The Position Paper proposes a much-needed regulatory framework for the services associated with crypto assets. A consultative process has been followed and a call for comments on the Position Paper has been made. Upon conclusion of the consultation phase the regulatory authorities, together with the national treasury, will detail the preferred policy position through a final position paper.
VDMA will continue to monitor further developments in the crypto asset regulatory environment and we remain at your disposal for any assistance you or your business may require in the crypto asset space and the financial services sector as a whole.