Tread Carefully on Crypto Purchases

Estimated read time 6 min read

The recent decision by the Financial Sector Conduct Authority (FSCA) to bring under its regulatory ambit the providers of crypto asset-related services does not mean that the FSCA now recognises crypto assets as a currency, and it is not equivalent to the rand. As some institutions and businesses in SA have indicated their willingness to use crypto assets to effect payments, it has become even more important to clarify the step taken by the authority, and to ensure that customers and investors are better informed before making decisions in this regard. Read: Crypto assets to be treated as financial products in South Africa D-day for crypto assets has arrived, as FSCA targets scams Once a financial service (advice and/or intermediary services in relation to a financial product) has been brought under the ambit of the Financial Advisory and Intermediary Services (Fais) Act, nobody is allowed to render such financial services “as a regular feature of [their] business without being authorised as a financial services provider or appointed as a representative of an authorised provider”. That is all that’s happened with crypto assets. The provision of services relating to these assets has been brought under the ambit of the Fais Act, which simply means that anyone rendering crypto-related services must be licensed under the Fais Act, and comply with its requirements of good governance and transparency, suitable competency and the fair treatment of customers. Well known examples of crypto asset services are: offering crypto asset wallets and providing for the trading of crypto assets (on an exchange). Crypto assets themselves are not being regulated by the FSCA. The FSCA’s approach is similar to that of other countries where regulators have taken steps to protect consumers by regulating the conduct of the providers of various crypto asset services as they continue to work on how best to deal with the growth in crypto assets and their associated risks. This means that SA citizens should continue to approach crypto assets cautiously, as they would with any highly risky and complex financial product. Be aware In particular, users of crypto assets should bear in mind that crypto assets have been characterised by what the International Monetary Fund (IMF) recently described as “severe turmoil and disruption” as well as repeated cycles of “rapid growth and retreat”. IMF Deputy MD Bo Li made the point recently that crypto asset service providers delivering critical functions should be licensed, registered and authorised. “Such entities include those providing storage, transfer, exchange, settlement, and custody services. Rules should be similar to those applying to providers of these services in the traditional financial sector.” This is exactly what the FSCA did in October 2022 when it declared cryptos a financial product, thereby requiring the providers of crypto-related services to be registered. Read: FSCA: Crypto platforms must be licensed in 2023 Those who render crypto-related services must apply for a licence in terms of the Fais Act. Failure to do so may, unless one is exempted, result in a fine of not more than R10 million, or imprisonment for a period of up to 10 years, if found guilty. Risks highlighted The recent high-profile collapse of crypto exchange FTX has highlighted the risks involved in investing and trading in these assets through regulated providers and has elevated the urgency for regulators to find the best way to address observed risks. Read: Just who is Sam Bankman-Fried, founder of now collapsed FTX? Crypto lender BlockFi goes bankrupt in wake of FTX’s fall FTX: Crypto is the cure, not the cause Some of the steps will obviously include regulation. This work is ongoing, not only in South Africa, but globally. Various multilateral regulatory and monitoring institutions such as the Financial Stability Board (FSB), the Bank of International Settlements (BIS) and the IMF have developed possible regulatory approaches in this regard. This work has included analysis of the risks revealed by the ongoing evolution of the crypto asset ecosystem. The FSB is leading the coordination of work on global standards that will underpin country-based regulation in this regard. Its work will take into account the standards being developed by other global standard setters. Addressing the risks associated with crypto assets has, in the words of the BIS, become “a more pressing policy issue”, a view shared by local regulators, including the FSCA. Three steps In its January 2023 bulletin, the BIS lists three steps aimed at addressing the risks associated with cryptos. The first relates to the protection of consumers and investors, and the second has to do with preserving the integrity of markets “against fraud, manipulation, money laundering and the financing of terrorism”. The third aspect deals with safeguarding the stability of the financial system. The protection of financial customers and investors is central to the very existence of the FSCA. Declaring crypto assets a financial product was to establish jurisdiction for the authority in this space, so that it could get a fair sense of the players in the market and how customers and investors are impacted. This step has been taken while the FSCA and other local financial sector regulators in the country, including the Prudential Authority, work through how best to deal with the risks associated with crypto assets, and most importantly, how best to regulate these instruments and markets locally. The regulatory work under way will address the last two steps outlined by the BIS, including possible future financial stability implications. The work relating to the possible abuse of crypto assets for money laundering and the financing of terrorism is even more urgent in light of the recent concerns highlighted by the Financial Action Task Force (FATF). Read: South Africa greylisted by FATF Greylisting should make South Africans see red SA’s greylisting: The journey to claw back credibility It was for this reason that the Financial Intelligence Centre Act (Fica) schedule was amended at the end of 2022 to include Crypto Asset Services Providers as accountable institutions for the purposes of Fica. All the work the FSCA and other regulatory role players within the financial system are doing is to ensure that the crypto market in SA is developed with a strong focus on consumer protection, while not stifling its potential contribution to the local financial industry growth, investment and possible job creation opportunities. Listen to Moneyweb Crypto editor Ciaran Ryan and crypto journalist R Paulo Delgado discuss how the collapse of FTX has changed crypto behaviour: You can also listen to this podcast on here. Unathi Kamlana is commissioner of the FSCA……..06 March 2023 – 21:03.

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