The initial regulations proposed by a crypto-asset regulations consultation paper, released by the South African Reserve Bank in January, indicate that a firmer regulatory regime will be put in place, says legal firm Cliffe Dekker Hofmeyr finance and banking director Bridget King and finance and banking candidate attorney James Peart.
The paper, developed by the Intergovernmental Fintech Working Group, recommended crypto-asset service providers be required to comply with the provisions of antimoney-laundering and combating the financing of terrorism in the Financial Intelligence Centre Act.
For each crypto-asset service provider registered at a central point, an assessment will be made as to whether the crypto-asset activities fit into existing regulatory frameworks or whether amendments should be made to existing laws and regulations to bring the relevant activity within the supervisory ambit of the regulator.
“Where it is impractical to amend existing regulations, new regulations will be drafted. This will likely be a lengthy process, involving the necessary period for public comment,” says King.
Regulators focus on the economic activities for which crypto assets can be used. Crypto assets are defined as assets issued electronically by decentralised entities, have no legal tender status and, consequently, are not considered as electronic money, as well as lacking statutory compensation arrangements.
These assets can be used for payments or exchange of such value and for investment purposes by crypto-asset users. They can also function as a medium of exchange, and/or unit of account and/or store of value within a community of crypto-asset users.
The proposed regulations have been necessitated by several threats, including the lack of consumer protection, possible misuse related to money laundering and terrorist financing, sidestepping exchange-control rules, and illicit financial flows and purchases, as well as tax evasion.
Regulators’ proposals will be implemented through the issuing of policy instruments by the appropriate regulatory body.
“The registration requirement could serve as the basis for the formal authorisation and designation as a registered or licensed provider for crypto-asset services operating in South Africa in the future,” says King.
The consultation paper proposes that the registration process be implemented by the first quarter of 2019; however, it is unclear when the South African Reserve Bank will publish the policy paper regarding registration and it is unlikely that the registration process will be implemented before the end of the first quarter of this year.
The paper proposes to monitor the market capitalisation of crypto assets, the number of merchants or retailers accepting crypto assets as payment in South Africa and globally, and the volume of such assets bought and sold through crypto-asset vending machines.
“Questions remain around the mechanisms of registration, possible reporting requirements and the regulation of other crypto areas. Some of these issues may be clarified in further consultation papers, as well as the South African Reserve Bank’s registration process policy proposal,” concludes King.