The Financial Sector Conduct Authority (FSCA) has published for comment a draft declaration on crypto assets as a financial product in terms of the Financial Advisory and Intermediary Services Act of 2002 (FAIS).
The FSCA also published a statement in support of the draft declaration, with the underlying basis of both stemming from the urgent need for improved disclosures to customers that highlight the increased risks involved in investing in crypto assets and to ensure that a more robust advice process is adopted (including proper risk assessments) when intermediaries advise customers to buy crypto assets.
Law firm Fasken notes that, through the draft declaration, crypto assets are defined in the same way that “virtual assets” are defined in the Financial Action Task Force (FATF) recommendations.
While the definition of crypto assets includes well-known cryptocurrencies such as Bitcoin, Ether and Litecoin, stablecoins and utility tokens also fall within the definition of crypto assets, affirms Fasken.
Fasken points out that crypto assets have enjoyed an exponential rise in popularity over the past decade, with increased interest from retail investors; however, regulators have grappled with the challenges associated with the regulation of crypto assets.
“South Africa is no different,” reports Fasken, noting that the position paper on crypto assets by the Crypto Assets Regulatory Working Group states that there are about 12 different crypto asset trading platforms in South Africa with a market capitalisation of about R6.5-billion.
As such, Fasken says, South African regulators have since 2004 taken steps toward the regulation of crypto assets.
Fasken also highlights that the position paper sets out the challenges inherent in regulating crypto assets and makes policy recommendations designed to address these challenges, while the draft declaration seeks to give effect to two recommendations, the first being specific services rendered in respect of crypto assets.
These must be included in the definition of financial services in the Financial Sector Regulation Act of 2017.
Also, services related to the buying and selling of crypto assets must be included in the licensed activities under the Conduct of Financial Institutions (COFI) Bill.
The second recommendation is that the FSCA should become the responsible authority for the licensing of services related to the buying and selling of crypto assets. Specific conduct standards should be developed for these services.
According to the draft declaration, transitional arrangements have been provided for to provide existing crypto asset service providers (CASPs) an opportunity to apply for authorisation as a financial services provider within four months of the effective date of the final declaration.
Further, Fasken notes that if crypto assets are included in the definition of a financial product under the FAIS Act, then any person furnishing advice or rendering intermediary services regarding crypto assets must be authorised under the FAIS Act as a financial services provider.
Also, any authorised person (or their representative) must comply with the relevant FAIS requirements.
Fasken notes that the FSCA has indicated that the COFI Bill is expected to give further effect to the regulation of the activities of CASPs by including these activities as a licensed activity.
In addition, Fasken says that, if the COFI Bill repeals the FAIS Act, as indicated in the second draft of the COFI Bill, the declaration will fall within the COFI Bill framework.
For these reasons, the FSCA has motivated that the draft declaration contribute towards the gradual implementation of existing proposals and does not pre-empt broader policy developments regarding crypto assets, according to Fasken.
Stakeholders are invited to comment on the draft declaration by January 28.