The Financial Sector Conduct Authority (FSCA) issued the first batch of up to 60 new licenses to crypto asset providers recently. This comes after the FSCA's decision in October 2022 that crypto assets would be considered financial products under the Financial Advisory and Intermediary Services Act, 2002 (FAIS) and the subsequent creation of a new category of financial service provider – the 'Crypto Asset FSP'.
Anyone providing crypto-asset financial services including trading platforms, token issuers, digital wallets, or custody in South Africa was given a deadline of 30 November 2023 to apply for a license under FAIS to become a Crypto Asset FSP.
In the 2022 Crypto Market Study by the FCSA, it estimated that close to 10% of South Africa’s total population, approximately 5.8 million people currently own crypto assets, with 43% of the population expected to be using them by 2030.
While the overall crypto economy in Sub-Saharan Africa is one of the smallest, accounting for 2.3% of the global transaction volumes from July 2022 to June 2023, a closer analysis reveals that cryptocurrency has made significant inroads among key populations. Nigeria ranks second on the 2023 Chainalysis Global Crypto Adoption Index. Other countries that score high on the index include Kenya (21), Ghana (29) and South Africa (31).
“By regulating Crypto Asset FSPs, the FSCA has shown it understands that South Africans rely on these service providers and invest significant trust and assets in them,” explains Kelle Gagné, Counsel at law firm Allen & Overy. “Crypto asset providers will now be subject to similar licensing hurdles and ongoing compliance requirements to obtain and keep their licenses, as other financial services providers such as financial advisors and insurance companies. Part of this compliance includes reporting breaches, incidents, and financial weaknesses to allow for intervention.”
Navigating crypto asset regulation
In recent years, crypto-related scandals have made headline news both internationally and locally. Just last week, Sam Bankman-Fried, the ex-chief executive of the bankrupt crypto exchange FTX, was sentenced to 25 years in prison for fraud and conspiracy to commit money laundering, among other charges. While in 2020, the South African firm Mirror Trading International (MTI) was considered the biggest investment scam by data firm Chainalysis in its review of crypto-currency related crimes.
These high-profile cases highlight the need for regulations but in contextualising the international regulatory trends, the FCSA noted in their report that jurisdictions around the world have implemented various regulations for crypto assets in recent years. The degree and range of these regulations are linked to factors such as the stage of maturity that the crypto ecosystem is developing, perceived threats to the stability of the financial system, the capacity of the regulatory bodies in charge of regulating cryptocurrency assets as well as the intention to promote innovation.
Commenting on the importance of the licensing of crypto asset providers in SA, Gagné says, “Of course no licensing regime is foolproof, but when entrusting crypto assets to a service provider, South African consumers can now check whether the service provider is licensed by the FSCA and take some comfort that the service provider is not beyond the reach of the law in South Africa.”
Additionally, the licensing of Crypto Asset FSPs has the important effect of bringing them into the Financial Intelligence Centre Act, 2001 (FICA) regime, meaning that Crypto Asset FSPs will have to 'FICA' their customers, report suspicious transactions and otherwise comply with South Africa's anti-money laundering and know-your-client laws and regulations.
Crypto Asset FSP license requirements
- To obtain a license, a Crypto Asset FSP must meet several requirements to ensure compliance and protect consumers. These include:
- Provide routine business information and disclose details about their directors, trustees, partners, members, key individuals and representatives.
- Individuals must meet the ‘Fit and Proper requirements for Financial Services Providers’ demonstrating qualities of honesty, integrity, competency and engagement in continuous professional development.
- Applicants and their key individuals and representatives must have no history of legal or professional misconduct and must not be under investigation or proceedings that could result in conviction.
- Competence is assessed based on experience, qualifications, and performance in regulatory exams.
- If not already regulated as a bank or insurer, the applicant must demonstrate financial soundness, with different requirements depending on whether the applicant will hold or receive client assets.
- All applicants must meet working capital and liquidity requirements, with higher thresholds for those holding client assets.
- Operational ability is also vital, requiring applicants to submit a comprehensive business plan for at least three years, along with risk management, governance, remuneration, business recovery, and compliance frameworks.
- If any functions are outsourced, the applicant must disclose this to the FSCA.
These stringent measures ensure that Crypto Asset FSPs operate ethically, competently, and with financial stability, safeguarding the interests of consumers and the integrity of the financial system.
“As the crypto market continues to evolve and expand in South Africa, regulatory oversight is increasingly important to safeguard investors and promote market integrity. By licensing Crypto Asset FSPs, the FCSA has demonstrated its commitment to consumer protection and regulatory compliance withing the digital asset ecosystem,” said Gagné.
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