On 20 November 2020, the Financial Sector Conduct Authority (FSCA) published the draft declaration of crypto assets as a “financial product” as defined in terms of section 1 of the Financial Advisory and Intermediary service Act 37 of 2002 (FAIS Act). This publication has ended years of speculation about the classification and regulation of cryptocurrency in South African and brings it for the first time into the regulatory fold.
FSCA has clarified by the use of the word “crypto assets” that it is the investment services related to cryptocurrency and not the cryptocurrency itself that it seeks to regulate. In terms of the current proposed declaration, “crypto assets” is defined as “any digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes, but excluding digital representations of fiat currencies or securities that already fall within the definition of financial product.”
These proposed amendments means that anyone providing “advice” or intermediary services” in respect of crypto assets would have to register as a financial services provider under the FAIS Act and comply with its obligations. This would extend to cryptocurrency brokers, advisors, exchanges and platforms. The regulation would also require enhanced disclosure mechanisms of the increased risk to investors posed by investment in crypto assets.
The FSCA felt that there is an urgency to implement regulations prompted by the risk of harm to consumers investing in volatile crypto assets that were not well understood. This was coupled with the increased selling of crypto assets to consumers in South Africa that was often accompanied by fraud and misrepresentation. In 2019, the FSCA was aware of at least 12 crypto asset platforms operating in South Africa. The largest three platforms have an estimated 800,000 South Africans registered, control 80-90% of the market and hold R6.5 billion assets.
The public was given until 28 January 2021 to comment on the draft amendment. There is no indication of the effective date of the amendment but we expect it may become effective during the course of 2021.