On Thursday, 19 October 2022, the Financial Sector Conduct Authority (“FSCA”) issued General Notice 1350 of 2022 (“the Declaration”) declaring that a crypto asset is now a financial product for purposes of the Financial Advisory and Intermediary Service Act, 2002 (“FAIS Act”).
The Declaration is made in terms of paragraph (h) of the definition of a “financial product” in the FAIS Act which states that a financial product means “any other product similar in nature to any financial product referred to in paragraphs (a) to (g), inclusive, declared by the Authority by notice in the Gazette to be a financial product for the purposes of this Act”.
This is a significant development as any person who, as a regular feature of their business, renders financial services (as defined in the FAIS Act) in relation to crypto assets, must (unless an exemption applies) either be authorised as a financial services provider or be appointed as a representative of an authorised financial services provider, and comply with the requirements of the FAIS Act.
We explain the FSCA’s approach to regulating crypto assets and the practical implications for financial service providers dealing with crypto assets below.
Background to the regulation of crypto assets in South Africa
The FSCA has noted, for some time now, that the prevalence of crypto asset related activities posed a risk to financial customers and sought to introduce measures to mitigate this risk.
As early as 2014, the South Africa Reserve Bank (“SARB”) through its National Payment System Department (NPSD), issued a position paper on crypto assets, which position paper highlighted the risks surrounding crypto assets, such as money laundering and the financing of terrorism. In 2016, the SARB together with National Treasury, FSCA and the Financial Intelligence Centre (“FIC”) established the Intergovernmental Fintech Working Group (“IFWG”) with the aim to develop a common understanding among regulators and policymakers of financial technology (fintech) developments as well as the regulatory and policy implications for the financial sector and the economy.
During 2018, the crypto assets regulatory working group (“CAR WG”) was formed under the auspices of the IFWG with the objective to formulate a coherent and comprehensive policy stance on crypto assets. The CAR WG released a consultation paper during January 2019, which set-out the perceived risks and benefits associated with crypto assets, provided an overview of some of the available regulatory approaches, and presented initial recommendations to industry participants and stakeholders. The relevant authorities (including SARB, National Treasury, FSCA and the FIC), together with relevant industry participants, considered the consultation paper and the CAR WG issued a position paper which was published for public comment during April 2020.
On 20 November 2020, the FSCA published a draft declaration which sought to give effect to particular recommendations of the CAR WG, including, that specified services rendered in respect of buying and selling of crypto assets must be included in the definition of ‘financial services’ in section 3(1)(a) of the Financial Sector Regulation Act 9 of 2017 (“FSR Act”), and that the FSCA should become the responsible authority for the licensing of such services.
The FSCA noted in the draft declaration that as an interim solution to address some of the immediate consumer risks, a similar outcome can be achieved in a more expeditious manner by declaring crypto assets as a financial product under the FAIS Act as opposed to in the FSR Act.
On 11 June 2021, the IFWG published a position paper on crypto assets, which confirmed that crypto assets would be regulated in South Africa in a phased manner. Twenty-five recommendations were proposed by the IFWG, through the CAR WG, as to how crypto asset regulation would be introduced, with the focus being on anti-money laundering and combating the financing of terrorism (AML/CFT), cross-border financial flows and the application of financial sector laws to crypto assets.
FAIS licensing considerations
With the commencement of the Declaration on 19 October 2022, any person who, as a regular feature of the business of such person, renders financial services in relation to crypto assets, as defined in the Declaration, must either be authorised under the FAIS Act as a financial services provider or be appointed as a representative of an authorised financial services provider under section 13 of the FAIS Act.
Any person who, as a regular feature of the business of such person, renders financial services in relation to crypto assets without a licence will be in contravention of section 7(1) of the FAIS Act, unless exempted.
The Declaration defines a “crypto asset” as follows:
“crypto asset” means a digital representation of value that –
(a) is not issued by a central bank, but is capable of being traded, transferred or stored electronically by natural and legal persons for the purpose of payment, investment and other forms of utility;
(b) applies cryptographic techniques; and
(c) uses distributed ledger technology.
In terms of section 36(a) of the FAIS Act, a contravention of section 7(1) of the FAIS Act constitutes an offence and a person found guilty of such an offence is, on conviction, liable to a fine not exceeding R10 million or imprisonment for a period not exceeding 10 years, or both such fine and such imprisonment.
Transitional provisions and exemptions
The FSCA recognises that appropriate transitional provisions must be provided, so that the business activities of persons affected by the Declaration are not unduly disrupted, and that they have appropriate time to compile and submit a licence application under the FAIS Act.
In order to facilitate an orderly transition, the FSCA has published a general exemption from section 7(1) of the FAIS Act (“General Exemption”) together with the Declaration.
The General Exemption temporarily exempts any person from section 7(1) of the FAIS Act subject to the condition that such person must:
- apply for a licence under section 8 of the FAIS Act between 1 June 2023 and 30 November 2023. Practically, a person rendering financial services in relation to crypto assets (as defined) as at 19 October 2022 may continue to do so without contravening the FAIS Act, provided that a licence application is submitted within the above stipulated period. The exemption will remain valid until the person’s licence application has been approved or rejected. If a person does not submit a licence application within the stipulated period, the General Exemption lapses;
- immediately comply with Chapter 2 of the Determination of Fit and Proper Requirements for Financial Services Providers, 2017, published by Board Notice 194 of 2017 in Government Gazette No. 41321 on 15 December 2017, as amended from time to time (“Determination”). Chapter 2 of the Determination sets out the Honesty, Integrity and Good Standing requirements that apply to all financial services providers, key individuals and representatives;
- immediately comply with section 2 of the General Code of Conduct for Authorised Financial Services Providers and Representatives, 2003 (“General Code”) as if it is a licensed financial services provider. Section 2 of the General Code provides that a financial services provider must at all times render financial services honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry;
- comply with the remaining provisions of the General Code by no later than 1 December 2023; and
- provide the FSCA with any information the FSCA requests that is in the possession of, or under the control of, the person, that is relevant to the financial services and/or similar activities rendered by such person.
In addition, the FSCA acknowledges that in the case of specific types of crypto asset financial services rendered, certain of these financial services should not at this stage be subject to the oversight of the FSCA. Crypto asset miners, node operators and persons rendering financial services in relation to non-fungible tokens are at this stage exempted from the application of the Declaration based on the General Exemption. The FSCA has stated that the services offered by these entities are ancillary in nature, pose a low consumer risk and therefore not subject to oversight by the FSCA.
Other key insights
- The FSCA has noted that the Declaration is an interim measure and will be repealed by the enactment of the Conduct of Financial Institutions (COFI) Act, which will similarly address these services.
- A draft exemption has also been published for comment and relates to proposed exemptions for crypto asset financial services providers and their key individuals and representatives from certain requirements inter alia the General Code of Conduct and the Fit and Proper Requirements. The exemptions that are being considered relate to minimum experience and qualification requirements, regulatory examinations, class of business training, CPD hours and competency requirements all in respect of crypto assets. The draft exemption is anticipated to be finalised and published early in 2023.
- Crypto assets financial services providers must also be aware of the implications of the Financial Institutions (Protection of Funds) Act, 2001 (“FI Act”) as it relates to crypto assets which may constitute trust property in some circumstances as set out under the said Act. The FSCA has stated that retaining a crypto asset for safe custody or administering a crypto asset on behalf of a client will trigger the FI Act. This will mean that crypto asset financial services providers will need to consider the compliance obligations set out thereunder in addition to its FAIS Act obligations.
The crypto assets industry has been the subject matter of much debate given the advances made in technology and the break-neck speed in which people have placed their trust within this industry.
The Declaration and supporting policy document demonstrate that South Africa’s regulators aim to keep pace with the technological advancement within the financial services space and adapting current regulatory frameworks where applicable.
Should you require assistance in understanding the implications of this regulatory development on your crypto asset operations or require guidance on the licensing process that is now applicable to persons rendering financial services in respect of crypto assets, please reach out to Clyde & Co’s Corporate and Regulatory team for support.
The following documents can be accessed here:
- The General Notice 1350 of 2022 – Declaration of a crypto asset as a Financial Product under the FAIS Act, 2002.
- The Policy Document supporting the declaration of crypto assets as a financial product under the FAIS Act.
- The Annexure A Response Matrix – Draft declaration of a crypto asset as a financial product.
- The FSCA Communication 30 of 2022 – Publication of declaration of a crypto asset as a financial product and accompany exemption notices.
- FSCA FAIS 90 of 2022 - Exemption of persons rendering financial services in relation to crypto assets from section 7(1) of the FAIS 2022.
- Notice regarding the publication of the draft exemption of persons rendering a financial service in relation to crypto assets from certain requirements, 2022 - Exemption of particular persons rendering financial services in relation to crypto assets from certain requirements 2022.