CMS Expert Guide to Crypto Regulation in South Africa

The Financial Intelligence Centre Act, 2001 (“FICA”) applies to 'accountable institutions' (as listed in Schedule 1 to FICA), requiring that they must be registered with the Financial Intelligence Centre.  Schedule 1 to FICA was amended on 29 November 2022, and came into effect on 19 December 2022, to include as accountable institutions any person carrying on the business of:

1. exchanging a crypto asset for a fiat currency or vice versa;
2. exchanging one form of crypto asset for another;
3. conducting a transaction that transfers a crypto asset from one crypto asset address or account to another;
4. safekeeping or administration of a crypto asset or an instrument enabling control over a crypto asset; and
5. participation in and provision of financial services related to an issuer’s offer or sale of a crypto asset.

For purposes of FICA, “crypto asset” means a digital representation of perceived value that can be traded or transferred electronically within a community of users of the internet who consider it as a medium of exchange, unit of account or store of value and use it for payment or investment purposes, but does not include a digital representation of a fiat currency or a security as defined in the Financial Markets Act, 2012 (Act 19 of 2012).

As accountable institutions, crypto asset service providers ("CASPs") are required (amongst others) to implement customer due diligence measures to prevent money laundering and the financing of terrorist and related activities.

Crypto assets have been declared a ‘financial product’ under the Financial Advisory and Intermediary Services Act, 2002. ("FAIS").

For purposes of FAIS, “crypto asset” means a digital representation of value that:

1. 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;
2. applies cryptographic techniques; and
3. uses distributed ledger technology.

Any entity providing "advice" or rendering "intermediary services" (in each case as contemplated in FIAS) with regards to crypto assets is required to be authorised as a financial services provider (“FSP”).

For purposes of FAIS, "advice" includes (but is not limited to) any recommendation, guidance or proposal of a financial nature furnished in relation to any financial product. "Intermediary services" include (but are not limited to) any act (other than the furnishing of advice) performed by a person for or on behalf of a client or product supplier, the result of which is that a client may enter into any transaction in respect of a financial product.

Exchange: The  exchange (buying and selling) of crypto assets is regulated under FICA. 

Custody: The administering of crypto assets as well as an instrument that allows control over the crypto asset is regulated under FICA.

Borrowing/Lending: At this juncture, crypto assets are not a recognised currency/legal tender in South Africa.  However, any borrowing or lending transaction carried out by any person in South Africa involving, among others, the exchange of a crypto asset for fiat currency or vice versa or the transfer of a crypto asset from one crypto asset address or account to another, is regulated in terms of FICA.

Yielding/Staking (including staking on proof of stake consensus blockchains): The administration of control over a crypto asset, or an instrument enabling control over a crypto asset, including to lock-up the crypto asset for the purposes of  staking by any person for or on behalf of a client is  regulated under FICA. Furthermore, the transfer of a crypto asset from one crypto asset address or account to another, including for purposes of staking or yield farming, by any person for or on behalf of a client is regulated under FICA.

NFT: Although no specific regulations have been adopted in South Africa with regards to non-fungible tokens ("NFTs") the broad definition of “crypto assets” for purposes of FICA, in our view, includes NFTs and, accordingly, activities related to NFTs are, in terms of FICA, regulated on the same terms as other crypto assets as described herein.

Direct sales of tokens by issuers: As with NFTs, as noted above, the broad definition of "crypto assets" for purposes FICA, in our view, includes both security tokens and utility tokens. Accordingly, activities related to security tokens and utility tokens are regulated in terms of FICA on the same terms as other crypto assets as described herein.

Exchange: Providing advice or rendering of intermediary services regarding, amongst others, the purchase of or investing in a financial product (including crypto assets) is regulated under FAIS.

Custody: Intermediary services, including the administering or safekeeping of financial products (including crypto assets), is regulated under FAIS.

Borrowing/Lending: At this juncture, crypto assets are not recognised  currency/legal tender in South Africa. However, any advice or intermediary services related to financial products (including the borrowing or lending of crypto assets) is regulated in terms of FAIS.

Yielding/Staking (including staking on proof of stake consensus blockchains): Any advice or intermediary services related to financial products (including in relation to the staking or yield farming of crypto assets) is regulated in terms of FAIS.

NFT: Although no specific regulations have been adopted in South Africa with regards to non-fungible tokens, by virtue of the intentionally broad definition of "crypto assets" for purposes FAIS, in our view, crypto assets include NFTs and, accordingly, activities related to NFTs are regulated on the same terms as other crypto assets as described herein in terms of FAIS.

Direct sales of tokens by issuers: As with NFTs, as noted above, the intentionally broad definition of crypto assets for purposes FAIS, in our view, includes both security tokens and utility tokens. Accordingly, activities related to security tokens and utility tokens are regulated in terms of FAIS on the same terms as other crypto assets as described herein.

Yes, subject to applicable exchange control requirements of the South African Reserve Bank; provided that such offshore business would, if licensed in South Africa, be regarded as an accountable institution for the purposes of FICA and required to be registered as such in order to provide such services in South Africa.

Yes, subject to applicable exchange control requirements of the South African Reserve Bank; provided that such offshore business, in event that it actively solicits business in South Africa, is likely to be deemed to be carrying on business within South Africa, and thus required to be registered as an "external company" in accordance with the provisions of section 23 of the South African Companies Act, 2008.  Any external company conducting the business of an FSP (including by providing financial services in relation to crypto assets in South Africa) is required to be licensed by the FSCA as an FSP for purposes of FAIS. 

In practice, the FSCA has, however, recognised that foreign financial services providers may be subject to similar licensing requirements by regulators in their home jurisdictions and, provided that such licensing requirements are acceptable to the FSCA, these foreign financial services providers may be able to obtain exemptions from compliance with certain requirements of FAIS.

In respect of reverse solicitation, the picture is less clear, and the extent of the business solicited from South African clients is likely to determine whether such foreign financial services provider is deemed to be carrying on business in South Africa.

Accountable institutions (including crypto assets service providers) are required to register with the Financial Intelligence Centre within 90 (ninety) days after the business has begun operating.  

The Financial Sector Conduct Authority ("FSCA") may raise various question and/or queries in response to a licence application and, as such, this process may take up to 6 (six) months to be finalised. Further, given the current backlog of licence applications from crypto asset service providers, the FSCA has advised that consideration of licence applications by CASPs will continue to be done in a phased approach.

There are currently no licences issued in relation to AML, however the Financial Intelligence Centre requires that businesses in general develop and maintain polices that guard against AML and terrorist funding. Registration as an accountable institution, where required, with the Financial Intelligence Centre is free.

The fees for licence applications are as follows:

• Category I FSP – ZAR2 544
• Category II (Discretionary FSP)– ZAR15 390
• Category IIA (Hedge Fund FSP) – ZAR15 390
• Category III (Administrative FSP) – ZAR46 241
• Category IV (Assistance FSP) – ZAR2 544 

Should the applicant already be licensed under any other categories or apply for more than one category then a discount of 10% will be applicable (except for Category III which will be discounted at 20%).

The FSCA proposed in September 2023 to increase the above licence application fees (which have remained unchanged since 2018) by an amount of 6% (six percent). The increase has not yet been implemented. When implemented, the licence fees will be as follows:

• Category I FSP – ZAR2 697
• Category II (Discretionary FSP)– ZAR16 313
• Category IIA (Hedge Fund FSP) – ZAR16 313
• Category III (Administrative FSP) – ZAR49 015
• Category IV (Assistance FSP) – ZAR2 544 (2697)

Given that the inclusion of CASPs as "accountable institutions" for purposes of FICA is a recent development, it is difficult to estimate the success rate of CASP applications for registration at this juncture.

Given that the  inclusion of crypto assets as financial products and, accordingly, the inclusion of CASPs as "financial services providers" for purposes of FAIS is a recent development, with applications for CASPs having only opened on 1 June 2023, it  is difficult to estimate the probability of success for application at this juncture.  

As accountable institutions, CASPs are required to  be registered and to report, among others, suspicious and unusual transactions (section 29) and cash transactions in excess ZAR49,999.99 (section 28) in terms of the reporting requirements set out in Part 3 (Reporting duties and access to information) of FICA.

FSPs  must comply with the relevant qualification requirements under FAIS,  including the applicable 'fit and proper' requirements for the relevant category of FSP. These requirements include meeting the necessary standards of honesty and integrity, competence, operational ability, financial soundness, and continuous professional development.