The South African Financial Sector Conduct Authority (FSCA) published on 20 November 2020 a draft declaration (draft Declaration) that would result in a person who provides advisory or intermediary services in relation to crypto assets being required to be licensed under the Financial Advisory and Intermediary Services Act, 2002 (Act No. 37 of 2002) (FAIS Act).
Definition Crypto Assets
The draft Declaration defines crypto assets 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." Crypto assets are to be brought under the scope of the FAIS Act by including them in the definition of "financial products", so that the provisions of the FAIS Act apply to them on the same basis as they apply to the financial products that are listed in the FAIS Act itself.
The FSCA's statement dated 20 November 2020 in support of the draft Declaration (Statement) explains that the regulation of crypto assets has been under consideration by the relevant authorities for a number of years. The Intergovernmental Fintech Working Group (IFWG) was established in 2016, comprising members from various SA authorities in order to develop a common understanding among regulators and policymakers of financial technology developments as well as the regulatory and policy implications for the financial sector and the economy. The Crypto Assets Regulatory Working Group (CAR WG) was formed under the auspices of the IFWG with as main objective to formulate a coherent and comprehensive policy stance on crypto assets.
The CAR WG published earlier this year a Position Paper on Crypto Assets (Position Paper), which, amongst others, highlights the challenges in regulating crypto assets and makes various policy recommendations relating to the regulation of the crypto assets environment. Various of these policy recommendations directly impact the FSCA. The draft Declaration is intended to give effect to two particular recommendations, i.e.:
- Recommendation 9 which provides that the specified services rendered in respect 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 also that ‘services related to the buying and selling of crypto assets must be included in the licensing activities under the Conduct of Financial Institutions Bill.
- Recommendation 10 which provides that, pursuant to Recommendation 9, the FSCA should become the responsible authority for the licensing of ‘services related to the buying and selling of crypto assets. Furthermore, specific conduct standards should be developed for these services.
Need for action
The FSCA notes in the Statement that the increased risk of harm to consumers purchasing or investing in crypto assets coupled with the exponential increase in the provision and use of crypto assets in South Africa has given further urgency to the need to start regulating the selling or intermediating of crypto assets in South Africa.
Although Recommendation 9 proposes that crypto assets must be designated as a financial service in terms of the FSR Act, the FSCA is of the view 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. In this respect, the FSCA considers that crypto assets are similar in nature to some of the other financial products as defined in the FAIS Act.
The effect of declaring crypto assets as a financial product under the FAIS Act is that:
- any person furnishing advice or rendering intermediary services in relation to crypto assets must be authorised under the FAIS Act as a financial services provider; and
- any person so authorised, including its representatives, must comply with the relevant FAIS requirements, e.g. the requirements of the General Code of Conduct for Authorised Financial Services Providers and Representatives, 2003, and the Determination of Fit and Proper Requirements, 2017.
The intention behind the draft Declaration is to capture intermediaries that advise on or sell crypto assets to consumers so as to provide adequate protection for consumers that are advised to purchase these products. These protections should at least result in improved disclosure to customers that more effectively highlight the risks involved in investing in crypto assets and should ensure that a more robust advice process is adopted. Licensing of intermediaries is also necessary to improve the quality of data for policymakers and regulators about the crypto asset environment, and to consider whether there is a need for further regulatory interventions.
The FSCA notes that the draft Declaration in no way impacts the status of crypto assets in the context of exchange control regulations or legitimises or gives credence to crypto assets. It is merely attempting to regulate intermediaries that are selling and advising customers to invest in crypto assets.
The FSCA invites submissions on the draft Declaration. They must be made using the submission template available on the Authority’s website and be submitted in writing on or before 28 January 2021 to the FSCA at [email protected]