CRYPTO ASSETS SOON TO BE REGULATED IN SOUTH AFRICA

Crypto assets have been on the radar of the South African Regulators for quite some time.

"Our view has changed and we now do regard (cryptocurrency) as a financial asset and we hope to regulate it as a financial asset," said South African Reserve Bank (“SARB”) deputy governor Kuben Naidoo on 13 July 2022 during a webinar.

However, according to Naidoo it will probably still take the around 12 to 18 months for the SARB “to get all of our ducks in a row".

Changes in three areas seem to be imminent.

Exchange Control Regulations (“Excon Regulations”)

The Intergovernmental Fintech Working Group (“IFWG”) has expressed the view, in a Frequently Asked Questions extract on its website, that crypto assets constitute capital as defined in regulation 10(1)(c) of the Excon Regulations. The IFWG therefore takes the view that the transfer of crypto assets from local exchanges to offshore exchanges without the permission of the South African Reserve Bank is a criminal offence.

The IFWG has also recently (in June 2021) published a position paper on crypto assets. Despite the stance reflected in the Frequently Asked Questions, the IFWG takes the view in the position paper that regulation 10 of the Excon Regulations should be amended to define crypto assets as capital so that they may be treated in a similar way to the way in which South African Rands are now regulated by regulation 10. The IFWG takes this view because, although it believes that crypto assets are not money, they “may perform certain functions similar to those of fiat currencies”.

A contravention of any of the Excon Regulations is a criminal offence. It is however a well-established principle that provisions that give rise to criminal and administrative penalties, must be interpreted restrictively in cases of doubt and ambiguity.

It would seem therefore that the IFWG itself has adopted a contradictory approach in its position paper and its “Frequently Asked Questions” on its website. Neither the question nor the policy paper has the force of law and it is not surprising therefore that there are different opinions in the market as to whether the definition of capital includes crypto assets. It would therefore seem as if amendments to the Excon Regulations to clarify that crypto assets constitute capital will occur in the near future.

The Financial Advisory and Intermediary Services Act, 2002 (“FAIS”)

FAIS governs the rendering of financial services (advice and/or intermediary services), as those terms are defined in FAIS, in respect of a financial product in South Africa.

“Financial product” includes a share, insurance policy, debenture, note or other security, and a “deposit”, as that term is defined in section 1(1) of the Banks Act, 1990. However, crypto assets do not currently constitute financial products. This definition may well be amended to include such assets.

A person rendering financial services must satisfy the Registrar of Financial Services Providers that it complies with FAIS in one of the following respects:

it is registered as an FSP; or
it is a “representative” on the license of a registered FSP (see the definition of “representative” in FAIS).

The Financial Intelligence Centre Act, 2001 (“FICA”)

In our previous articles, we discussed that South Africa has until 30 February 2023 to meet a tight deadline to amend its Financial Intelligence Centre Act, 2001 (“FICA”) or face the consequences of its financial institutions being added to a grey list by the Financial Action Task Force alongside countries such as Yemen, South Sudan and Haiti.

We also mentioned that, on 21 July 2022, the Standing Committee on Finance released the draft amendments to the Schedules 1,2 and 3 of FICA. If these draft amendments are passed in their current form, several entities, would become accountable institutions. This would include;

A “person who carries on the business of one or more of the following activities or operations for or on behalf of a client:

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

FICA places numerous obligations on “accountable institutions”, which go beyond mere “Know Your Customer” (“KYC”) obligations, including:

registration with the Financial Intelligence Centre;
conducting customer due diligence;
record-keeping of prescribed client information and transaction records;
developing, documenting, maintaining and implementing a Risk Management and Compliance Programme (“RMCP”);
ongoing training of employees on FICA and the institution’s RMCP;
appointment of a compliance officer; and
reporting obligations such as the submission of cash threshold reports suspicious transactions reports and terrorist property reports.

ENSafrica can assist with all your FICA compliance requirements.

Angela Itzikowitz
Executive | Banking and Finance
aitzikowitz@ENSafrica.com

Era Gunning
Executive | Banking and Finance
egunning@ENSafrica.com

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