A sneak-peek at the future of crypto asset regulation in SA [Opinion]

Last month the Intergovernmental Fintech Working Group (IFWG) has released its long-awaited position paper on Crypto assets (the Position paper) following the initial consultation paper published in 2019 (see this story).

The IFWG was established in 2018 and is made up of regulators representing different South African regulatory regimes, from financial services and banking regulators such as the Financial Sector Conduct Authority (FSCA) and the SA Reserve Bank, to the SA Revenue Service as the regulator of taxation regulation.

The IFWG’s initial exploration of the South African crypto asset market culminated in the 2019 consultation paper (opens as a PDF) which provided an overview of the regulatory and market risks and benefits associated with the emerging crypto assets industry.

The SA government’s IFWG has released a Position paper on crypto assets market. Here are  some of the most pertinent recommendations

The Position paper (opens as a PDF) published last month builds on the observations set out in the Consultation paper, and has provided the industry with an outline of the potential regulatory framework for the SA crypto assets industry.

The Position paper suggests that crypto assets be accommodated within the existing South African regulatory framework, whilst ensuring that sufficient safeguards be implemented.

The Position paper proposes 30 recommendations to address the key operational, market and consumer risks identified by the regulators as well as to enable South Africa to participate safely in the global crypto assets market.

We set out some of the most pertinent recommendations below.

1. The regulation of crypto asset service providers. The focus of the Position paper is not on the regulation of crypto assets themselves but rather on the regulation of services rendered regarding crypto assets and the regulation of crypto asset service providers. To this end, the Position paper provides a list of specifically identified crypto asset service providers, including trading platforms, the buying and selling of crypto assets, crypto asset fund providers and wallet providers.
2. Crypto asset service providers will be required to register as “accountable institutions” under the Financial Intelligence Centre Act, 2001 (Fica). The provisions of Fica, as South Africa’s primary anti-money laundering regulatory framework will become applicable to crypto asset service providers, as a result of South Africa’s obligation to adhere to FATF Recommendation 15 which now requires crypto asset service providers to be subjected to formal anti-money laundering (AML) regulation. In accordance with Fica, crypto asset service providers will be required to “KYC” their customer using a process that best aligns to the risks of the particular crypto asset service providers. However, there remains uncertainty, both nationally and internationally, as to how AML risk should be identified and assessed in the crypto asset industry.
3. Crypto assets remain without legal tender status and will not be recognised as e-money. However, crypto assets may be used as a medium of exchange where merchants choose to accept crypto assets as a payment method.
4. The FSCA should become the responsible authority for the regulation of services related to buying and selling of crypto assets. Crypto assets may take many forms including that of an investment instrument, a digital representation of a consumer service, or utility distributed through a blockchain. However, due the wide definition of “crypto assets” provided in the Policy Paper, regardless of the type or purpose of the crypto asset, it will subject to financial service regulation.

The Position paper is welcomed as it provides greater certainty than the Consultation paper around the risks of crypto assets and the regulatory regime which is best suited to house them.

Notably, however, the Position paper fails to propose recommendations around data protection. It is most unfortunate, as the digital environment in which crypto asset service providers operate have the potential to inflict some serious infringement to a person’s or an organisation’s privacy rights.

In addition, although cybercrime is mentioned as a threat to crypto asset trading platforms, and the Position paper states that crypto asset service providers should ensure that they meet the international cybersecurity standards for the safeguarding of crypto assets, the Position paper arguably does not go far enough to protect against the growing cybercrime threat which is so prevalent in this Fourth Industrial Revolution.

Read more: SA’s Intergovernmental Fintech Working Group releases position paper on crypto assets
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Read more: SARB calls on the public to comment on consultation paper on crypto assets

*Seshree Govender is a specialist attorney at Webber Wentzel. Cindy Liebowitz and Fatima Ismail also from Webber Wentzel, also helped compile this article.

Featured image: MichaelWuensch via Pixabay