Crypto Assets in South Africa are now legally recognised as Financial Products

Fasken partner Bianca Da Costa and Senior Associate Nicholas Ndlovu.

On 19 October 2022, the Financial Sector Conduct Authority (“FSCA”) officially declared that crypto assets are now classified as a financial product in terms of the Financial Advisory and Intermediary Services Act, 37 of 2002 (“FAIS”) (“Declaration”). The Declaration was published in Government Notice 1350 in Government Gazette 47334.

The Declaration has defined crypto assets as 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.

As a result, financial services providers concerned with crypto assets will now fall within the regulatory jurisdiction of the FSCA. This Declaration has further implications because entities regulated by FAIS often have to comply with other financial sector laws which are enforced by the FSCA, which may now apply to any person furnishing advice or rendering intermediary services in respect of crypto assets.

Further, the FSCA has also published a Policy Document supporting the Declaration with the purpose of providing:

background to and contextualise the Declaration;
an overview of the consultation process that was followed when making the Declaration;
clarity on the effect of the Declaration, including transitional provisions, and the approach the FSCA is taking in establishing a regulatory and licensing framework under the FAIS Act that would be applicable to Financial Services Providers (FSP) that render financial services in relation to crypto assets.

Previously, on 20 November 2020, the FSCA published the draft Declaration of a Crypto Asset as a Financial Product under FAIS (“Draft Declaration”). At the time, the underlying basis for the Draft Declaration and its supporting statement stemmed from the urgent need:

for improved disclosures to customers that highlight the increased risks involved in investing in crypto assets; and
to ensure that a more robust advice process is adopted (including proper risk assessments) when intermediaries advise customers to purchase crypto assets.

Our review of the underlying details on the process and the initial moves of the FSCA towards the regulation of crypto assets in South Africa can be accessed here: The FSCA’s Draft Declaration: Closing in on Crypto Assets in South Africa | Knowledge | Fasken.

However, persons who render financial services, being advice and/or intermediary services, concerning crypto assets have been generally exempted from the application of section 7(1) of FAIS. The general exemption only applies until the relevant licence application under the FAIS Act has been approved or declined. The relevant licence applications must be submitted between 1 June 2023 and 30 November 2023.

In a press release dated 20 October 2022, the FSCA has noted that the reasons for the exemption are as follows:

To further facilitate transitional arrangements for existing providers of crypto asset activities. The transitional arrangements entail that a person may continue to render financial services in relation to crypto assets without being licensed, provided that such person applies for a licence under the FAIS Act within the above period specified in the exemption.; and
To exempt certain ecosystem participants from the FAIS Act. These participants are crypto asset miners and node operators performing functions in respect of the security and health of the network as well as persons rendering financial services in relation to non-fungible tokens[1].”

Furthermore, the FSCA also announced the following additional key points:

A Draft Exemption of Persons rendering Financial Services in relation to Crypto Assets from Certain Requirements (“Draft Requirements Exemption”) has been published for the sake of efficiency in facilitating the application of an appropriate regulatory framework for Crypto Asset FSPs once they are licensed.
The Draft Requirements Exemption proposes to exempt licensed Crypto Asset FSPs and their key individuals and representatives from certain requirements of, amongst others, the General Code of Conduct for Authorised Financial Services Providers and their Representatives (“General Code”) and the Determination of Fit and Proper Requirements, 2017 (“Fit and Proper requirements”).
However, it is important to note that the requirements contained in the General Code and Fit and Proper requirements will apply to all Crypto Asset FSP’s once they are licensed, except those requirements that they are exempted from in terms of the Draft Requirements Exemption.

The Draft Requirements Exemption has been published for public comment pending finalisation, to solicit stakeholder inputs on the proposed regulatory framework that will apply to licensed Crypto Asset FSP’s.

Submissions on the Draft Requirements Exemption must be made using the submission template available on the FSCA’s website and be submitted in writing on or before 1 December 2022 to the FSCA at FSCA.RFDStandards@fsca.co.za.

ENDS

[1] The terms crypto asset miner, node operator and non-fungible token are defined in the published
Exemption of persons rendering financial services in relation to crypto assets from section 7(1) of the
Financial Advisory and Intermediary Services Act, 2002.