FSCA’s Declaration of Crypto as a Financial Product Under the FAIS ACT

Context for the Declaration

FSCA’s declaration was flagged in advance and was prompted by FATF in particular. Since 2014, FATF has been flagging risks relating to virtual (crypto) assets, and virtual asset service providers (VASPs / CASPs). FATF’s Mutual Evaluation Report on South Africa from October 2021^[1] found that SA was non-compliant on Recommendation 15 relating to new technologies, and flags VAs and VASPs:

FSCA’s approach builds on the IFWG’s position papers from 2020^[2] and 2021^[3], which outline key principles relating to CAs:

General principles:

• Appropriate regulation for CASPs
• An activities based perspective
• Regulation proportional to the risks
• Collaborative approach
• Proactive monitoring of developments
• Seeking to increase digital financial literacy for consumers

Regulatory principles:

• A risk based approach
• A unified regulatory approach
• Phased implementation
• Technology neutral
• Resilient and adaptive

In November 2020, the FSCA published a draft notice^[4] proposing to declare crypto assets as a financial product under the Financial Advisory and Intermediary Services Act, 2002. In the FSCA Regulation Plan^[5] for April 2022 to March 2025, the timing for this declaration was blocked out as some time before the end of 2022.

The FSCA Policy Document Details

The key paragraph of the Government Gazette is the following: “The Authority, under paragraph (h) of the definition of “ financial product” as defined in section 1 of the [FAIS] Act, hereby declares a crypto asset as a financial product for purpose of that definition.”

The key points from the accompanying Policy Document are:

• CASPs will need to register under the FAIS Act as FSPs from 1^st June to 30^th November 2023, but have an exemption under FAIS until 30^th November 2023 and while their application is being considered. They will need to be authorised under FAIS, or comply with FAIS, and comply with Fit and Proper Requirements and the General Code section 2.
• There are draft exemptions from some aspects of the FAIS requirements (to be finalised early 2023), including the requirement to hold public indemnity insurance (pending investigation of whether it is or will become available for crypto), and some of the Regulatory Exam and CPD requirements – so there are no requirements for minimum experience or qualifications.
• Those providing crypto custody must provide accounts, keep funds separate, provide audits, etc. in line with requirements for conventional custodial arrangements.
• The activity of mining crypto or running a node is exempt from registration.
• NFTs are exempt from being treated as financial products.
• Derivatives of crypto (e.g. a top 10 crypto unit trust) have always been subject to regulation as financial products and remain so.
  

Commentary and Implications

SA regulators continue to engage, are consistent in their approach, and are responding to guidelines from global bodies like FATF.

International standard setting bodies (SSBs) are shaping the regulatory conversation:

• GSSBs include the FSB, FATF, IOSCO, BCBS, BIS (CPMI) – all with different focus areas, but looking to achieve consistency across regulation to avoid the worst features of regulatory arbitrage, and to achieve common goals
• Publications from these are digested by local regulators, and feature in their considerations when drafting local regulations. Studying these publications, and regulations that are being implemented in other key jurisdictions, e.g. MiCA in Europe, gives an indication of what may be coming.

SA regulators are measured and consultative in their approach:

• This approach is consistent with bringing crypto within the regulatory framework and providing the regulations and customer protection that would apply to any other financial product. It is a big step in the normalisation of crypto.
• SA regulators are guided by the SSBs, and take a consultative and collaborative approach, which means that local entities have the opportunity both to get a good sense of what is in the pipeline, and to influence that legislation with their input.

AML, CFT and financial crime will continue to be a focus:

• As a global issue, financial crimes of all types are a key focus of the SSBs, and thus of SA regulators. This will drive adoption of things like the FATF travel rule, and stronger KYC / CDD enforcement.

There are some obvious areas where this regulation will evolve:

• The qualification requirements will probably change as crypto qualifications become mainstream.
• The NFT exemption may change in the long term as NFTs become used more commonly to represent tokenised financial assets etc. Currently it looks like a loophole.

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