“Ultimately, the plan is to put an end to anonymous virtual transactions.” This is according to the Financial Intelligence Centre (FIC), which on 1 March issued a draft sector risk assessment report for crypto asset service providers (CASPs) for consultation.
In the draft report, the FIC states that to manage and mitigate the risks emerging from virtual assets, countries should ensure that CASPs are regulated for anti-money laundering and countering the financing of terrorism (AML/CFT) purposes, licensed or registered, and subject to effective systems for monitoring and ensuring compliance with the relevant measures called for in the Financial Action Task Force (FATF) Recommendations.
CASPs is one of the sectors identified by the AML/CFT community as potentially highly vulnerable for money laundering and terrorist financing (ML/TF).
According to the FIC, the overall inherent risks of money laundering and terrorist financing for CASPs in South Africa, based on national and international experience, can be classified as high.
In the draft report, the FIC says the classification is because of “the potential for abuse and the fact that mitigating supervisory measures are still in the process of being introduced”.
Tightening the legal net
The CASPs sector has been included, as item 22, in Schedule 1 to the Financial Intelligence Centre Act since amendments to the schedules were implemented in December 2022.
The FIC and the FSCA have also amended legislation and published regulations to bring crypto assets under their respective regulatory frameworks.
Read: Why the FSCA brought crypto assets within the regulatory net
The FIC says although the legislation and regulations seek to achieve financial integrity and consumer protection objectives, regulatory gaps may still exist at all appropriate spheres of governance and law enforcement. This is because crypto assets impact various policy areas, such as efficiency, financial stability, safety and soundness, transparency, financial inclusion, terrorist financing, money laundering, and competition.
“The report serves to assist such businesses in understanding their money laundering and terrorism financing risks and introduce measures that can be adopted by the sector to mitigate and manage such risks,” the FIC says.
Market overview of CASPs sector
As of 20 February, 87 CASPs were registered with the FIC. The FIC draft report states that although this does not confirm the total number of operators, it provides an indication of the size of the sector in South Africa.
Late last year, the FSCA published a document “South Africa’s Crypto Assets Market Study”, which found that the crypto economy in sub-Saharan Africa was the smallest among all regions, accounting for 2.3% of the global transaction volume from July 2022 to June 2023, amounting to $117.1 billion in on-chain value.
Read: Crypto market study reveals 10 common risks to investors
However, the document noted that, irrespective of this relatively small uptake of crypto assets compared to the rest of the world, the sector had made significant inroads in Africa. Nigeria ranked second on the 2023 Chainalysis Global Crypto Adoption Index. Other countries in the region that scored high on the index were Kenya (21), Ghana (29), and South Africa (31).
In addition, the research indicated that the average crypto assets traded were about R520 million a month in 2022. The study found that most crypto asset FSPs in South Africa provided financial services by making use of unbacked crypto assets (60%), followed by stablecoins (26%) such as USD Coin and Binance Coin.
Other findings were that more than half of the crypto asset FSPs had built their businesses around retail customers.
“Understanding the extent of retail participation over time will be critical in assessing the consumer protection risk and impact of this market,” the researchers concluded.
A 2022 study by Triple A (Singapore Blockchain company) indicates that more than 5.8 million people, 9.44% of South Africa’s population, own crypto assets.
Breaking down digital currency ownership by income, the Triple A study found that 77% of South African digital currency owners have an annual income of R450 000 and less. This suggests that digital currencies are largely owned by low- to middle-income South Africans, Triple A said.
A large majority of South African digital currency owners are in the 18 to 44 age group (83%). Only 7% of them are 55 and above. This suggests that digital currencies are largely owned by South African millennials, Triple A concluded.
Risks CASPs need to consider when conducting business
The FIC draft report sets out the international money laundering risks and terrorist financing risks associated with CASPs and outlines reporting required of CASPs under FICA.
It also lists the various risks based on desktop monitoring and research that CASPs need to consider when conducting their daily business. These include:
- products and services risks;
- client risks;
- transaction risks;
- risks relating to delivery channels;
- geographic risk;
- terrorist financing risk; and
- proliferation financing risk.
In addition, the draft report provides indicators of ML/TF activity for the sector, including ML/TF vulnerabilities and risks associated with CASPs.
It also shares examples of “red flags” relevant to the profile and unusual behaviour of either the sender or the recipients of crypto assets.
Comments on the draft sector risk assessment report can be submitted until the close of business on Friday, 22 March. Comments must be sent to the FIC via consult@fic.gov.za. Only online comments will be accepted.
For other queries, contact the FIC’s compliance contact centre on 012 641 6000, select option 1, or submit a web query by clicking on: http://www.fic.gov.za/ContactUs/Pages/ComplianceQueries.aspx
