The FSCA is exploring ways to better understand DeFi’s risks and opportunities. One option on the table? Testing select DeFi use cases in the Regulatory Sandbox of the Intergovernmental Fintech Working Group (IFWG) to help develop a “balanced regulatory and supervisory approach”.
The IFWG was established in 2016 with the objective to create a forum for regulators to gain deeper insights into fintech innovation to regulate and foster responsible innovation to help ensure the continued efficient functioning of financial markets and financial stability, and the safeguarding of customers’ interests.
If you’re wondering why the FSCA is suddenly interested in kitchen appliances – don’t worry, they’re not. In this case, DeFi stands for decentralised finance, not the popular appliance brand.
The DeFi market in South Africa is projected to reach revenue of about US$2.8 million (R51 561 720) in 2025, indicating a nascent but expanding market.
“Although the DeFi market size is still very small compared to the traditional financial sector, it is imperative for the FSCA to continuously monitor the sector for any risks that might be detrimental to consumers’ welfare,” the FSCA notes.
As the FSCA explains it: “DeFi applications or protocols are blockchain-based and are typically built using smart contracts which are given effect through pieces of code that determine the rules of the DeFi product. Users who interact with DeFi smart contracts do what they would usually do in traditional finance such as borrow money, make loans, or trade assets without traditional intermediaries (like commercial banks), and the entire operation runs on code.”
Blockchain is a decentralised distributed ledger technology that records transactions in a secure, transparent, and tamper-proof manner. Instead of relying on a central authority (such as a bank or government), blockchain networks operate through a network of computers (nodes) that validate and store data collectively. DeFi applications are mainly built on the blockchain platform Ethereum.
Smart contracts are self-executing programs on a blockchain that automatically enforce agreements when certain conditions are met – no middleman needed.
South African users are most likely more familiar with DeFi’s twin (although not identical), Centralised Finance (CeFi).
The FSCA has taken significant steps to regulate CeFi. In October 2022, the FSCA declared crypto assets as financial products under the Financial Advisory and Intermediary Services Act, bringing providers of financial services related to crypto assets under its regulatory jurisdiction.
Following this declaration, the FSCA initiated a licensing process for crypto asset service providers (CASPs) on 1 June 2023. As of December 2024, the FSCA had approved 248 institutions to operate as licensed CASPs in South Africa.
Read: FSCA crypto licensing update: more than 240 CASPs approved
To understand the difference between the two, try and think of traditional banking as CeFi and DeFi as a new way of handling money without banks or middlemen.
Imagine you have a bank account. When you deposit money, the bank keeps it safe, helps you make payments, and even offers loans. But the bank is in control – it decides what fees to charge, who can access loans, and when you can withdraw money.
CeFi works the same way but with cryptocurrencies. Platforms such as Binance, Coinbase, and Luno act like banks, holding your digital money (crypto) and offering services such as trading and lending. However, just like with a bank, you rely on the company to keep your funds safe and follow the rules.
Now, imagine you keep your money in cash. You don’t need a bank to store it, send it to someone, or use it for purchases – you just hand it over directly.
DeFi works like this but in digital form. It allows people to trade, borrow, lend, and invest directly with each other using blockchain technology, without needing a bank or financial institution. Instead of relying on a company, DeFi uses smart contracts.
Examples are Uniswap (for trading), Aave (for lending), and MakerDAO (for stablecoins).
This makes transactions faster, more transparent, and accessible to anyone with an internet connection. However, the technology does not come without its risks and challenges.
According to a Decentralised Finance (DeFi) Market Study by the FSCA released last week, the key challenge for regulators in South Africa “is that they may not have the jurisdiction to regulate DeFi protocols as these are spread all over the world and can be accessed by anyone with an internet connection”.
“Therefore, it is imperative to understand these risks to be able to respond accordingly,” the Authority notes.
Study findings
A recent FSCA survey of 21 CASPs found that DeFi is gaining traction in South Africa. Local crypto exchanges are increasingly offering DeFi tokens, reflecting growing interest as these assets gain global momentum.
Although DeFi is still in its early stages, respondents estimate its total value locked (TVL):
- 38% believe it exceeds R500m.
- 24% estimate it between R50m and R500m or are unsure.
- 10% believe it is under R10m.
When asked about likely DeFi users:
- 71% identified retail customers.
- 19% pointed to SMMEs.
- 10% mentioned larger enterprises.
“Due to the complexity of DeFi protocols, the current ecosystem seems to primarily cater to retail investors who are crypto/tech savvy and have a high risk appetite.”
Key benefits identified include:
- financial inclusion;
- increased transparency;
- lower transaction costs (57%);
- 24/7/365 availability (48%); and
- no geographic restrictions (29%).
Despite its potential, DeFi presents significant risks:
- Smart contract vulnerabilities – coding errors (43%).
- Interconnectedness risks – dependencies between smart contracts (33%).
- Market manipulation and fraud.
- Lack of governance and operational weaknesses.
“Feedback from the market participants confirms the view that DeFi ecosystem has structural flaws and poses risks that might potentially undermine consumer protection and market integrity.”
The survey notes that the 2022 “crypto winter” also exposed many of DeFi’s vulnerabilities, similar to traditional finance (TradFi), including liquidity mismatches, leverage, and governance issues.
“The lack of robust regulatory oversight and clear consumer protection measures further exacerbate these risks, leaving users vulnerable and potentially undermining market trust,” the survey notes.
However, a major challenge for regulators is that DeFi operates globally:
“They may not have the jurisdiction to regulate DeFi protocols, as these are spread all over the world and can be accessed by anyone with an internet connection.”
Then there is also the question if DeFi is truly decentralised.
According to the survey, although DeFi is “fundamentally characterised by its decentralised nature, elements of centralisation still exist within the ecosystem”.
The survey notes that these elements can manifest in various forms, such as centralised governance structures, reliance on centralised oracles, and the concentration of power among a few key developers or entities.
“Recognising these centralisation aspects is crucial for understanding the full scope of DeFi’s impact and the associated risks, particularly from a consumer protection and market conduct perspective.”
From a consumer protection standpoint, they survey notes that the presence of centralisation within DeFi can lead to potential conflicts of interest, lack of accountability, and increased vulnerability to fraud and manipulation.
“Ensuring robust consumer protection measures, such as transparency requirements, regular audits, and dispute resolution mechanisms, is essential to safeguard users against these risks.”
Most prominent use cases
Market participants highlighted DeFi’s most prominent use cases are payments (52%), lending and borrowing (48%), and decentralised exchanges (33%), commonly referred to as DEXs.
According to the survey, DeFi payment solutions are particularly beneficial for cross-border transactions and remittances, providing a more efficient and inclusive financial system.
Some fintech companies in South Africa are integrating self-custody Web3 wallets into their platforms. These wallets give users full ownership of their assets and private keys, unlike custodial wallets, where a third party manages funds.
With Web3 self-custody wallets, users can:
- swap thousands of tokens across networks at optimal prices;
- access decentralised applications (dApps);
- transfer funds seamlessly between exchanges and wallets;
- earn yield on crypto assets; and
- buy, mint, and link non-fungible tokens (NFTs).
These innovations have made it easier for South Africans to purchase and convert crypto assets using local banking infrastructure.
In DeFi, users can also lend their cryptocurrency to earn interest or borrow crypto by providing collateral. Platforms such as Aave and Compound facilitate these transactions without intermediaries.
How it works:
- Lenders deposit assets into liquidity pools, making them available to borrowers.
- Borrowers provide collateral – often exceeding the loan amount – to secure the loan.
- Interest rates are determined by supply and demand in the liquidity pools.
Some South African crypto exchanges are integrating DeFi lending platforms such as Aave to connect lenders and borrowers directly.
Aave is a DeFi protocol that enables users to lend and borrow cryptocurrencies without the need for a centralised intermediary.
DEXs allow users to trade crypto assets directly without a central authority.
Popular DEXs include Uniswap, SushiSwap, and PancakeSwap. In South Africa, some DEXs enable users to buy, sell, and swap various crypto assets, including Bitcoin and Ethereum.
Beyond trading, DEXs offer lending, borrowing, and yield-earning opportunities through stablecoins and other crypto assets.
The survey notes that a robust and adaptive regulatory environment for DeFi “that safeguards the interests of consumers, and the financial system” will rely on stakeholder engagement and participation.
“Formal reviews, such as consultative documents and regulatory sandboxes, could solicit the views of market participants and ensure that regulatory authorities and stakeholders are aligned and that decision-making processes are transparent.”
