Anyone who provides financial advice or intermediary services in respect of crypto assets will have to register as an FSP following the FSCA’s declaration that these assets are financial products under the FAIS Act.
The declaration was made in General Notice 1 350 of 2022 and took effect from 19 October.
It puts in place a regulatory and licensing regime for persons providing financial services in respect of crypto assets. Crypto asset FSPs must be licensed and will be subject to the FSCA’s oversight and supervision.
The declaration defines a “crypto asset” as a “digital representation of value” that:
- Is not issued by a central bank but can be traded, transferred or stored electronically by natural and legal persons for the purpose of payment, investment and “other forms of utility”;
- Applies cryptographic techniques; and
- Uses distributed ledger technology.
The definition used in the (final) declaration is the same as the one published in June last year by the Crypto Assets Regulatory Working Group of the Intergovernmental Fintech Working Group for adoption across all regulatory authorities in South Africa. The draft definition, published in November 2020, was intended to align with the definition of virtual assets contained in the Financial Action Task Force’s Recommendations (standards).
Crypto asset FSPs must be licensed
The declaration has the effect that anyone who, as a regular feature of their business, renders financial services (as defined in section 1 of the FAIS Act to include advice and/or intermediary services) in relation to crypto assets, must:
- Either be authorised under section 8 of the FAIS Act as an FSP or be appointed as a representative of an authorised FSP under section 13 of the FAIS Act; and
- Comply with the requirements of the FAIS Act and its subordinate legislation.
Anyone who, as a regular feature of their business, renders financial services in relation to crypto assets without a licence will be in contravention of section 7(1) of the FAIS Act, unless exempted. Such a contravention constitutes an offence in terms of section 36(a) of the FAIS Act, and a person found guilty of such an offence is, on conviction, liable to a fine not exceeding R10 million or imprisonment for up to 10 years, or both.
COMING NEXT YEAR: Moonstone Compliance’s Regulatory Update Workshop will take a deep dive into the regulation of crypto asset providers. The workshop is due to take place towards the end of the first quarter of next year. Details about the workshop will be announced in our newsletters and Moonstone Update.
The declaration does not mean that crypto assets are legal tender, because this is something that only the South African Reserve Bank can determine.
Regulation 28 of the Pension Funds Act continues to prohibit retirement funds from investing in crypto assets, and collective investment schemes cannot invest in crypto assets.
The declaration does not apply to or affect financial services rendered in relation to crypto asset derivatives. FSPs providing financial services in relation to crypto asset derivatives are already subject to the FAIS Act, and providers of crypto asset derivatives remain subject to the Financial Markets Act.
In its policy document supporting the declaration, the FSCA said that declaring crypto assets a financial product under the FAIS Act is a “critical” interim step towards protecting customers, pending the conclusion of broader developments surrounding crypto assets. Once the Conduct of Financial Institutions (Cofi) Bill has been enacted, the FAIS Act will be repealed, and crypto asset-related financial services will be addressed under the Cofi Act.
General and temporary exemptions
Alongside the declaration, the FSCA also published a notice (FAIS Notice 90 of 2022) that:
- Exempts certain entities in the crypto ecosystem from having to be licensed in terms of the FAIS Act; and
- Temporarily permits entities that must be authorised to continue to operate without a licence, provided they meet certain requirements.
In addition, the FSCA published a draft exemption that proposes to exempt licensed crypto asset FSPs and their key individuals and representatives from certain requirements of the General Code of Conduct for Authorised FSPs and Representatives and the Determination of Fit and Proper Requirements for FSPs. The draft exemption has been published for public comment and is discussed in a separate article.
Read: Unpacking the proposed regulatory exemptions for crypto FSPs
Application of the general exemption
The entities that are exempt from having to comply with the FAIS Act are:
- Crypto asset miners, which the notice defines as “a juristic or natural person that, alone or in a mining pool, uses computers or specialised hardware to participate in blockchain processing by verifying and adding new transactions to the blockchain”.
- Node operators, who are juristic or natural persons who run “software that keeps a complete or pruned version of the blockchain and broadcasts transactions across the network”.
- People who render financial services in relation to non-fungible tokens, which are “crypto assets recorded on a blockchain with unique identification that distinguishes them from each other and can be associated with real-world objects”.
Transitional arrangements
The temporary exemption for crypto providers that are required to be licensed, in terms of section 7(1) of the FAIS Act, is subject to the following conditions:
1. They must apply for a licence under section 8 of the FAIS Act between 1 June and 30 November 2023. This means that a person currently rendering financial services in relation to crypto assets can continue to do so without contravening the FAIS Act, provided that a licence application is submitted within the stipulated period.
The exemption will remain valid until the person’s licence application has been approved or rejected. If a person does not submit a licence application within the stipulated period, the exemption lapses.
It is important to note the following:
- Providers cannot apply for a licence yet; the FSCA needs to amend certain licence application forms to cater for crypto assets. Applications for licensing will open on 1 June next year.
- The requirement is that providers apply for a licence between 1 June and 30 November next year. As long as a provider has submitted an application by 30 November, it can continue to operate while the FSCA processes its application.
2. They must immediately comply with:
- Chapter 2 of the Determination of Fit and Proper Requirements for FSPs (Board Notice 194 of 2017), which sets out the honesty, integrity and good standing requirements that apply to all FSPs, key individuals and representatives.
- Section 2 of the General Code of Conduct for Authorised FSPs and Representatives, (Board Notice 80 of 2003) as if they are a licensed FSP. Section 2 of the General Code provides that an FSP must at all times render financial services honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry.
3. By 1 December 2023, comply with the rest of the General Code of Conduct, excluding section 13, which requires providers to have guarantees, or professional indemnity or fidelity insurance. Among other things, compliance with the General Code means crypto FSPs will have to perform a financial needs analysis for people wanting to invest in these assets and keep records of advice.
In addition, anyone who is subject to the exemption must immediately comply with requests from the FSCA for information in their possession or under their control that is relevant to the financial services and/or similar activities they render.
Failure to comply with the conditions of the exemption will automatically result in the exemption no longer being applicable to that person.
Fica compliance
The amendments to Schedule 1 of the Financial Intelligence Centre Act (Fica) include crypto-asset service providers as accountable institutions. These amendments have not yet come into effect, but it is expected they will before the end of this year.
FSPs regulated by the FAIS Act are accountable institutions for the purpose of the schedule. As such, any person who renders a financial service in respect of crypto assets (and who is therefore required to be licensed as an FSP) will also have to comply with Fica.
FSCA contact information
Queries relating to the declaration should be sent to the FSCA’s Regulatory Frameworks Department via email to karien.nel@fsca.co.za or johannvanderlith@fsca.co.za.
Moonstone Compliance has been assisting FSPs to comply with financial services legislation and regulations for the past 20 years. To find out more about our services, visit www.moonstonecompliance.co.za, or phone 021 883 8000, or email support@moonstonecompliance.co.za
What RE exam must one complete to be accredited in crypto assets?
Will completing the RE1 and registering as an FSP be enough?
We are still waiting for the FSCA to announce whether crypto FSPs will write one of the existing exams (probably the RE1) or whether a new exam will be created.
Does this legislation encompass businesses that accept Crypto as payment. Just a regular retail store that wants Crypto as an option.
No, it does not.