The six-month window period for crypto asset FSPs to apply for authorisation by the FSCA opens on Thursday, and the Authority has published updated licensing application forms to accommodate crypto asset FSPs.
Forms FSP 2, FSP 4C, FSP 4D and FSP 5 that must be completed by FSPs and submitted to the FSCA when applying for a licence in terms of section 8 of the FAIS Act have been amended to provide for the crypto asset product sub-category.
The FSCA has published all 16 licence forms in a single pdf, together with FAIS Notice 29 of 2023 (Application by FSPs for authorisation, 2023), which repeals and replaces FAIS Notice 1 of 2018.
Click here to download the new licence form pack from the FSCA’s website. The pdf includes instructions on the application and submission process.
The forms can also be downloaded individually in pdf or Word format by going to www.fsca.co.za > Regulated entities > Licensing and registration > FAIS > New applications > Forms
An application fee must be paid before the application is submitted. The fee is based on the category of licence applied for, and the FSP’s number of key individuals (KIs) and representatives.
Crypto asset FSPs have from 1 June to 30 November this year to apply for authorisation.
Anyone who, as a regular feature of their business, renders a financial service in relation to crypto assets can continue to render such services without being licensed under section 7(1) of the FAIS Act provided they apply for a licence between 1 June and 30 November. This is in terms of the general exemption published by the FSCA when it declared a crypto asset as a financial product in October 2022.
The exemption from the licensing requirement will apply until the licence application submitted within the window period has been approved or declined. As long as a provider applies for a licence by 30 November, it can continue to operate while the FSCA processes its application. If a crypto asset FSP does not submit a licence application within the stipulated period, the exemption lapses, and the business will have to stop rendering crypto asset-related financial services.
Essentially, when applying for a licence, crypto asset FSPs need to show that they meet the “fit and proper” requirements as set out in the Determination of Fit and Proper Requirements for FSPs (Board Notice 194 of 2017). These relate to honesty, integrity, and good standing; competence (qualifications and experience); continuous professional development; operational ability; and financial soundness.
The Determination and the General Code of Conduct for Authorised FSPs and Representatives (Board Notice 80 of 2003) are two key regulatory instruments, subordinate to the FAIS Act, that govern financial and intermediary services in South Africa.
In terms of the FAIS Act, it is an offence for an eligible entity not to be authorised. Operating without a licence may result in a fine of up to R10 million or imprisonment of up to 10 years.
Are you compliant with Fica?
Section 6 on form FSP 7 asks applicants whether they have measures in place to comply with all the requirements of the Financial Intelligence Centre Act (Fica).
In terms of the amendments to Schedule 1 of Fica that came into force on 19 December 2022, crypto asset service providers (Casps) are now accountable institutions.
The schedule defines a Casp as a person who carries on one or more of the following activities or operations for or on behalf of a client:
- Exchanging a crypto asset for a fiat currency or vice versa;
- Exchanging one form of crypto asset for another;
- Conducting a transaction that transfers a crypto asset from one crypto asset address or account to another;
- Safekeeping or administration of a crypto asset or an instrument enabling control over a crypto asset; and
- Participating in and providing financial services related to an issuer’s offer or sale of a crypto asset.
Crypto asset FSPs should consider carefully whether they are performing any of the above services. If they are, they need to register with the Financial Intelligence Centre (FIC).
Registration must be completed and submitted using the online registration system called goAML.
Note that Fica does not have transitional provisions. The requirement for Casps to register as accountable institutions applied from 19 December 2022.
In addition to registering with the FIC, accountable institutions must fulfil certain regulatory obligations, which include:
- Identifying and verifying new clients;
- Ongoing due diligence in respect of existing clients;
- Appointing a compliance officer;
- Training employees on Fica compliance and money laundering, terrorist financing and proliferation financing (ML/TF/PF) risk exposure;
- Undertaking business risk assessments for ML/TF/PF; and
- Formulating and implementing a risk management and compliance programme.
In view of the question asked on FSP 7, it is advisable for crypto asset FSPs that meet the definition of an accountable institution to ensure they are registered with the FIC and are Fica-compliant before submitting their licence application.
Do you need to apply for a licence?
When the FSCA declared crypto assets to be a financial product, it defined 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 following should be noted about the above definition:
- It uses the term “crypto assets”, not “cryptocurrency”, because crypto assets are not legal tender in South Africa;
- It is intentionally wide; and
- It is technology-neutral, so crypto asset FSPs cannot rely on the design of their software to avoid the requirement to be licensed.
The above definition should be read in conjunction with how the FAIS Act defines “advice”, “financial service”, “financial services provider” and “intermediary service”. In combination, these definitions encompass a wide range of activities relating to assisting individuals to invest in, buy, sell, manage, or keep in safe custody a financial product. An individual trading crypto for their own account would not be an FSP, but if you are assisting someone to trade crypto or recommending that they trade crypto, even as a “side hustle”, you may be required to be licensed as an FSP.
The FSCA has, at this stage, decided that certain activities that qualify under the definition of a crypto asset do not require those engaged in these activities to apply for a licence. These are:
- Crypto asset miners, which are defined 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 (NFTs), 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”.
Miners and node operators support what happens on the blockchain and are not consumer-facing, so the FSCA does not believe these persons need to be regulated under the FAIS Act. Although NFTs can be traded, the Authority believes they present a lower risk than fungible tokens. Not everyone agrees with this view, and it is possible that NFT providers may in future have to licensed.
Crypto asset derivatives
It is important to note that traders in crypto asset derivatives have always had to be licensed.
The Financial Markets Act (FMA) defines a “derivative instrument” as a financial instrument or contract that creates rights and obligations and whose value depends on or is derived from the value of one or more underlying asset, rate, or index, on a measure of economic value, or on a default event.
The FMA defines “securities” as including a derivative instrument, and the FAIS Act defines a financial product as including “securities” as defined in the FMA.
A contract that creates rights and obligations and whose value depends on or is derived from the value of one or more crypto asset (crypto asset derivative) is therefore a derivative instrument as defined in the FMA.
As such, financial services rendered in relation to crypto asset derivatives have always been subject to the FAIS Act.
FSPs providing financial services in relation to crypto asset derivatives are already subject to the requirements of the FAIS Act and are not subject to the general exemption.
Other conditions attached to the exemption
There are other conditions attached to the exemption granted to crypto asset FSPs to operate temporarily without a licence. These are:
- Immediate compliance with Chapter 2 of the Determination of Fit and Proper Requirements for FSPs. Chapter 2 sets out the honesty, integrity and good standing requirements that apply to all FSPs.
- Immediate compliance with section 2 of the General Code of Conduct. Section 2 provides that an FSP must 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.
- Compliance with the rest of the General Code by 1 December 2023.
- Provide the FSCA with any information requested by the Authority that is relevant to the financial services and/or similar activities rendered by the FSP.
If a crypto asset FSP does not adhere to any of the above conditions, the FSCA can withdraw the exemption.
Final exemption notice
As Moonstone previously reported, the FSCA has published the final notice setting out the exemptions from the General Code of Conduct and the Determination of Fit and Proper Requirements that will apply to licensed crypto asset FSPs, and to their KIs and representatives.
The final exemptions are contained in FAIS Notice 25 of 2023 (“Exemption of persons rendering a financial service in relation to crypto assets from certain requirements”), which was published on 11 May.
Key change: qualification requirement
There is one significant difference between the draft notice published in October 2022 for public comment and the final notice: crypto asset FSPs, KIs and reps are required to have a qualification recognised by the FSCA, per section 23 of the Determination of Fit and Proper Requirements.
The draft notice had proposed exempting crypto asset FSPs, KIs and reps from this requirement. But this is no longer the case, and section 23 of the Determination will therefore apply as it is to crypto asset FSPs, their KIs and reps.
This change has implications for crypto asset FSPs’ licence applications. An FSP must have appointed a KI when it applies for a licence, and a person must have a recognised qualification to be appointed as a KI.
The FSCA has updated its list of qualifications recognised for FSPs, KIs and reps to provide for the crypto asset product sub-category. The list can be accessed here.
If you hold a non-recognised qualification and believe your qualification should be recognised, you can include an application to the FSCA for recognition as part of your licence application.
Here is a summary of the other requirements and exemptions that will apply to licensed crypto asset FSPs.
Exemption from guarantees or indemnity insurance
Crypto asset FSPs do not have to have suitable guarantees, or professional indemnity insurance, or fidelity insurance cover, per section 13 of the General Code of Conduct.
Note that this exemption from section 13 of the General Code of Conduct applies only insofar as it relates to the rendering of financial services in respect of crypto assets. Where an FSP is licensed for other financial products in addition to crypto assets, the exemption does not apply to the other financial products.
Temporary exemption from regulatory examinations
Crypto asset FSPs and their KIs are exempt for 18 months from 11 May (the date of publication of Notice 25 of 2023) from completing and passing the regulatory examinations required in terms of section 8A of the FAIS Act, read with Part 4 of Chapter 3 of the Determination of Fit and Proper Requirements.
A “regulatory examination” means a regulatory examination based on the qualifying criteria set out in the tables in Annexure Five to the Determination.
RE exams: supervised representatives
A “crypto asset supervised representative” (excluding a supervised representative referred to below) who before the Notice 25 of 2023 was published had never been appointed as a representative of an FSP is exempt from completing the regulatory examinations for two years from the date on which he or she was first appointed to render financial services in respect of crypto assets.
A crypto asset supervised representative who before Notice 25 was published only has a date of first appointment to (a) render financial services in respect of a “Tier 2 financial product” or (b) perform the execution of sales, must within two years from the date on which such person was first appointed as a representative to render financial services, other than the execution of sales, in relation to crypto assets, comply with the applicable regulatory examination requirements.
A “crypto asset supervised representative” means a representative of a crypto asset FSP who:
- Renders financial services in relation to crypto assets;
- Does not meet one or more of the “competency requirements”; and
- Renders financial services under supervision.
“Competency requirements” is defined in section 1 of FAIS Notice 86 of 2018 (Exemption of services under supervision).
“Supervision” means the guidance, instruction, and oversight, by any means or medium, by a supervisor using a variety of assessment, observation and oversight methods or tools that are appropriate for the assessed level of competence of the crypto asset supervised representative.
“Tier 2 financial products” are listed in Annexure Three to the Determination of Fit and Proper Requirements.
CPD requirements: crypto asset FSPs, KIs and reps
Crypto asset FSPs, their KIs and representatives must complete a minimum of six hours of CPD (continuous professional development) activities relating to crypto assets every CPD cycle. (The CPD cycle runs from 1 June of every year and ends on 31 May of the following year.) Note these crypto asset CPD activities are in addition to the CPD requirements set out in section 33(1) of the Determination of Fit and Proper Requirements.
CPD requirements: supervised reps
A crypto asset supervised representative must complete at least six hours of CPD activities relating to crypto assets per CPD cycle.
The timeframe within which these activities must be completed is the earlier of:
- The date from which the supervised representative meets the applicable regulatory examination and qualification requirements pertaining to crypto assets; or
- After six years from the date on which the supervised representative was first appointed as a crypto asset supervised representative.
A crypto asset supervised representative who, before the publication of Notice 25 of 2023, only has a date of first appointment to (a) render financial services in respect of Tier 2 financial products, or (b) execute sales in relation crypto assets, who after such date of appointment is appointed to render financial services other than the execution of sales, must complete a minimum of six hours of CPD activities relating to crypto assets per CPD cycle.
The timeframe within which these activities must be completed is the earlier of:
- The date from which the supervised representative meets the applicable regulatory examination and qualification requirements pertaining to crypto assets; or
- After six years from the date on which the supervised representative was first appointed as a crypto asset supervised representative.
Moonstone Compliance can help you
Are you unsure whether you are required to be licensed as a crypto asset FSP? Do you need help with submitting your licensing application? Moonstone Compliance has 20 years’ experience in providing FSPs of all sizes with meeting their FAIS Act obligations.
Moonstone Compliance also offers compliance, consulting, and training options for accountable institutions of all types and sizes to help them implement anti-money laundering procedures and meet the requirements of Fica.
Click here to read more about Moonstone Compliance’s suite services or send us an online enquiry.
