Crypto assets are not currently a financial product. While not illegal, there is no dedicated legal framework governing the use of crypto-assets and the provision of services related to them. There is ongoing work being conducted by the authorities to bring crypto assets within the regulatory purview. The Intergovernmental Fintech Working Group (“IFWG”) comprising of the Financial Sector Conduct Authority (“FSCA”), the National Credit Regulator, the National Treasury, the South African Reserve Bank (“SARB”) and the South African Revenue Service (“SARS”) have released a number of position papers on crypto assets, outlining various use cases and recommendations for the future legislative accommodation of crypto assets. Upon reading these position papers it is evident that there are several steps to take and legislative areas to cover in the regulation of crypto assets. This then begs the question- which legislative change will be implemented first?
Crypto Assets as Financial Products
In a pre-recorded webinar hosted by PSG Konsult on 12 July 2022 (“PSG Webinar”), the deputy governor of the SARB, Kuben Naidoo (“Naidoo”), confirmed that the declaration of crypto assets as a financial product would be the first regulatory step to take effect. This follows from the FSCA’s draft declaration, published on 20 November 2020 (“Draft Declaration”), proposing to include “crypto assets” as part of the definition of “financial product” under the Financial Advisory and Intermediary Services Act 38 of 2002, as amended (“FAIS Act”).
Defining Crypto Assets
The Draft Declaration provides a much-needed definition of crypto assets, which serves as a point of departure for its further inclusion and interpretation within the regulatory space. It defines “crypto assets” as:
“any digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes, but excluding digital representations of fiat currencies or securities that already fall within the definition of financial product”
This definition is quite broad and, as it does not refer to cryptography or distributed ledger technology, it does not limit crypto assets to the blockchain network. Notably, the term “crypto assets” is used, as opposed to “cryptocurrencies”, aligning with the IFWG’s position that crypto assets are not currencies and are not recognised as form of legal tender in South Africa. The term crypto assets also aligns with SARS’ tax treatment thereof, as crypto assets are viewed as intangible assets as opposed to currencies for tax purposes. You can read more about tax on crypto assets here.
But what are the implications of defining crypto assets as a “financial product”?
Most entities offering services within the financial sector are required to be licensed with the FSCA. Section 7 of the FAIS Act provides that a person may only act or offer to act as a financial services provider if licensed in terms of the FAIS Act. The FAIS Act defines a “financial services provider” as a person who, as a regular feature of their business, furnishes advice and/or renders an intermediary service in connection with a financial product/s. An intermediary service is specifically defined as “any act other than the furnishing of advice, performed by a person-
(a) the result of which is that a client may enter into, offers to enter into or enters into any transaction in respect of a financial product; or
(b) with a view to—
(i) buying, selling or otherwise dealing in (whether on a discretionary or non-discretionary basis), managing, administering, keeping in safe custody, maintaining or servicing a financial product;
(ii) collecting or accounting for premiums or other moneys payable by the client in respect of a financial product; or
(iii) receiving, submitting or processing the claims of a client in respect of a financial product”
Therefore, if crypto assets were to be defined as “financial products”, persons furnishing advice and/or rendering “intermediary services” in connection with crypto assets (“Crypto Asset Service Providers”) would need to be licensed by the FSCA. This would include: intermediaries that sell crypto assets to clients; entities that advise clients on crypto-related investments; platforms offering interest-earning crypto “accounts” to clients; and entities providing custody for crypto assets such as crypto wallet service providers and service providers offering cold storage solutions.
Once licensed, these Crypto Asset Service Providers (also referred to as ‘CASPS’ in foreign jurisdictions) would need to comply with the requirements set out in the FAIS Act; including making relevant disclosures to their clients, using qualified advisors to provide their services, maintaining sufficient compliance, and maintaining full and proper accounting records and audited annual financial statements. In essence, licensing would require Crypto Asset Service Providers to be more transparent and accountable to clients.
A further impact of declaring of crypto assets as financial products in terms of the FAIS Act, is that Crypto Asset Service Providers would be considered “accountable institutions” in terms of the Financial Intelligence Centre Act 38 of 2001, as amended. This would require them to have appropriate client due diligence (KYC) procedures in place and to report any suspicious transactions to the relevant authority in order prevent money laundering and other illicit activities.
Rationale for Draft Declaration
In its statement in support of the draft declaration, the FSCA states that crypto assets have similar features to other financial products, such as acting as a commodity or a means of payment or acting like a security – which is why it can easily be catered for within the provisions of the FAIS Act. However, the FSCA acknowledges that, due to its digital nature, crypto assets are different to other financial products and that the declaration of crypto assets as financial products is only an interim measure to “address some of the immediate consumer risks” in an “expeditious manner”. There are still a range of legislative changes that need to be implemented in order to address the full array of areas which crypto assets impact.
When can we expect implementation?
The declaration of crypto assets as financial products is a long-awaited legislative update. While there is no clear deadline for the implementation of the terms contained in the Draft Declaration, during the PSG Webinar, Naidoo indicated that it should take the regulators around 12 to 18 months to implement the changes – putting the date for regulation of crypto assets as financial products at early 2024 at best.
Given that crypto assets are not currently a financial product, governed by clear laws, if you or your business are considering offering crypto-related products it is advisable that you take legal advice so that when regulation is enacted, your business is still viable. Contact us today and let’s see how we can help you.
About the author
Mikayla joined Dunsters as a candidate attorney in 2020 and is currently in her second year of articles. She is an alumni of Stellenbosch University where she obtained her BA(Law), LLB and LLM degrees. While completing her LLM she obtained practical experience in the legal field and gained valuable insight into the plight of disadvantaged communities by working as a paralegal at the Stellenbosch University Law Clinic.
Mikayla enjoys general civil litigation and has a keen interest in Company and Tax Law. She particularly enjoys drafting civil pleadings as well as tailoring commercial contracts to suit each client’s unique goals.
In her time off, Mikayla enjoys taking long drives and frequenting outdoor markets.