On 20 November 2020, the Financial Sector Conduct Authority issued a draft Declaration of Crypto Assets as a Financial Product under the Financial Advisory and Intermediary Services Act 2002 (FAIS Act). The Declaration will be made in terms paragraph (h) of the definition of ‘financial product’ in the FAIS Act, which provides that a financial product includes ‘any other product similar in nature to any financial product referred to in paragraphs (a) to (g), inclusive, declared by the FSCA to be a financial product for the purposes of this Act’. The FSCA has taken the view that crypto assets are similar in nature to other financial products hence the draft Declaration.
The draft Declaration is the result of lengthy consideration by the National Treasury, the SARB, the FSCA, and the Financial Intelligence Centre on how best to regulate crypto assets, and also as members of the Intergovernmental Fintech Working Group and the subsequently established Crypto Assets Regulatory Working Group. In its 2019 Consultation Paper on Crypto Assets, the Working Group highlights the challenges in regulating crypto assets and makes various policy recommendations relating to the regulation of crypto assets. The draft Declaration is intended to give effect to two particular recommendations:
- Recommendation 9 which provides that the specified services rendered in respect of crypto assets must be included in the definition of ‘financial services’ in section 3(1)(a) of the Financial Sector Regulation Act, 2017 , and that ‘services related to the buying and selling of crypto assets must be included in the licensing activities under the Conduct of Financial Institutions Bill. The FSCA is, however, of the view that as an interim solution to address some of the immediate consumer risks, a similar outcome can be achieved sooner by declaring crypto assets as a financial product under the FAIS Act.
- Recommendation 10 which provides that the FSCA should be the responsible authority for the licensing of services related to the buying and selling of crypto assets, and should develop specific conduct standards for these services.
Effect of the draft Declaration
The effect of declaring crypto assets as a financial product under the FAIS Act will be that –
- any person furnishing advice or rendering intermediary services in relation to crypto assets must be authorised under the FAIS Act as a financial services provider (FSP), and must comply with all the requirements under the FAIS Act; and
- any authorised person, including its representatives, must comply with the relevant FAIS requirements, e.g. the requirements of the General Code of Conduct for Authorised Financial Services Providers and Representatives, 2003 (General Code), the Determination of Fit and Proper Requirements, 2017 (F&P Requirements).
Once registered as a FSP, a crypto asset service provider (CASP) may in turn become subject to the requirement to register as an accountable institution in keeping with the requirements of Schedule 1 of the Financial Intelligence Centre Act 2001. As an accountable institution, a CASP will need to comply with anti-money laundering requirements, including the identification and verification of clients and the reporting of suspicious transactions.
Further communication regarding the proposed framework for regulating crypto assets under the FAIS Act, will follow. This may entail a conduct standard or separate code of conduct for crypto assets or a combination of leveraging on existing legislation and issuing exemptions, for example, a general exemption from the requirements contained the General Code and F&P Requirements, only to the extent that these are found to be inappropriate in the context of crypto assets.
Existing CASPs will continue their operations, but must submit an application for authorisation as an FSP under section 8 of the FAIS Act within 4 months of the effective date of the final Declaration. The business will be allowed to continue its operations until its application for a licence has been granted or declined. If such business fails to submit an application within 4 months, it must cease its operations.
Any new business that wants to start providing financial services in relation to crypto assets, after the effective date of the final Declaration, will have to obtain an FSP licence before it can start furnishing such services.
In the context of the broader developments surrounding crypto assets, the draft Declaration is intentionally limited in scope to only capture advice and intermediary services in respect of crypto assets.
The draft Declaration will not cover the full scope of potential CASP activities. Broader developments surrounding crypto assets will be given effect through the COFI Bill which will constitute the future consolidated legal framework governing the conduct of financial institutions. The COFI Bill will as part of its activity-based approach capture advice and a variety of intermediary type services in relation to crypto assets as licensing activities. It is also proposed that the COFI Bill will reenact the FAIS Act, meaning that the Declaration, if made, will ultimately be collapsed into the COFI Bill framework.
The extent to which the exchange control regulations prohibit or regulate crypto assets will still apply despite the draft Declaration. South African residents must continue to ensure compliance with applicable exchange control requirements notwithstanding any licensing of CASP activities
Call for comment
The FSCA has specifically requested comment on the scope of the proposed definition of crypto assets, as well as any insights into potential unintended consequences. Submissions on the draft Declaration must be made in writing by 28 January 2021 to the FSCA at FSCA.RFDStandards@fsca.co.za, using the submission template available on the FSCA’s website.