Following on from our earlier blog on the declaration of crypto assets as financial products under the FAIS Act (the Declaration) we have received numerous queries on the transitional arrangements relevant to the new licensing regime, and the impact of the Declaration on crypto asset derivatives.
Specific concerns have been raised regarding whether existing crypto asset providers have to now cease business – the simple answer to this is no. Existing crypto asset business may continue subject to the terms of a temporary general exemption from section 7(1) of the FAIS Act (ie. the requirement to be licensed), which has been issued alongside the Declaration. In terms of the exemption, any person rendering financial services in respect of crypto assets is exempt from section 7(1) of the FAIS Act on the condition that such person must:
- Apply for a licence under section 8 of the FAIS between 1 June 2023 and 30 November 2023. This means that a person rendering financial services in relation to crypto assets at the time that the Declaration takes effect 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, and business will need to cease;
- Immediately comply with Chapter 2 of the Determination of Fit and Proper Requirements for Financial Services Providers, 2017, (Determination). Chapter 2 sets out the Honesty, Integrity and Good Standing requirements that apply to all FSPs;
- Immediately comply with section 2 of the General Code of Conduct for Authorised Financial Services Providers and Representatives, 2003 (General Code) as if it is 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;
- Comply with the rest of the General Code by 1 December 2023; and
- Provide the FSCA with any information the FSCA requests that is in the possession of, or under the control of, the person, that is relevant to the financial services and/or similar activities rendered by such person.
Crypto asset derivatives
The Financial Markets Act, 2012 (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.
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. In turn, 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. As such, financial services rendered in relation to crypto asset derivatives have always been subject to the FAIS Act. 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 requirements of the FAIS Act and are not subject to the general exemption discussed above. Further, providers of crypto asset derivatives remain subject to the FMA.