South Africa has taken significant steps to bring clarity and regulation to the crypto asset space. The South African Financial Sector Conduct Authority (FSCA) has officially declared that crypto assets are considered financial products. This landmark decision, effective as of 19 October 2022, marks a critical shift in the regulation of crypto assets in the country.
Defining Crypto Assets as Financial Products
Under section 1(h) of the Financial Advisory and Intermediary Services Act (FAIS) Act, the FSCA’s declaration brings crypto assets under its regulatory purview. This reclassification means that crypto assets are now subject to FSCA regulation, introducing new requirements and standards for market participants.
The designation necessitates that any individual providing advice or intermediary services related to crypto assets must be authorized as a financial services provider or a representative of such a provider. Market participants have until 30 November 2023 to apply for these licenses, under the new framework.
The FAIS Act provides a comprehensive definition of crypto assets as non-central bank-issued tradeable digital units of value that utilize cryptographic and distributed ledger technologies.
Addressing a Gray Area and Global Concerns
The decision to regulate crypto assets comes as a response to previously unclear regulations and heightened concerns about financial crimes. It follows an FSCA proposal and draft legislation published on 20 November 2020 to extend regulatory oversight to crypto asset-related financial service providers.
Before this declaration, South Africa was at risk of being greylisted by the Financial Action Task Force (FATF), which identified the country’s lack of crypto asset regulation as a significant deficiency in anti-money laundering and counter-financing terrorism efforts. This new regulation addresses these concerns, aligning South Africa with international standards.
An FSCA policy document accompanies this declaration, offering explanatory notes, transitional details, and a roadmap for a comprehensive crypto asset regulatory and licensing framework.
Transitional Measures and Exemptions
The FSCA has also published a draft general exemption, open for public comments until the start of December. This exemption will provide existing crypto asset sector players with a transition period to align with the new regulatory framework. Between June and November next year, these individuals can provide financial services without a license, provided they submit their license applications during this grace period.
The draft exemption also excludes specific ecosystem participants from FAIS Act regulations. These include crypto asset miners, node operators maintaining crypto asset networks, and those engaged in non-fungible tokens (NFTs).
A Clear Distinction: Crypto Assets vs. Legal Tender
It’s essential to note that the FSCA’s declaration of crypto assets as financial products does not mean they are considered legal tender. The distinction is crucial, as it clarifies the nature of crypto assets under the regulatory framework.
The regulator’s spokesperson, Eugene Du Toit, emphasized this point during a press conference. The FSCA is not legitimizing crypto assets or conferring any form of official recognition upon them. Instead, the goal is to regulate and protect consumers, providing legal tools to tackle scams and fraudulent activities within the crypto asset space.
A Step Toward Global Compliance
The reclassification and the subsequent regulations to follow are essential for South Africa’s financial standing on a global stage. By aligning its regulations with international standards, South Africa aims to avoid being greylisted by the FATF. These regulations will help address concerns related to terrorism financing and money laundering.
Taxation of Cryptocurrencies in South Africa
It’s important to note that South Africa applies taxation to cryptocurrencies. The South African Revenue Service (SARS) treats cryptocurrencies as intangible assets, and any gains from buying or selling them are subject to taxation. The tax rate varies depending on an individual’s income tax bracket, with a maximum rate of 45%.
The Future of Cryptocurrencies in South Africa
The future of cryptocurrencies in South Africa depends on regulatory developments, economic factors, and public sentiment. The country’s young and tech-savvy population, coupled with a growing interest in blockchain technology, provides reasons for optimism despite the challenges that lie ahead.
Government Outlook and Regulatory Developments
South African regulatory authorities have proactively addressed the need for clear regulatory guidelines in the cryptocurrency space. In 2019, the Crypto-Asset Regulatory Working Group was established to investigate all aspects of crypto assets and related blockchain concepts. The group made key recommendations, leading to regulatory changes in 2022.
The Prudential Authority issued a guidance note in August 2022 for banks concerning anti-money laundering (AML) and counter-financing of terrorism (CFT) controls related to crypto assets and crypto asset service providers (CASP). The note highlights the importance of a risk-based approach to managing risks.
In October 2022, the Financial Services Conduct Authority (FSCA) declared crypto assets as a “financial product” under the Financial Advisory and Intermediary Services Act of 2002. This designation introduced a licensing requirement for advisory or intermediary services related to crypto assets.
In November 2022, the definition of an ‘Accountable Institution’ in the Financial Intelligence Centre Act of 2001 was amended to include entities involved in exchanging crypto assets or providing related financial services. These changes introduced additional governance, risk, and compliance requirements, including AML, CFT, and sanctions controls.
The South African Reserve Bank (SARB) continues to explore the potential of a Central Bank Digital Currency (CBDC) through its participation in Project Dunbar, testing a wholesale cross-border CBDC.
In conclusion, South Africa is taking proactive steps to regulate crypto assets, align with international standards, and address concerns related to financial crimes. These regulatory developments mark a significant milestone in the crypto asset space in South Africa, creating a more secure and transparent environment for market participants and investors.
