South Africa has adopted a comprehensive, risk-based approach to regulating crypto assets and their service providers, aiming to mitigate risks while fostering responsible innovation. The regulatory framework is centered on classifying crypto assets as financial products and bringing crypto asset service providers (CASPs) under the existing financial services laws. This phased and collaborative approach is guided by the Intergovernmental FinTech Working Group (IFWG), which includes key financial regulators.
Governing bodies and key history
South Africa’s regulatory framework is overseen by two main bodies: the Financial Sector Conduct Authority (FSCA) and the Financial Intelligence Centre (FIC).
- The FSCA is responsible for licensing and market conduct supervision. In October 2022, it declared crypto assets a “financial product” under the Financial Advisory and Intermediary Services (FAIS) Act. This declaration, which took effect in 2023, requires anyone providing financial services related to crypto assets to be licensed as a Financial Services Provider (FSP). The FSCA has issued hundreds of licenses since implementing this new regime in June 2023.
- The FIC is responsible for anti-money laundering (AML) and counter-terrorist financing (CTF) oversight. In December 2022, it listed CASPs as “accountable institutions” under Schedule 1 of the Financial Intelligence Centre Act (FICA). This means CASPs are subject to FICA compliance obligations, such as registering with the FIC and reporting suspicious transactions.
The most recent text definition of key items
- Crypto Asset: South Africa uses the term “crypto asset” rather than “virtual asset”. A crypto asset is defined as “a digital representation of value that is not issued by a central bank, but is capable of being traded, transferred or stored electronically… for the purpose of payment, investment and other forms of utility”. It applies cryptographic techniques and uses distributed ledger technology (DLT).
- Crypto Asset Service Provider (CASP): A CASP is an entity that carries on the business of one or more of the following activities for a client:
- Exchanging a crypto asset for a fiat currency or vice versa.
- Exchanging one form of crypto asset for another.
- Transferring a crypto asset from one address or account to another.
- Providing safekeeping or administration of a crypto asset or the instruments of control over it.
- Participating in or providing financial services related to an issuer’s offer or sale of a crypto asset.
Key elements of their regulation
South Africa’s approach is guided by six core principles, including the idea of “same activity, same risk, same regulations” and a commitment to enabling responsible innovation.
- Dual Regulation: The framework involves two main pieces of legislation. The FAIS Act governs market conduct and consumer protection by requiring licensing. The FICA addresses financial crime by placing CASPs under AML/CTF obligations.
- Travel Rule Implementation: In line with international standards from the Financial Action Task Force (FATF), the FIC has implemented Directive 9, which mandates that CASPs collect and transmit information about the sender and recipient of crypto asset transfers. This applies to transfers above a certain threshold.
- Taxation: Normal income tax rules apply to crypto assets, and taxpayers are required to declare gains or losses as part of their taxable income.
Requirements for the CASP
To operate legally, a CASP must meet a number of compliance requirements:
- Dual Registration: CASPs must first obtain an FSP license from the FSCA. They must also register with the FIC as an accountable institution. The FSCA has issued over 248 licenses, while more than 50 applications are still under consideration.
- AML/CTF Obligations: As an accountable institution, a CASP must implement robust customer due diligence (CDD) measures, keep detailed records, and report suspicious or unusual transactions.
- Compliance Reporting: CASPs are required to submit regulatory reports to the FIC, such as a risk and compliance return and a risk management and compliance programme (RMCP).
- “Fit and Proper” Requirements: The directors and shareholders of CASPs must meet “fit and proper” requirements, which include demonstrating the requisite knowledge, competency, and practical experience to operate the business.
What it means for the stakeholders
- Consumers and Investors: The regulation aims to protect consumers from fraud and market abuse. By licensing CASPs, the FSCA provides a level of oversight that helps to ensure market transparency and provides a mechanism for complaints.
- Financial Institutions: The regulatory framework provides clarity, enabling traditional financial institutions to engage with the crypto asset sector. Banks and other regulated entities can now have a clearer understanding of the compliance and risk management standards expected when dealing with CASPs.
- CASPs: The licensing and registration process has brought a high degree of legitimacy to the sector, which has been a major driver of growth. However, the stringent requirements for capital, compliance, and reporting can be challenging, particularly for new entrants or smaller firms. The FSCA’s phased approach to applications and the opportunity for voluntary withdrawal provide a mechanism for firms to address any shortcomings before reapplying.
Useful Links
- Financial Sector Conduct Authority (FSCA): https://www.fsca.co.za/
- Financial Intelligence Centre (FIC): https://www.fic.gov.za/
- FSCA Declaration of a crypto asset as a financial product: https://www.gov.za/sites/default/files/gcis_document/202210/47334gen1350.pdf
- FIC Public Compliance Communication 57 (PCC 57): https://www.fic.gov.za/wp-content/uploads/2023/09/2023.07-PCC-PCC-57-CASPs.pdf
- CMS Expert Guide to Crypto Regulation in South Africa: https://cms.law/en/int/expert-guides/cms-expert-guide-to-crypto-regulation/south-africa
