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FSCA takes first steps to hold crypto service providers liable for advice

FSCA takes first steps to hold crypto service providers liable for advice
(Photo: Milan Jaros / Bloomberg)

Effective immediately, financial advisers will be held to a higher standard, to protect consumers from fraud and dodgy advice.

The Financial Sector Conduct Authority (FSCA) has taken the first steps in regulating cryptocurrency, by declaring crypto assets financial products under the Financial Advisory and Intermediary Services Act (FAIS). This means crypto service providers have now become accountable institutions, with the same level of oversight as any other financial product offered by a registered financial service provider.

Effective immediately, financial services providers will now be held to a higher standard when advising customers on cryptocurrency, and their customers will have recourse if they have been poorly advised. 

In a notice published in the Government Gazette on Wednesday, 19 October, the declaration follows a draft declaration published in 2020. 

It means crypto service providers must apply for licensing as financial services providers (FSP) under the FAIS Act between 1 June and 30 November 2023. Once registered as an FSP, they may be required to register as accountable institutions under the Financial Intelligence Centre Act (Fica).

Desiree Reddy, Norton Rose Fulbright head of regulatory compliance, explains that the move was long overdue from a regulatory perspective. 

“We’ve been seeing with the rogue crypto traders and the effect of that on what for the most part is still a very naive public when it comes to investments in crypto assets.”

She says it creates compliance obligations for crypto asset providers, many of whom have been in business in South Africa for years, in an unregulated environment. Now, the FSCA has said that if they want to continue, they need to be licensed and fall within the full licensing and compliance regime. 

“Given that this is our first step towards regulation, I think we’re still a bit behind that level of complexity when it comes to differentiating between the different types of assets, but I think it will come. The FSCA has always said – even when the draft regulation was published back in 2020 – that they appreciate that this isn’t going to fill the gap completely, as it touches on one element of crypto asset trading. But it’s by no means the answer from a legal perspective to all of the issues regarding crypto assets. So, we will see more regulation in this space and potentially that level of differentiation also.”

South Africa is behind the curve in terms of regulation of crypto assets, with a recent World Bank survey recommending that the country needs to take steps to do so. 

“So, from that perspective, we are on the backfoot [compared with what] other countries are doing. I don’t think it would be fair for us to say they’re doing it better, because we’re still so far behind.” 

Enduring enigma

A benchmark survey by Pet Rock Investments, published this month, noted that crypto assets in South Africa remain an enigma for many financial advisers and 66% of clients were buying crypto – without seeking advice. 

“Crypto is unregulated, volatile and comes with a completely new set of challenges. Yet between 15% and 22% of South Africa’s adult population are cryptocurrency investors, even though the majority of South Africans are reported to have little to no knowledge of cryptocurrency.”

Read in Daily Maverick: “Crypto is becoming more cryptic and could turn into a bit of a yawn

The survey indicated that financial advisers see crypto becoming a key part of future planning in the next 12 months, with 72% of them already planning to allocate crypto in client accounts, and 63% reporting that they own crypto assets in their personal portfolios. 

Reaction

Paul Casarin, CEO of Pet Rock Investments, says financial advisers are looking for exposure to this asset class but are fundamentally concerned with its volatility and inherent technical risks, especially custody.

“Regulations will provide the level of trust the market needs – especially this year. However, advisers see other risks which are paramount to understand before allocating any crypto to an investment portfolio.”

Marius Reitz, the general manager for Africa at Luno, believes the classification of crypto as a financial product will help provide regulatory clarity to both investors and crypto asset service providers. 


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“The licensing requirements that will flow from this classification will drive high standards in the industry, particularly in relation to consumer protection, with potential investors easily able to identify those providers that satisfy regulatory requirements,” Reitz says, adding that Luno is “delighted” to see the development of the regulatory framework in South Africa progressing.

“We look forward to further progress in the near future. Another key benefit is that it should allow financial advisers to formally advise their clients on crypto investments. Until now, financial advisers could not provide advice on unregulated investment opportunities.”

Sean Sanders, CEO and founder of Revix, also welcomed the development, saying the consequences of the declaration are sweeping. 

“Existing crypto asset service providers, including crypto asset exchanges, will now be held to the same standard as traditional financial service providers, and accordingly will have to apply to the FSCA for the appropriate licence, and in doing so meet the FSCA’s stringent prudential standards.”

He says crypto asset service providers should now expect to progressively meet the Financial Intelligence Centre’s financial surveillance and anti-money laundering requirements as accountable institutions.

These consequences are sweeping and are likely to rapidly clean up the crypto asset industry in South Africa. 

However, the classification change does not go far enough because it fails to address the most critical area of consumer protection: the safe storage of cryptocurrencies by crypto platforms, he says, because at the bare minimum, regulated cryptocurrency platforms should be required to have their users’ cryptocurrency balances audited and verified periodically. DM/BM

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