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Virtual currencies, particularly cryptographically secured ones, may be the wave of the future for payment systems.  Left unchecked, however, and the decentralised and disintermediated nature of these digital assets pose a laundry list of risks and challenges to governments, markets and backers of the fiat money orthodoxy. The rise of crypto and digital assets has left a legal and regulatory lag, heightening concerns around its potential to perpetuate tax evasion, exchange control circumvention, the financing of terrorism, money laundering, and marketing fraud, among other unscrupulous pursuits. These are grave concerns, not least for a country freshly greylisted by the Financial Action Task Force (FATF) for not non-compliance with international standards relating to the prevention of money laundering and terrorist financing. After curly-haired crypto king Sam Bankman-Fried was dethroned by allegations of fraud linked to his billion dollar crypto exchange, FTX, which collapsed alongside him, international disquiet over crypto has now reached fever pitch. Regulatory authorities the world over have rolled up their sleeves and sprung, if belatedly, into concerted action. (Just recently, the US Securities and Exchange Commission began its wider crypto crackdown by filing charges against the largest crypto exchange, Binance, accusing the platform of flouting federal securities laws and placing investors’ assets at significant risk). So, what, for their part, have our regulators been up to? As it turns out, quite a bit.

In 2018, the Crypto Asset Regulatory Working Group (CARWG) was formed in South Africa under the auspices of the Intergovernmental Fintech Working Group specifically to review and consider the country’s existing and future approach to the regulation of virtual currencies. The CARWG was tasked with formulating clear and coherent policy stances on emerging virtual currency use while ensuring the continued integrity, stability and efficiency of financial markets, protecting the interests of investors, and combating illegitimate cross-border financial flows. On 11 June 2021, the CARWG published the final iteration of its position paper. The Group acknowledged that while virtual currencies may perform certain functions similar to those of traditional currencies, securities and financial products, the official nomenclature had to shift: the descriptor “currency” was too legitimating, and “crypto assets”, dispelling any doubt that SARB might endorse its legal tender status, was adopted instead. Drawing on international sources, the Group defined a crypto asset as:

[A] digital representation of value that is not issued by a central bank, but is capable of being traded, transferred or stored electronically by natural and legal persons for the purpose of payment, investment and other forms of utility, and applies cryptography techniques in the underlying technology.

According to the position paper, the overall intention is not to regulate the actual crypto assets and associated products per se, but rather the entities that provide services in relation to such products. As such, the South African​ policy position on crypto assets is neither explicitly hostile nor demonstrably friendly: subject to new developments, the aim is to remain neutral “with the objective of enabling responsible innovation in the crypto asset ecosystem, while ensuring a level playing field between both incumbent and new role players.”

The CARWG position paper made thirty regulatory recommendations. Some have already been implemented, while the rest are likely to emerge in some shape or form once the COFI Bill is enacted. The recommendations may be grouped into three overarching categories: (i) the implementation of an Anti-Money Laundering and Combatting the Financing of Terrorism (AML/CFT) framework; (ii) a framework for monitoring cross-border financial flows; and (iii) the application of financial sector laws.

Two decisive recommendations have thus far been implemented:

  1. The declaration of crypto assets as a “financial product” in terms of paragraph (h) of the definition of “financial product” in s1(1) of the Financial Advisory and Intermediary Services Act (FAIS Act). The effect of the declaration is 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 any person so authorised, 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). The declaration also means that the Financial Sector Conduct Authority (FSCA) is empowered to act against any FSP providing ‘advice’ and/or ‘intermediary services’ in respect of crypto assets without explicitly being authorised to do so.
  2. The amendment of Schedule 1 of the Financial Intelligence Centre Act 38 of 2001 to include CASPs as an accountable institution. Accountable institutions, in terms of the FIC Act, are required to register with the Financial Intelligence Centre and to fulfil certain regulatory obligations including, in addition to the filing and reporting of suspicious and unusual transactions: implementing customer identification and verification, customer due diligence, appointing a compliance officer, training employees on FIC Act compliance and money laundering/terrorist financing risk exposure, undertaking business risk assessments, and maintaining and implementing a risk management and compliance programme.

A fair number of the recommendations concern the divvying up of regulatory responsibility as between the FIC, SARB, FSCA and National Treasury in respect of  the monitoring, enforcement and prudential supervision of the crypto asset ecosystem. With the anticipated repeal of the FAIS Act by the COFI Bill, there is also a nod of recognition given to the development and incorporation of future licensing activity under the latter. Unsurprisingly, the CARWG has left it to FSCA to make a determination on whether crypto assets should be considered as allowable assets for the asset spreading requirements of pension funds. The interim policy stance is firmly against allowing collective investment schemes and pension funds to have exposure to crypto assets.

From an exchange control perspective, the CARWG proposes that crypto assets be included in the definition of “capital” for the purposes of Exchange Control Regulation 10(1)(c). Regulation 10(1)(c) stipulates that no person may, without the permission of the SARB, enter into any transaction whereby ‘capital’ or any ‘right to capital’ is directly or indirectly exported from South Africa (for those curious, the raison d’être of this unassuming law, as the SCA in Oilwell (Pty) Limited v Protec International Ltd & others had occasion to point out, is to ‘control foreign exchange in the public interest and to prevent the loss of foreign currency resources through the transfer abroad of capital assets held in South Africa’). The SARB grants its permission through Authorized Dealers such as commercial banks. However, in terms of the current ECRs, ADs are not enabled to permit and process cross-border crypto asset transactions. Until such time as the amendment to Reg 10(1)(c) is effected, the SARB has therefore drawn a hard line in sand and prohibited crypto assets from being sent abroad, period. Individuals wishing to send crypto assets abroad must liquidate them locally first, transfer the funds overseas through an AD, and use the funds so transferred to purchase the crypto assets on a foreign exchange.

On the consumer protection front, the CARWG has not recommended anything as bold as the UK Financial Conduct Authority’s recent directive that firms promoting crypto asset products or services must carry a clear risk warning in their adverts. Examples given by the FCA include telling customers they should not expect protection “if something goes wrong” and ought to be “prepared to lose all the money you invest”. Perhaps similar rules are in the offing, or so we can only hope, lest another Bankman-Fried type pull the proverbial wool over unsuspecting eyes.