The effect of crypto assets being classified as financial products

What is a crypto asset?

A crypto asset, formally known as “cryptocurrency,“ is a digital representation of value or a contractual right that is not issued by a central bank and, that until October last year, was unregulated by the South African Financial Sector Conduct Authority (FSCA). A crypto asset can be traded or transferred by a natural or juristic person and is stored electronically in a digital crypto wallet or on a crypto trading platform for payment and investment purposes. Crypto assets apply cryptography techniques to safeguard information and communications through the use of codes that enable only the recipient for whom such information is intended to understand and process that information. Most cryptocurrencies are secured via decentralised blockchain networks (powered by enormous, global computing power) that allow anyone to view and verify crypto transactions and the transfer of value on the internet.

The Financial Action Task Force

The Financial Action Task Force (FATF) is the inter-governmental global money laundering and terrorist financing watchdog based in Paris that sets international standards and develops policies that aim to combat and prevent money laundering and the financing of terrorist activities. The FATF issued a report that cited South Africa’s non-existent crypto asset regulation as one of the major deficiencies in the context of anti-money laundering and counter-financing terrorism. The FATF warned that if South Africa does not take the necessary remedial steps to address all the deficiencies identified in the aforesaid report by February 2023, it would accordingly take action and place South Africa on its “grey-list.” On 19 October 2022, the FSCA issued a general notice declaring crypto assets “financial products” under section 1(h) of the Financial Advisory and Intermediary Services Act No. 37 of 2002 (FAIS) with immediate effect.

Better safeguard crypto owners

This means that, with effect from 19 October 2022, crypto assets are subject to FSCA regulation, which permits the regulator to now have more control over crypto assets and be in a position to better safeguard crypto owners.

This is good news in the wake of the collapse of the Crypto Exchange FTX last year, which resulted in an estimated $8 billion loss of its customers’ money, because this recent legislation now empowers the FSCA to prosecute identified criminals who set up fake crypto wallets and platforms.

It is important and interesting to note that the regulator also published a draft general exemption with the general notice that expressly excludes crypto asset miners, node operators, and consumers dealing in non-fundable tokens (NFTs) from the ambit of the definition of “financial products”.

A policy document was also issued by the FSCA in support of the general notice that sets out the scope, effect, licensing, and transitional provisions relating to crypto assets. The Policy Document also provides that anyone who renders financial services, as defined in section 1 of the FAIS Act, that pertain to crypto assets must be authorised as a Financial Services Provider (FSP) under section 8 of the FAIS Act or be appointed as a representative of an authorised FSP under section 13 of the FAIS Act and be fully compliant with all the applicable regulations, relating thereto.

30 November 2023 deadline

Crypto Service Providers within South Africa have until 30 November 2023 to apply, for licences to operate as FSPs. Should they fail to apply by the due date, they risk criminal conviction and a R10 million fine.

From a tax perspective, the South African Revenue Service (SARS) will continue to apply normal income tax rules to crypto assets. Affected taxpayers must declare their crypto asset gains or losses as part of their taxable income. Income received or accrued from crypto asset transactions may be taxed on the revenue account under “gross income”; alternatively, such gains may be regarded as capital in nature and subject to Capital Gains Tax.

Taxpayers in turn are entitled to claim expenses associated with crypto asset accruals or receipts, provided that such expenditures are incurred in the production of the taxpayer’s income and for purposes of trade.

Conclusion

In conclusion, it is a positive development that crypto assets are now regulated in South Africa, as this will assist in preventing and mitigating risk relating to theft, global money laundering, the financing of unlawful activities, and most importantly, undermining our monetary policy in an already weakened economy.