Now that the Financial Sector Conduct Authority (FSCA) has declared cryptocurrencies as financial instruments, this emerging asset class can emerge from the twilight world of fraudsters and opportunists.
Crypto Asset Service Providers (Casps) must apply to become licensed Financial Service Providers (FSPs) under the Financial Advisory and Intermediation (Fais) Act by November 2023.
In case you missed it, this was brought about by a “declaration” by the FSCA. This provides a first step towards a transparent legal framework that can assist other local government agencies (South African Revenue Service (Sars), South African Reserves). Banking and Financial Intelligence Center – To foster progressive sentiment among domestic and foreign cryptocurrency market participants.
The first draft of the FSCA Declaration was published in November 2020. The current definition of crypto-assets includes references to the applicability of cryptographic technology and the use of distributed ledger technology.
Digital representations of fiat currencies (also known as stablecoins) appear to be explicitly excluded. It also excludes crypto derivatives subject to financial market laws.
The definition of financial instruments under the Faith Act includes securities, corporate bonds, money market instruments, participating interests, long-term or short-term insurance, pension benefits, foreign currency investments, and medical service benefits. The legislation is a rather blunt instrument that also includes a general provision allowing registrars, after consultation with the Fais Advisory Board, to include in their definition products similar to those already defined.
This means that crypto-assets do not have their own category under Fais, but instead are to be recognized as financial instruments subject to various exemptions detailed in the FSCA Supporting Policy Document published with the Final Declaration. became.
The FSCA declaration and supporting policy documents are open to the general public for licenses, provided that applications are made by prospective FSPs for crypto assets between June 1, 2023 and November 30, 2023. A temporary exemption applies.
Despite the temporary exemption, the immediate application of the “adequate and proper” requirements set out in the Fais General Code of Conduct will be adhered to.
This includes general obligations to provide financial services honestly and fairly, conflict of interest management, disclosure requirements, advice and marketing requirements, incorporation of complaint management processes, fair contractual dealings, and risk management and internal Includes system management implementation.
Investor peace of mind
This immediate application of the Fais General Code of Conduct gives Fais Ombud jurisdiction to hear crypto-related complaints, thus providing financial customers with some protection, but capped at R800 000.
Given the risks of the industry, the FSCA does not require aspiring crypto FSPs to carry professional indemnity or fidelity insurance, but this issue will be investigated further.
Certain cryptographic activities are outside the scope of FSCA, such as mining nodes, node operators, and non-fungible token (NFT) services.
It is worth noting that the FSCA policy document refers interchangeably to the Financial Markets Act (FMA) and Fais with respect to derivative instruments. Crypto Derivatives are categorized as FMAs, similar to Over-the-Counter Derivatives Providers (ODPs).
This raises further questions about how cryptocurrency derivatives providers will normalize their operations in the absence of a transition framework.
No definition is provided as to what classifies as a Cryptocurrency Contract for Difference (CFD).
This is a bold and forward-looking move by FSCA, which recognizes the inevitability of crypto-assets and has intelligently framed regulations from that perspective. This makes it much more difficult for another “Mirror Trading International” to emerge, as the presence or absence of an FSP license will instantly let potential customers know how smart it is to trade with a cryptocurrency company.
Industry participants are invited to comment by December 1, 2022 to implement the draft exemption.
* Darren Hanekom is a Director of Hanekom Attorneys Inc.