Last week, the Financial Sector Conduct Authority (FSCA) officially declared “crypto assets” to be financial products in terms of the Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS Act).
Financial services under the FAIS Act are regarded as any “advice” or “intermediary service” (dealing, managing, administrating, servicing, or maintaining) in respect of a financial product.
What is the effect of the Declaration?
- The Declaration has the effect that any person who, as a regular feature of their business, renders financial services in relation to crypto assets must be licensed as a financial services provider (FSP) in term of the FAIS Act and comply with its requirements.
- The FSCA has provided for a transition period for the licence applicable process to run effectively from 1 June 2023 until 30 November 2023.
What is a crypto asset?
A Crypto asset is defined under the FAIS Act 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;
- applies cryptographic techniques; and
- uses distributed ledger technology
Are there any exemptions to this Declaration?
Noting the broad definitions of “crypto assets” and “financial services”, the FSCA exempted some activities from the crypto asset FSP licence requirements:
- Mining and node operators, and
- Persons rendering financial services in respect of non-fungible tokens (NFTs).
Do all of the FAIS Act requirements apply to crypto asset FSPs?
All crypto assets FSPs will have to immediately comply with some provisions of the FAIS Act and the remainder of the applicable regulations by 1 December 2023 subject to a few exemptions proposed by the FSCA below:
- General Code of Conduct requirement will apply except the requirements of professional indemnity and insurance.
- Fit and proper requirements will apply except:
- minimum experience for crypto assets,
- specific academic qualifications,
- regulatory examination requirements (only a temporary exemption),
- no class of business training requirements, and
- Limited continual professional development training on crypto assets.
What about financial services related to crypto asset derivative instruments?
Crypto asset derivative instruments were already regarded as financial products in the “derivative instrument” category under the FAIS Act and accordingly FSPs of crypto asset derivative instruments have to obtain a FSP licence under the FAIS Act for derivative instruments The Declaration will not change this position.
Are there are other impending regulatory developments for crypto assets?
- Amendments to Exchange Control regulation to clarify the position on crypto assets as capital by the South African Reserve Bank
- Inclusion of crypto asset service providers as “accountable institutions” in terms of the Financial Intelligence Centre Act, 38 of 2001 with the Financial Intelligence Centre.
Please contact us if you require assistance to unpack these new provisions or with the FSP licence process for crypto assets under the FAIS Act.