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Crypto Investment: Licences You Need And Rules You Need To Know

What is a cryptocurrency investment licence, and why is it needed?

The Fintech legal sector has seen an increase of activity in recent years spurred on by the disruptive nature of blockchain technology, distributed ledgers, smart contracts and the use of artificial intelligence and data analytics. Regulators recognise the potential of the Fintech innovations and are responding by implementing regulations in this sector.

A cryptocurrency investment licence is a regulatory permit or authorization granted by a governing or regulatory body to individuals, companies, or entities that wish to engage in activities related to cryptocurrency investments. This can encompass a range of activities such as trading, brokering, fund management, and advisory services related to cryptocurrencies.

These licences are necessary for the following reasons:

1. Consumer Protection

Licensing serves as a means to protect both consumers and investors. Licensed entities are typically required to adhere to certain standards and regulations that are meant to ensure fair and transparent operations. This can mitigate the risks of fraud, scams, and other malicious activities in the cryptocurrency market.

2. Operational Integrity

A licence often mandates that businesses maintain specific operational standards. This might include the safekeeping of funds, proper data protection measures, and the prevention of money laundering and terrorism financing.

3. Market Trust and Credibility

Entities that possess a licence are often perceived as more trustworthy by consumers and peers. The licence acts as a stamp of approval, indicating that the entity has passed a rigorous evaluation process and adheres to established regulatory norms.

4. Regulatory Compliance

As the cryptocurrency industry matures, many countries and regions are developing specific regulatory frameworks to oversee and manage the risks and potential of the sector. Obtaining a licence ensures that businesses remain compliant with local laws and avoid potential legal repercussions. Reach out to the legal team at Caveat to learn more about local regulatory requirements.

5. Facilitation of Business Relationships

Many financial institutions and partners may only engage with licensed cryptocurrency businesses due to their own risk and compliance policies.

In essence, a cryptocurrency investment licence provides a structured and regulated framework for entities to operate within. This ensures the safety of their operations and the broader market, while also fostering trust among investors and participants in the cryptocurrency ecosystem.

What are the requirements for a cryptocurrency licence?

Here are the requirements for a cryptocurrency licence, based on general practices across jurisdictions that have specific regulations:

1. Registration and Application

Companies typically need to register with the relevant government agency or financial authority, providing details about the business, the services offered, and the target market.

2. Fit and Proper Test

Company directors, key personnel, and significant shareholders may be subjected to tests ensuring they have a clean criminal record and are competent to operate a financial business.

3. Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) Protocols

Jurisdictions often mandate cryptocurrency businesses to have AML and CFT protocols in place. This includes Know Your Customer (KYC) procedures, transaction monitoring, and reporting suspicious activities.

4. Capital Requirements

Some regions require cryptocurrency businesses to maintain a certain level of capital to address operational and other related risks.

5. Cybersecurity Measures

Cryptocurrency businesses are generally required to establish strong cybersecurity measures to safeguard customer data and funds.

6. Custody and Protection of Customer Funds

There might be stipulations regarding the handling and storage of customer funds, such as the use of cold wallets or multi-signature wallets, or insurance on customer funds.

7. Transparency and Disclosures

Businesses could be obligated to disclose specific information to their customers about transaction fees, potential risks linked with cryptocurrency investments, and the market’s volatile nature.

8. Audit and Reporting

Regular audits by external entities may be necessary, with results being submitted to the overseeing regulatory authorities.

9. Consumer Protection

Mechanisms to address customer complaints and disputes should be in place.

10. Ongoing Compliance

Continual monitoring and updates to internal protocols to maintain compliance with evolving regulations may be required.

11. Payment of Licensing and Renewal Fees

Many jurisdictions have fees associated with the initial cryptocurrency licence application and its subsequent renewals.

In South Africa,  crypto asset service providers will have to be classified as accountable institutions under the Financial Intelligence Centre Act, 2001 (“FICA”). Consequently, they will be subject to statutory cash reporting and monitoring obligations. In addition, crypto assets will be declared “financial products” under the Financial Advisory and Intermediary Services Act, 2002 (“FAIS”) requiring crypto asset service providers to register for a financial services provider licence under the FAIS Act. With the new Conduct of Financial Institutions Bill on the cards, the expectation is that crypto assets will potentially have their own set of regulations which will apply exclusively to them.

In addition, crypto assets are deemed “financial products” under the applicable financial services regulations, imposing potential licensing obligations on those who work in the cryptocurrency investment space.

Caveat Offerings

Fintech and Crypto Law covers a broad range of regulations, many of which were formulated before its existence.  As such, it covers laws and regulations in the fields of financial services, ITC, exchange control, and tax, and involves keeping abreast of these regulations as they change to adapt to it.

Caveat’s Fintech and Crypto Law team is multi-disciplinary and includes financial services, tax, and technology law experts, which enables us to provide appropriate advice to cryptocurrency brokers, advisors, exchanges, and platforms in this developing landscape. In the Fintech law and policy space, we also provide regulatory advice, legal opinions, and drafting of agreements in compliance with the applicable regulatory framework.  Reach out to us for assistance in the area of cryptocurrency and Fintech in general.

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