Following the recent announcement by the South African Reserve Bank of their intention to declare crypto assets a financial product, South Africa’s market is primed for growth if legislation appropriately balances the potential benefits that this innovative industry provides, against the risks that exist, writes Brent Petersen, South African Legal Lead at Easy Crypto South Africa and a member of newly formed crypto industry body.
South Africa’s crypto assets market is currently unregulated, but not for much longer. In July 2022, the South African Reserve Bank announced that they intend to implement proposed amendments within the next 12 to 18 months that will provide a legal framework that will regulate crypto assets for industry players, stakeholders, and investors in South Africa. This will be the regulators first attempt to bring crypto assets into the South African regulatory space, which means they need to ensure they get the fundamental laws and regulations right from the outset.
Last year, African start-ups raised around $5.2 billion. At least $2 billion from that amount went to fintech start-ups, with $127 million dedicated to crypto ventures. Despite this high figure, Africa still only accounted for 0.5% of global blockchain funding, highlighting the growth potential of this market.
Part of the solution to achieving this growth — and a way for governments to capitalise on tax revenue and job creation — is through regulation. It is also equally important to stress that provision should be made for responsible innovation when drafting these proposed amendments, due to the crypto asset industry being very much in its infancy stage.
What regulations could do?
Crypto assets currently exist outside the definition of capital in South Africa as defined by the Exchange Control Regulations Act 1961. Crypto assets are also currently not defined as a financial product in terms of the Financial Advisory and Intermediary Services Act 37 of 2002, meaning they cannot be offered by authorised dealers or banks.
With that said, industry players, stakeholders and investors understand that to get into the game of crypto assets, they require a bank account to allow for the exchange of fiat currency when transacting with Crypto Asset Service Providers (CASPs). This means that CASPs already have a fundamental place in the industry, as they coexist and to a certain extent, compete with the financial and banking sectors.
Crypto assets as such adopt the same characteristics as other financial products. For this reason alone, there could not be a better time for Regulatory Authorities to develop the appropriate domestic legal framework by taking the approach where regulation is clear and understandable to attract investors and innovators to our country. Regulation will provide more certainty, accountability, and stability to an otherwise volatile crypto market. The Intergovernmental Fintech Working Group’s Crypto Asset Regulatory Working Group (“IFWG CAR WG”) offers various recommendations and suggestions on how legislation amendments will help in this regard.
Better exchange control regulations, for instance, will allow the South African Reserve Bank to report the exportation and importation of crypto assets. This will be possible once the Regulatory Authorities follow through on their intention to expand the definition of “Capital” to include crypto assets as well as implementing the correct reporting channels for balance of payment purposes.
Extending the Financial Intelligence Centre Act to include CASPs, as a Schedule 1 Accountable Institution (AI), will help ensure better transparency and accountability to identify through Know Your Client (KYC) processes and protocols, which in turn will deter bad actors when it comes to suspicious activities and transactions, such as money laundering and combating the financing of terrorism.
Although CASPs are not currently considered as AI at this stage, Easy Crypto has voluntarily registered itself as a disclosing party, which is the first step we have taken to maintain a level of credibility in the industry by reporting unusual and suspicious activities and transactions, thus ensuring the protection of our customers from bad actors who are attempting to exploit them.
Another promising regulation will be the inclusion of CASPs under the Financial Advisory and Intermediatory Services Act. This act helps regulate financial service providers (FSP), through the enforcement of a professional code of conduct. Categorising crypto assets as a financial product will allow for CASPs to be brought under the FAIS Act.
What we have mentioned above are only a few of the proposed amendments we can expect to take place. These amendments by the Regulatory Authorities will help formally bring crypto assets into the South African legal framework. In the process, CASPs will also be included in the financial sector.
How Regulations will change the market?
Regulations are an essential part of protecting the rights and safety of consumers, ensuring a market can reliably deliver public goods and services. Regulation will also assist in preventing fraud and other financial-related risks. Clear laws mean better governance, and in time accountability and oversight will ensure sustainable growth.
Once the Reserve Bank approves crypto assets as a financial product, CASPs will be better equipped to source crypto assets offshore for importation purposes, thereby improving and stimulating foreign direct investment into the South African fiscus. This will bring local crypto assets more in line with international prices, helping to further grow the market in South Africa.
Changes to regulations are set to take place in the next 12 to 18 months. In that time, we can expect several amendments to existing financial sector laws and regulations. Now only around 11.5% of South Africans hold crypto assets. We can expect that this percentage will increase when the proposed amendments take hold, given the fact that banks have begun to set up dedicated crypto teams within their businesses. At the same time, it is worth noting that CASPs, such as Easy Crypto, have already taken proactive steps to gear up to ensure that they are aligned and compliant when the new rules and regulations take effect.
Crypto assets and the various use cases are evolving at a rapid rate, making it a hard asset to regulate. The best thing we can hope for is a broad and principled approach to regulations that prevents misuse and promotes innovation, helping to grow the industry. In that sense, regulations need to be principle-based, not prescriptive. This will enable our local market, creating a tech hub that attracts the kind of investment and opportunities that South Africa needs to stimulate economic growth and transformation. It’s a future we should all be excited about.
