Crypto Assets Should Remain Without Legal Tender Status and Not Be Recognized as Electronic Money, Say South African Regulators

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The South African Intergovernmental Fintech Working Group (IFWG) has put out a policy paper with 30 crypto recommendations one of which is to keep crypto without a legal tender status and not recognize it as electronic money in the country.

While the paper acknowledges that there are 12 different crypto asset trading platforms in the country with a market capitalization value of approximately R 6.5 billion (Approx. $240 billion), it goes on to state:

“Crypto assets and the various activities associated with this innovation can no longer remain outside of the regulatory perimeter. Clear policy stances on the variety of emerging use cases must be taken in order to deepen regulatory certainty.”

SEE ALSOThe South African Reserve Bank to Introduce New Crypto Rules to Stop Currency Controls

In order to develop regulatory and policy responses to the emergence of crypto assets in South Africa, the CAR WG conducted a functional analysis of crypto assets. This means that the economic function of crypto assets was assessed, rather than the specific technology applied or the entity involved as shown below:

  • purchasing/buying and/or selling
  • payments
  • capital raising through ICOs
  • crypto asset funds and derivatives
  • market support

The 30 recommendations from the paper are:

  1. Entities providing crypto asset services be regarded as CASPs (Crypto Asset Service Provider) and hence under CASP regulation
  2. All CASPs will be required to register with the FIC (Financial Intelligence Centre) as an accountable institution and to adhere to the legislative requirements aimed at AML/CFT
  3. The FIC should assume the supervisory role and duties to ensure compliance by those CASP business entities
  4. The CAR WG (Crypto Assets Regulatory Working Group) should continue monitoring crypto assets and should define the specific focus of a crypto assets monitoring programme
  5. Crypto assets remain without legal tender status and not be recognised as electronic money
  6. Crypto assets not be allowed for the conduct of money settlements in financial market infrastructures
  7. Appropriate supervisory and regulatory approach for the treatment of crypto assets should be considered
  8. The adoption of a uniform definition of crypto assets within the South African regulatory framework to be considered
  9. Services related to the buying and selling of crypto assets must be included in the licensing activities
  10. FSCA (Financial Sector Conduct Authority) should become the responsible authority for the licensing of ‘services related to the buying and selling of crypto assets’
  11. The Financial Surveillance Department of the SARB (South African Reserve Bank) should assume the supervisory and regulatory responsibility for the monitoring of illegitimate cross-border financial flows in respect of crypto asset services
  12. The Financial Surveillance Department of the SARB should request the Minister of Finance to amend Exchange Control Regulation 10(4) to include crypto assets in the definition of ‘capital’
  13. The Financial Surveillance Department of the SARB should amend the AD Manual (Currency and Exchanges Manual for Authorized Dealers) to enable authorized dealers to facilitate and report cross-border transactions in respect of crypto assets (including the transfer of fiat currency for the purpose of buying crypto assets across borders
  14. The Financial Surveillance Department of the SARB should expand the Authorized Dealer in foreign exchange with limited authority (ADLA) framework to allow the appointment of CATPs (Crypto asset trading platforms)
  15. The CAR WG recommends that the Financial Surveillance Department of the SARB explicitly allow individuals, through an amendment of the Exchange Control Regulations, to purchase crypto assets within the single discretionary allowance (SDA) and the foreign capital allowance (FCA)
  16. A new dispensation should be created under the exchange control framework to allow CATPs (licensed as above) to source or buy crypto assets offshore for the purpose of selling to the local market
  17. CATPs should be required to report crypto asset transactions to the Financial Surveillance Department of the SARB. The trigger event of reporting should be specified by the Financial Surveillance Department of the SARB
  18. Exemption should be provided for under Section G of the AD Manual as a market maker or arbitrageur for crypto assets, as appointed in Recommendation 14 above
  19. The FIC should amend Schedule 1 of the FIC Act to include all CASPs as a new category of accountable institutions to be enacted through section 73(3) of the FIC Act
  20. All requirements in terms of the FATF (Financial Action Task Force) Recommendations for virtual assets and virtual asset service providers should become applicable to CASPs. (Refer to Recommendations 1-3 above)
  21. Consideration be made for the inclusion of an enabling provision in the legislative framework for the regulation of the use of crypto assets for domestic payment purposes and/or the regulation of payment services associated with crypto assets
  22. The regulation of ICO issuers must be aligned, as far as possible, to the regulation of issuers of securities or ‘over-the-counter’ financial instruments
  23. ICO issuances for payment or exchange and utility token offerings be aligned to
    Recommendations 9 and 10 as a financial service
  24. The CASP that issues the token or provides financial services related to an issuer’s offer or sale of a crypto asset should be required to adhere to AML/CFT requirements, and should become an accountable institution
  25. The pooling of crypto assets be regarded as constituting an alternative investment fund, which should therefore become a licensing activity
  26. The FSCA should make a determination on whether crypto assets should be considered as allowable assets for the assetspreading requirements of pension funds
  27. Institutions which issue over-the-counter instruments with crypto assets as the underlying asset class should be required to be licensed by the FSCA
  28. The CASP that provides the crypto asset alternative investment fund or derivative instruments should be required to adhere to the AML/CFT requirements
  29. A CASP offering custodial services and/or digital wallet provisioning be considered as providing financial services
  30. CASPs that provide safe custody and digital wallet services (custodial wallets only) should be required to adhere to AML/CFT requirements and should become accountable institutions

The policy paper is open for comment through May 15 2020.

 

About IFWG

Members of the Intergovernmental Fintech Working Group (IFWG) include the Financial Intelligence Centre (FIC), the Financial Sector Conduct Authority (FSCA), the National Credit Regulator (NCR), National Treasury (NT), the South African Revenue Service (SARS) and the South African Reserve Bank (SARB)

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