The Financial Sector Conduct Authority of South Africa (FSCA) has put out a draft declaration notice of crypto assets as a financial product.
The classification is an interim solution to address some of the immediate consumer risks and immediately capture intermediaries that advice on or sell crypto assets to consumers so as to provide adequate protection for consumers that are advised to purchase these products.
While the declaration is intentionally limited in scope as to only capture advice and intermediary services in respect to crypto assets, this new position however will require service providers to adopt proper risk assessments and improved risk disclosures to customers who decide to purchase crypto assets.
The FSCA views this as ‘a critical and urgent interim step in protecting customers in the crypto assets environment as broader policy developments surrounding crypto assets progress and unfold.’
The statement is in support of crypto assets to be regulated as a financial product under the financial advisory and intermediary act and will require crypto assets service providers to register with the FSCA as financial services providers (FSPs).
According to the FSCA:
“The declaration would have the effect that any person furnishing advice or rendering intermediary services in relation to crypto assets must be authorized under the FAIS Act as a financial services provider.”
While FSCA does not attempt to regulate, legitimize or give credence to crypto assets, the regulator says:
“The draft declaration is merely intended to be an interim step in mitigating certain immediate risks in the crypto assets environment, pending the outcome of broader developments currently taking place through the Crypto Assets Regulatory Working Group (CAR WG), which will inform future policy interventions to be implemented across a variety of regulators and laws.”
A look at the Position Paper by CAR WG details the challenges of regulating crypto assets, and importantly, makes various policy recommendations relating to the regulation of the crypto assets environment.
Interestingly, various policy recommendations in the draft document directly impact the FSCA, which is likely the reason the regulator took the initiative to put out this declaration even while the matter is still under consideration.
Draft Declaration by @FSCA_ZA declares crypto assets as a financial product under FAIS Act. Not an endorsement of crypto but rather to ensure that crypto assets fall under FAIS Act as a financial services provider, including crypto asset exchanges and platforms, and advisers
— maya fisher-french (@mayaonmoney) November 20, 2020
The draft declaration is intended to give effect to 2 particular recommendations:
- Recommendation 9 – Specified services rendered in respect of crypto assets be included in the definition of ‘financial services’ and these services (related to buy and selling crypto assets) be included in the licensing activities under the Conduct of Financial Institutions (COFI) Bill
- Recommendation 10 – The FSCA become the responsible authority for licensing services related to buying and selling of crypto assets, and furthermore, develop specific conduct standards for these services
The statement in support of the draft declaration acknowledges that crypto assets are not exactly the same as securities or foreign currency denominated investment instruments due to their digital nature.
This is in stack contrast to SEC Nigeria which has so far classified and regulated crypto assets as securities.
As a result, the effect of declaring crypto assets as a financial product under the FAI Act is that:
“Any person furnishing advice or rendering intermediary services in relation to crypto assets must be authorized under the FAIS Act as a financial services provider (FSP).
Any person so authorized must comply with the relevant FAIS requirements such as the General Code of Conduct for Authorized Financial Services Providers and Representatives and the Determination of Fit and Proper Requirements among others.”
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