2022: The year that showed up crypto and added consumer protection

The year 2022 was not a good one for crypto currencies, but at least South African consumers got some protection against crypto scams, such as Mirror Trading International (MTI), during the year when the Financial Sector Conduct Authority (FSCA) declared crypto assets as a financial product in terms of the Financial Advisory and Intermediary Services Act.

Bitcoin started the year with a significant drop in value that continued from $47 733 on New Year’s Day and decreased to its lowest value of $15,757 in November. Its value was $64,400 in November 2021 before dropping by almost 20%. In 2022 Bitcoin lost about 67% of its value.

Other crypto currencies also did not do so well during 2022, with the TerraUSD stablecoin and its sister token Luna collapsed after an alleged attack on Terra’s algorithm started a domino effect that led to a decrease in the Luna price and the whole system imploded.

However, this was not the end of the crypto currency woes, as Alameda Research and FTX, founded by Sam Bankman-Fried, became insolvent. Bankman-Fried has been arrested for defrauding its customers.

ALSO READ: Mirror Trading International liquidators claim R4,6 billion from 18 masterminds

MTI crypto investors still waiting

Meanwhile, South African investors in MTI are still waiting for news about their money. Johann Steynberg started MTI in April 2019 as an automated Bitcoin trading platform and investors had to deposit a prescribed minimum amount of Bitcoin in MTI’s wallet which MTI said it would grow by between 0.5% and 1.5% per day using a ‘Trading Bot’.

Investors could earn even bigger returns if they referred other investors and thousands of people invested in MTI, but the scheme started to collapse when the FSCA started investigating the scheme. The company was provisionally liquidated at the end of 2020 and finally liquidated on 30 June 2021.

The liquidators applied in March this year to declare MTI unlawful to force the winners to return all profits they made, but some members are blocking this to ensure they do not have to pay back their ‘winnings’.

In May, this year the joint liquidators of MTI instituted legal proceedings to claim R4 666 077 528 from 18 masterminds involved in the scheme called the biggest scam ever. The liquidators will use the money to pay MTI’s debts to its creditors.

ALSO READ: Consumers finally have some protection from cryptocurrency bad actors

Consumer protection

The FSCA declared crypto assets as a financial product in terms of the Financial Advisory and Intermediary Services Act with immediate effect in October.

According to a notice published in the Government Gazette, “crypto asset” means a digital representation of value that is not issued by a central bank, but can be traded, transferred or stored electronically for the purpose of payment, investment and other forms of utility, applies cryptographic techniques and uses distributed ledger technology.

Experts have been calling for regulation of crypto assets for as long as people have been able to invest in them. Declaring crypto as a financial product now also includes crypto asset service providers as accountable institutions under schedule 1 of the Financial Intelligence Centre Act (FICA).

Therefore, a person providing advice as defined under FAIS regarding crypto assets will now also be required to be licensed as a financial services provider in terms of FAIS and comply with the relevant requirements of both FAIS and FICA, including the necessary reporting requirements, to ensure proper monitoring, reporting and oversight by the FSCA and FIC over all crypto asset transactions, according to the Crypto Assets Regulatory Working Group.

The main reason for classifying crypto assets as financial product under FAIS and the inherent oversight of these products by the relevant regulators, is to protect consumers who participate in the crypto asset market. Many consumers were victims of crypto scams and scandals over the past few years.

ALSO READ: If you hate reading, investing in crypto might not be for you

Problems with crypto assets

The working group identified various problems with crypto assets that:

• Are a form of fintech innovation that may impact on the financial sector of the country
• Operate within a regulatory void as no globally harmonised approach or position has been reached as yet
• May create conditions for regulatory arbitrage while posing risks
• May become systemic, as interest, investment and participation in crypto assets continually grows.

The risks the working group identified are the establishment of a parallel, fragmented, non-sovereign monetary system, consumer protection, market efficiency and integrity risks, an undefined legal and regulatory framework and money laundering and terrorism financing, as well as exchange control and market conduct risks and operational risk, including cybersecurity risk.

Using crypto assets to pay for goods and services could also cause the risk of parallel, unregulated and fragmented payment systems, a reduction in the efficiency of the national payment system, perceived regulatory acceptance and operational risk and a lack of consumer protection for crypto asset payments.