Consumers finally have some protection from cryptocurrency bad actors

There is finally some crypto protection for consumers after the Financial Sector Conduct Authority declared crypto assets as a financial product in terms of the Financial Advisory and Intermediary Services Act with immediate effect.

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.

It can, however, 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.

Cryptocurrency protection

Experts have been calling for regulation of these 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.

This includes 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 a 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.

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Risks of 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,
• integrity risks,
• an undefined legal and regulatory framework,
• money laundering and terrorism financing
• exchange control and market conduct risks,
• operational risk, including cybersecurity risk.

Using cryptocurrency 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.

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Declaration was expected

Cryptocurrency investment platform, Revix, said in a statement it generally welcomes the declaration of crypto assets as a financial product within the framework. The declaration was expected, as it was included in the FSCA’s roadmap for 2022.

“Moreover, it is consistent with the policy recommendations made by the Crypto Assets Regulatory Working Group within the multi-regulator forum of the Intergovernmental Fintech Working Group (IFWG). However, the consequences of this declaration are sweeping,” Revix said.

Existing crypto asset service providers, including exchanges, will now be held to the same standard as traditional financial service providers and will accordingly have to apply to the FSCA for the appropriate license and in doing so, meet the FSCA’s stringent prudential standards.

Crypto asset service providers (CASPs) should now also expect to progressively meet the Financial Intelligence Centre’s (FIC) financial surveillance and anti-money laundering requirements as Accountable Institutions.

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Accountable institutions for crypto assets

According to Revix, accountable Institutions have seven key obligations, ranging from customer due diligence, record keeping, the appointment of a compliance officer, a bespoke risk management and compliance programme, reporting, training and registration with the FIC.

“These consequences are sweeping and likely to rapidly clean up the crypto asset industry in South Africa. The regulatory burden on CASPs may stifle innovation and is likely to impose significant barriers of entry or continued access for smaller firms, but on a balance, this will be outweighed by the obvious consumer protection benefits.”

Consumers in the South African market can now interact with CASPs with greater confidence and expect that their crypto assets to be protected to a greater degree and demand greater transparency on fees and custodial practices.

“However, we do have to note that the FSCA’s declaration is overbroad insofar as it fails to distinguish between different classes of crypto assets. The declaration does not cater for the difference between stablecoins, crypto asset securities, crypto asset commodities and crypto asset utility tokens.”

Revix says this overbroad declaration is out of step with the international approach, where great care has been taken to distinguish between digital securities and ordinary cryptographic assets. In the United States, for example, the current SEC chair has conceded that it is unlikely that Bitcoin would qualify as a security.

Due to the fact that the declaration was expected, Revix says it has pre-emptively enhanced its existing compliance and operational framework to operate at the same level as a traditional financial service provider.