FARZAM EHSANI: Prudential Authority’s note is a welcome one for crypto

On August 15 Prudential Authority (PA) CEO Fundi Tshazibana issued a guidance note to all SA financial institutions that, to my mind, could be read as: “It’s time to bank crypto companies”.

At first glance the note didn’t appear to have anything to do with crypto, because it is titled “Supervisory guidelines for matters related to the prevention of unlawful activities”.

The first line of the executive summary says the purpose of the note is to inform banks of practices related to the implementation of anti-money laundering and counter-financing of terrorism (AML/CFT) controls in relation to crypto-assets (CAs) and crypto-asset service providers (CASPs).

The remainder of the document refers to the policies and procedures that banks should have in place, and it ends by saying when the PA thinks a bank’s “policies, processes and procedures relating to its risk assessment are inadequate” it may “require [that] bank to strengthen” these.

It also briefly reviews the Financial Action Task Force (FATF) guidance on risk-based approaches in banks and cites FATF Recommendation 15, which includes “identifying and assessing” AML/CFT risks in “new or developing technologies”.

The FATF is the intergovernmental organisation that was created to develop policies to combat money laundering and terrorism financing, and SA is one of its 39 members.

After references to applicable regulations, the guidance note states: “The PA is aware that certain banks in SA have previously opted to terminate with CASPs or discontinued banking services to CASPs.”

To my knowledge, this is the first time the Reserve Bank, where the PA is housed, has officially acknowledged this occurrence. 

It is something that happened to VALR, the Johannesburg-based cryptocurrency exchange. FNB unbanked us and other major crypto companies headquartered in SA back in 2019/2020, and we all moved to other banking partners in the country.

The note then adds the following, for which we have argued for some time: “Risk assessment does not necessarily imply that institutions should seek to avoid risk entirely (also referred to in banking as ‘de-risking’), for example, through wholesale termination of client relationships that may include CASPs.

“De-risking may pose a threat to financial integrity ... as it could potentially create opacity in ... financial conduct, and it eliminates the possibility of treating money laundering/terrorism financing/proliferation financing (ML/TF/PF) risks.”

To me, this is the gentlest way a regulator could say to its banks: “Don’t unbank the crypto industry!” The PA still leaves space for banks to act with discretion in this regard, by stating: “If the risk posed by a particular business or customer is too great to manage successfully, the decision to de-risk should only be made after careful due diligence and consideration.”

The remaining portion of the note gives guidance linked to the treatment of CASPs and crypto-assets “based on the application of a thorough risk-based approach”. The PA in effect guides banks to “evidence an understanding of what elements are driving or reducing ML/TF/PF risk within CASPs and crypto-assets” versus having a blanket ban on banking crypto companies.

The PA states that bank policies, procedures and controls are “required to be tailored and [to] cater for the varying levels of risk that CASPs and CAs, as well as threats by customers engaging in such activity, may pose".

The note ends with the PA asking the banks to make the guidance note available to its independent auditors, and requires CEOs and said auditors of the institutions (the banks) to return a signed copy as an “acknowledgment of receipt”.

Progress

This is a great step forward for crypto, for SA and for the banks themselves. It’s particularly helpful for companies in the crypto space that are responsibly striving to protect products that serve people.

Risks and bad actors obviously still remain in the crypto industry (as they do elsewhere) and banks won’t immediately start banking all crypto companies. But this note takes SA in the right direction in allowing new technologies and innovation to flourish in the country.

We still have a way to go with the entire crypto regulatory framework in SA, and many are working on this from within the regulators and the industry at large. Challenges to the regulatory framework still exist, but this guidance note gives me hope.

Start-ups are hard. Crypto start-ups are even harder, particularly when a basic thing such as having a bank account is not a given. Well done to the Reserve Bank — this is an important and much-needed statement for the country.

• Ehsani is CEO of crypto-currency exchange VALR.