SEAN SANDERS: Crypto assets are to be treated the same as stocks — now what?

The Financial Sector Conduct Authority (FSCA) has published an official “declaration” that crypto assets will be classified as financial products under the Financial Advisory & Intermediary Services (Fais) Act.  

But what does that mean?  In short, crypto assets are no longer unregulated, and in mid-2023 qualifying crypto asset service providers will be able to get licensed for the first time in SA.

Regulation is not only critical to protect consumers — it is an essential ingredient in the effective functioning of global financial services. The declaration does not come as a surprise; the FSCA included this in its published roadmap for 2022, and the Reserve Bank repeatedly affirmed this reality.

Moreover, it is consistent with several of the policy recommendations made by the Crypto Assets Regulatory Working Group (Casp), which forms part of the Intergovernmental Fintech Working Group.

Classifying crypto assets as a financial product benefits crypto investors as well as reputable crypto investment platforms. However, it affects crypto users and associated platforms that utilise crypto assets for peer-to-peer payments and/or international remittances. This is because crypto asset transfers from one party to another will in effect be treated as a transfer of a financial product, which is more administratively burdensome for all parties and less tax-efficient than utilising a traditional payment method such as an electronic funds transfer.

The consequences of this declaration are therefore sweeping. Existing crypto asset platforms will now be held to the same standard as traditional financial service providers, and accordingly will have to apply to the FSCA for the appropriate licence and, in doing so, meet its stringent prudential standards. Moreover, Casp should now also expect to progressively meet the Financial Intelligence Centre’s (FIC’s) financial surveillance and anti-money laundering requirements as “accountable institutions”. 

Accountable institutions have seven key obligations, ranging from customer due diligence, record keeping, the appointment of a compliance officer and a bespoke risk management and compliance programme, to reporting, training and registration with the FIC. These rules all exist to protect the end consumer.

Unfortunately, the classification change of crypto assets and associated regulation does not yet make any reference to undoubtedly the most critical area of consumer protection — the safe storage and custody of crypto assets by crypto platforms. 

At the bare minimum, regulated Casps should be required to have their users’ crypto asset balances periodically audited and verified by a reputable third-party accounting firm. Revix was the first platform in SA to voluntarily do this with Mazars, who have independently verified our crypto asset holdings each and every quarter over the last two years. We hope to see the FSCA add these reporting requirements in the future to better protect consumers.

On a net basis, we believe classifying crypto assets as traditional securities — in the same bucket as stocks or bonds — is a positive development for SA crypto investors, as they will be afforded the same protection they currently receive from respected financial services firms such as banks. 

Consumers in the SA market can now also interact with greater confidence with regulated crypto platforms and can expect their crypto assets to be protected to a greater degree and can demand greater transparency on fees and custodial practices. Crypto platforms will also benefit as they can now obtain the necessary financial licensing to prove theyare legitimate and trusted operations. 

The lack of crypto regulations in SA has been restrictive on our business operations as our crypto platforms have been unable to advertise across digital channels or via large-name publications. Additionally, building customer trust is challenging as the number of scams in the crypto space has placed the industry in a bad light, making crypto investors exceptionally sceptical when dealing with crypto platforms. This is especially challenging when dealing with already licensed financial institutions that want to invest in the crypto space through reputable partners but require that partner to be licensed. 

The declaration does not cater for the difference between stablecoins, security tokens, commodity-backed crypto assets and crypto asset utility tokens. 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 US, for example, the chair of the Securities and Exchange Commission has conceded that it is unlikely Bitcoin would qualify as a security. 

We would have liked to have seen a similar crypto regulatory approach to what the German or Swiss regulators introduced. In both of these markets the regulators put the necessary consumer protections in place while considering the innovation and job creation opportunities that the crypto industry could offer. 

By lumping all crypto assets under the securities umbrella the FSCA risks losing local crypto operations to more sophisticated international territories. This not only results in tens of thousands of jobs potentially being lost but risks SA financial innovation falling further behind other developed markets. An example is that digital bank payments (EFTs) are still not instant in SA as they are in the UK, Singapore and many other innovative economies. This costs South Africans billions a year through inefficiency and payment fraud.

The crypto asset space has grown to be far more than just Bitcoin and Ethereum. Blockchain technology has unlocked a world where national currencies through one-for-one backed stablecoins can be transferred over a blockchain instead of via a bank. Additionally, commodities, physical art, ownership rights and many other assets can be tokenised and stored as well as transferred over a blockchain. 

Crypto assets are going to be a big part of the future of finance, and while we’re taking a step in the right direction by affording everyday people greater protection, there is still a long staircase to climb to be ready to innovate, attract foreign investment and create jobs in the crypto space.

• Sanders is CEO and founder of Revix.