HANNES WESSELS: FSCA licences may be the growth catalyst crypto needs in SA

The SA Financial Sector Conduct Authority’s (FSCA) recent move to encompass cryptocurrencies within its licensing legislation is timely and pivotal for the evolution of crypto as an investment asset class in this country.

The decision is a significant milestone, not just for the crypto sector but for the economy as a whole and particularly the investor community.

For one, the licensing of cryptocurrency asset service providers signals an important maturation of the local crypto market, a significant step towards integrating digital assets into the mainstream investment ecosystem. And, importantly, it is a definitive move towards aligning with global crypto investment compliance standards.

The significance of this development cannot be overstated. SA’s decision to bring crypto service providers under the financial services provider umbrella is both a strategic and necessary measure — one that has been largely well-received by industry participants. With 128 licence applications made at last count on November 30, it is clear that there is a healthy appetite for a formalised crypto investment market.

The urgency with which the FSCA approached the licensing requirement also reflects an understanding of the need to match the broader global trend of crypto assets becoming increasingly mainstream, as illustrated by the huge investor movements in the US that followed the launch of bitcoin exchange traded funds (ETFs).

However, beyond alignment with global regulatory trends there are several other reasons why this licensing regime could be a game-changer for SA. For one, it’s a decisive step towards removing the country from the Financial Action Task Force’s greylist. This will not only improve its international financial reputation but also strengthen its ability to combat money laundering and terrorist financing, thereby once again attracting the global investor inflows our economy so desperately needs.

Closer to home, licensing the crypto exchanges helps establish a secure and transparent domestic crypto trading environment, with ethical buying and selling of crypto, coupled with robust financial advice, giving local investors the confidence to participate in a sector that they may have previously avoided due to perceptions of volatility and opaqueness.

The importance of building this domestic trust in crypto as an asset class is obvious from the findings of a market study done by the FSCA ahead of its licensing implementation. The research showed that only about 10% of South Africans own crypto assets. When you compare this to the US, where regulated bitcoin ETFs are now attracting inflows of hundreds of billions of dollars daily, the hope is that a more regulated crypto market will also catalyse far greater investment in digital assets here.

This potential to mainstream crypto as an investment asset class is arguably the most significant benefit of the licensing regulations. The initial focus of the FSCA on licensing exchanges is a commendable first step, demonstrating the authority’s commitment to nurturing a sound crypto industry. Once that has been achieved, the logical next step should be to proactively bring crypto assets into the traditional investment fold, notably the country’s ever-popular unit trusts and its increasingly appealing ETF segment.

The importance of achieving this at pace and scale is clear from the strain the country’s traditional JSE equity investment universe has been under for some time now. Crypto assets offer a new avenue for investment managers to unlock alpha — returns above the market average — and also overcome the challenges associated with a shrinking bourse.

The importance of meeting the needs and expectations of changing investor demographics also shouldn’t be overlooked. Younger investors, who are shaping the future of investment in SA, are inherently more open to risk and innovation. They seek dynamic, nontraditional investment opportunities with high growth potential.

Of course, this enthusiasm for risk still needs to be tempered — mainly to help enthusiastic young investors avoid losses — so a robust regulatory framework offers valuable protection from exploitation and excessive and unnecessary risk.

With all of this in mind, the FSCA's licensing requirements should not be seen merely as regulatory measures; they have the potential to be enablers of growth and innovation in an SA investment market that is in dire need of both.

• Wessels is country head at Binance SA.