Until quite recently, crypto assets were largely unregulated in South Africa, necessitating participants in the crypto environment to tread carefully given the prevalence of fly-by-night crypto traders.
Widely considered as the first legal step to properly bring the crypto environment into the South African legal framework, the Financial Sector Conduct Authority (“FSCA”) in General Notice 1350 of 2022 (“Notice”) published in Government Gazette No. 47334, stated that crypto assets would be declared as of 19 October 2022 as a ‘financial product’ under section 1 of the Financial Advisory and Intermediary Services Act 37 of 2002 (“FAIS Act”).
The Notice defines, for purposes of the FAIS Act, a ‘crypto asset’ as a:
“a digital representation of value that –
– is not issued by a central bank, but is capable of being traded, transferred or stored electronically by natural and legal persons for the purpose of payment, investment and other forms of utility;
– applies cryptographic techniques; and
– uses distributed ledger technology.”
The FSCA originally, when it published its draft declaration on crypto assets being considered as financial products, cited the need for “improved disclosures to customers highlighting the risk involved when investing in crypto assets” and “ensuring a robust advice process is followed when intermediaries advise customers to purchase crypto assets”.
As a consequence of the inclusion of crypto assets in the FAIS Act, all service providers involved with crypto assets (including but not limited to the giving of advice and the sale of crypto assets) will have to be licensed as a financial services provider in terms of the FAIS Act and consequently be obliged, by law, to be compliant with all applicable regulatory requirements and will furthermore find themselves also within the jurisdiction of the FSCA.
Financial service providers (whether it be advisory or intermediary services) who concern themselves with crypto assets are for now though, generally exempt from the application of the FAIS Act and its code of conduct insofar as it relates to the need to be licensed in terms of the FAIS Act. The current exemption, however, shall only apply until the relevant licence application under the FAIS Act has been approved or denied and service providers not currently registered will have until 30 November 2023 (applications will open on 1 June 2023) to submit their licence applications. Criminal conviction as well as a R10 million fine lie in wait for those who risk non-compliance.
The Commissioner of the FSCA, during a press conference following the publication of the Notice, stated that the regulation of crypto assets will protect consumers from scams and empower the authorities to take appropriate action against such scammers.
Strict licensing requirements, compliance with the FAIS Act, and adherence to its code of conduct will definitely assist in driving away many scammers currently involved in the crypto space. Consumer confidence should also be boosted by the fact that those who offer them advice on crypto assets and/or who either directly or indirectly promote the sale thereof, must do so honestly, fairly and with due skill, care and diligence in the consumer’s best interests and furthermore be in possession of a valid license to act as a registered financial services provider.
To minimise risk, consumers who wish to obtain advice on, or buy crypto assets, should therefore ensure they deal exclusively with a licensed financial services provider. Licenced providers will have to, for example, make full disclosure on products and whether such are aligned with the consumer’s financial needs (as per the required needs analysis), and must also keep and present a detailed record of advice. Consumers who feel aggrieved with the advice given to them and/or the sale of crypto assets to them by a licensed financial services provider will in the near future be able to lodge a complaint with the FAIS ombud for adjudication, alternatively, consumers can contact their attorneys who can advise them on other suitable legal action.
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