FSCA considering declaring crypto assets a financial product
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THE Finance Services Conduct Authority (FSCA) is considering declaring crypto assets a financial product, which will give it jurisdiction over these transactions following the latest scam Africrypt, where investors lost a staggering R54 billion.
In the latest scam, South African cryptocurrency investment company AfriCrypt allegedly defrauded about $3.6bn in investor funds after the company claimed its trading system was “hacked”. About 69 000 bitcoins were stolen.
Africrypt founders Ameer Cajee and his brother Raees Cajee allegedly transferred the funds from a South African account before fleeing to the UK.
The FSCA said yesterday it was investigating whether a financial product or service was offered to the public, which would have required Africrypt to be registered with the authority, but at this stage it had only found evidence of crypto asset transactions, which were not regulated in terms of any financial sector law in South Africa.
“”Our preliminary observations concerning Africrypt led us to believe that regardless of what mechanisms we are putting in place, this entity was offering exceptionally high and unrealistic returns akin to those offered by unlawful investment schemes commonly known as Ponzis,” the FSCA said.
“The public is urged to understand that unrealistically high returns suggests that the investment scheme is likely to be fraudulent. Moreover, no investments should be made without seeking the assistance and advice of properly licensed financial service providers who should only offer products from legitimately licensed financial institutions,” it said.
Besides the underlying concerns around the suitability of crypto assets as an asset class for investment, due to the lack of an underlying business model and the risk of large fluctuations in the market price in most cases, the FSCA was also concerned about the large number of scams being perpetrated.
“Many of these entities are often not based in South Africa or have poor security in place to protect the crypto asset being acquired by the public, and in theory held on behalf of the customer.
Often, however, these intermediaries are just fraudulent operators,” the FSCA said, adding that the crypto asset sector had a number of legitimate players that offered a legitimate service, albeit in a service that the FSCA was concerned about.
The Africrypt fraud has been likened to the Stellenbosch head-quartered Mirror Trading International crypto currency scam, where aboutR9bn of investor funds was lost which was ranked by industry commentators as the biggest scam globally in 2020.
Earlier this month the Intergovernmental Fintech Working Group (IFWG) published a paper on crypto assets that provides a framework on how these assets will be regulated in future.
Daily crypto asset trading values in South Africa exceeded R2bn for the first time in January this year, evidence of significant value moving into crypto assets without the South African Reserve Bank Financial Surveillance Department having oversight over such flows, according to the IFWG.
Its position paper made 25 recommendations on how to bring crypto assets into the South African regulatory universe.