Last week, the FSCA published a draft declaration that crypto assets be regarded as a financial product under the Financial Advisory and Intermediary Services (FAIS) Act. Picture: Chris Ratcliffe/Bloomberg
Last week, the FSCA published a draft declaration that crypto assets be regarded as a financial product under the Financial Advisory and Intermediary Services (FAIS) Act. Picture: Chris Ratcliffe/Bloomberg

Protection for SA cryptocurrency investors

By Martin Hesse Time of article published Nov 30, 2020

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WORDS ON WEALTH

In August, I wrote that “cryptocurrency is coming of age as an investment” in the light of more buy-in from large global institutional investors, wide interest on the part of a younger generation of investors, and increased regulation, which would have the effect of taming and legitimising the crypto market, which is largely unregulated.

Last year, the South African regulators established a working group, the Crypto Assets Regulatory Working Group, comprising members of the National Treasury, South African Reserve Bank and Prudential Authority, Financial Sector Conduct Authority (FSCA), Financial Intelligence Centre, National Credit Regulator and South African Revenue Service, and it published a position paper which proposed a number of recommendations on the regulation of crypto assets.

The first practical step towards regulation was the release by the Treasury in July of proposed amendments to the Financial Intelligence Centre Act (Fica), which seek to include certain cryptoservice providers in the ambit of “accountable institutions” under Fica.

Accountable institutions in terms of the act are obliged to register with the Financial Intelligence Centre, conduct extensive customer due diligence, keep records, maintain risk-management compliance programmes, and comply with reporting obligations, which include the reporting of suspicious transactions.

Last week, the FSCA took things a step further by publishing a draft declaration that crypto assets be regarded as a financial product under the Financial Advisory and Intermediary Services (FAIS) Act.

A statement released by the FSCA said: “The draft declaration is intended to give partial effect to some of the recommendations contained in the position paper by declaring crypto assets as a financial product under the FAIS Act.

“The declaration would have the effect that any person furnishing advice or rendering intermediary services in relation to crypto assets must be authorised under the

FAIS Act as a financial services provider, and must comply with the requirements of the act. This will include crypto asset exchanges and platforms, as well as brokers and advisers.

“It is envisaged that implementation of the draft declaration will result in improved disclosures to customers that more effectively highlight the high risks involved in investing in crypto assets and should also ensure that a more robust advice process is adopted (including proper risk assessments) when intermediaries decide to advise customers to purchase crypto assets.”

In other words, if you are interested in buying Bitcoin or other cryptocurrencies, any company or intermediary you use will have to be a registered financial services provider, licensed to deal in crypto assets and subject to the requirements of the FAIS Act, which include properly assessing you to determine your risk profile.

If the provider contravenes the code of conduct under the act – for example, by not assessing you thoroughly and over-estimating your appetite for risk – you can lay a complaint with the FAIS Ombud.

Last week, Business Report reported that Marius Reitz, the general manager for the African division of global cryptocurrency exchange Luno, said Luno welcomed the draft declaration, and “supported regulation in the industry, because it made it possible for consumers and professional services such as auditors to be confident they were dealing with a product defined by regulatory standards and that licensed crypto products had passed through a vetting process”.

Richard Rattue, the managing director of Compli-Serve SA, a compliance management service for financial services providers, welcomed the draft declaration as the next logical step in the regulatory process.

“Bringing some regulatory certainty to the growing crypto asset marketplace is a necessary and important step at this stage given the exponential growth of the crypto space. Regulators worldwide are taking note of the increasing use of crypto assets, and the related importance to provide a regulatory framework to accommodate these assets as soon as possible,” Rattue said.

On the obligations of financial advisers selling you any investment, which would now include cryptocurrency, Rattue said: “A robust process is required when giving advice, which must include a thorough risk assessment, which will be unique to every client.”

Comments on the draft declaration are open until January 28.

“I suspect that there will be a positive response given the growing need for transparency, and that we can only move forward, given how quickly interest in crypto assets is gaining pace,” Rattue said.

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