South African Regulators have issued a consultation paper that proposes firm regulations for crypto assets, to mitigate the risks associated with crypto trading. A consultation paper released by the South African Reserve Bank (SARB) and other regulators in January indicates that robust regulations are in the pipeline for crypto assets, after warning the public for years about the risks associated with the electronically-issued tokens.
These concerns regarding the lack of a specific legal framework that regulates crypto assets, were initially raised by the SARB about four to five years ago and have finally culminated in firm policy proposals by the regulators, through an Intergovernmental Fintech Working Group.
The consultation paper does not, at this stage, seek to ban the purchase, sale or holding of crypto assets, or the use of crypto assets as payments, but it appears that a firm regulatory regime might soon be put in place.
The regulators have focused on the economic activities that crypto assets can be utilised for and have accordingly proposed the following definition: “Crypto assets are digital representations or tokens that are accessed, verified, transacted, and traded electronically by a community of users. Crypto assets are issued electronically by decentralised entities and have no legal tender status, and consequently are not considered as electronic money either. It, therefore, does not have statutory compensation arrangements. Crypto assets have the ability to be used for payments (exchange of such value) and for investment purposes by crypto asset users. Crypto assets have the ability to function as a medium of exchange, and/or unit of account and/or store of value within a community of crypto asset users.”
The proposed regulations have been necessitated by a number of threats that have already materialised, and are listed by the regulators as being:
- the lack of consumer protection;
- possible misuse related to money laundering and terrorist financing;
- escape from exchange control regulations;
- illicit financial flows and purchases; and
- tax evasion.
The regulators point out that one of the reasons why crypto assets are difficult to regulate is because they operate on a global level, and do not fit neatly within a specific defined economic function. Therefore, a unified international regulatory approach is essential.
Should each country impose different levels of regulation, then crypto assets will migrate towards jurisdictions that are less stringently regulated, resulting in most countries regulations being ineffective.
The consultation paper sets out that the regulators' proposals would be implemented through the issuing of policy instruments by the appropriate regulatory body.
The first proposal is for the registration of “crypto asset service providers” at a central point, which – according to the regulators – would serve to gain further insights from market participants. This registration requirement could serve as the basis for the formal authorisation and designation as a registered/licensed provider for crypto asset services operating in South Africa in the future.
The consultation paper proposes that the registration process to be implemented by the first quarter of 2019, however, it is unclear at this stage when exactly SARB will publish its policy paper regarding registration. Given where we already are in 2019, it is unlikely that the registration process will be implemented before the end of the first quarter of this year.
On the completion of registration, an assessment will be made as to whether crypto asset activities will fit into existing regulatory frameworks, or whether amendments can be made to existing laws and regulations to bring the relevant activity within the supervisory ambit of the regulator.
Where it is impractical to amend existing regulations, new regulations will be drafted. This will likely be a lengthy process, involving the necessary period for public comment.
In the meantime, it has been recommended that crypto asset service providers be required to comply with the anti-money laundering and combating the financing of terrorism provisions in the Financial Intelligence Centre Act, 2001, and regulations made thereunder.
In terms of future monitoring mechanisms, the consultation paper proposes to monitor the overall market capitalisation of crypto assets; the number of merchants/retailers accepting crypto assets as payment both in South Africa and internationally; and the volume of crypto assets bought and sold via crypto asset vending machines.
Several questions remain around the mechanisms of registration, possible reporting requirements and the regulation of other crypto areas. Some of these issues may be clarified in the regulators' further consultation papers, as well as SARB’s registration process policy proposal.
Bridget King, Director and
James Peart, Candidate Attorney
in the Finance & Banking practice at
Cliffe Dekker Hofmeyr (CDH)