At the beginning of January, the South African Reserve Bank (SARB) released a new consultation paper focusing on crypto assets in the country.
Whilst the SARB’s consultation paper does not (at this stage) intend banning the purchase, sale or the use of crypto assets, it appears that fairly robust regulations are heading our way, said Bridget King, director at Cliffe Dekker Hofmeyr.
“The majority of the regulators’ consultation paper highlights the perceived risks associated with crypto assets, including yet to materialise threats, like the potential for crypto assets to infringe on central banks’ historically exclusive right to issue money and control the money supply, which may lead to the monetary policy transmission mechanism becoming less effective,” said King.
One of the reasons that crypto assets are difficult to regulate, is because crypto assets operate on a global level, and do not fit neatly within a specific defined economic function, she said.
“This means that a unified international regulatory approach is essential.
“Should each country impose different levels of regulations, then crypto assets will migrate towards jurisdictions that are less stringently regulated, resulting in most countries regulations being ineffective.”
How will the proposed regulations work?
According to King, the regulators envisage that their proposals will be implemented through the issuing of policy instruments by the appropriate regulatory body.
“The first of these proposals is the registration of ‘crypto asset service providers’ at a central point, the objective of which, according to the regulators, is to specifically gain further insights from market participants,” she said.
“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.”
King said that registration will be required for all entities performing the following crypto asset activities:
- Crypto asset trading platforms (or any other entity facilitating crypto asset transactions) that provide intermediary services for the buying and selling of crypto assets, including through the use of crypto asset vending machine facilities;
- Crypto asset trading platforms that trade, convert or exchange fiat currency or other value into crypto assets;
- Crypto asset trading platforms that trade, convert or exchange crypto assets into fiat currency or other value; and
- Crypto asset trading platforms that trade, convert or exchange crypto assets into other crypto assets, crypto asset digital wallet providers;
- Crypto asset safe custody providers (ie a platform that safeguards, stores, holds or maintains custody of crypto assets belonging to another party);
- Crypto asset payment service providers (ie all payment services provided when using crypto assets as a medium of exchange); and
- Merchants and service providers accepting payment in crypto assets.
It is stated in the consultation paper that the details of the registration process will be set out in a policy paper to be published by the SARB in 2019, King said.
“The regulators have indicated that they expect 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 the 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 2019,” she said.
“On the completion of registration, the regulators will then turn their attention to assess 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 regulators.
“In situations where it is impractical to amend existing regulations, new regulations will be drafted.
“This will likely be a lengthy process, involving the necessary (and vitally important) period for public comment.”
No anonymous trading allowed
King said that the regulators have also recommended that crypto asset service providers be required to comply with the Financial Intelligence Centre Act.
These provisions would require crypto asset service providers to do, among other things, the following:
- Register with the FIC, conduct due diligences of clients, perform ongoing monitoring and file reports on suspicious and unusual transactions, or cash transactions of R25,000 and above;
- Apply a risk-based approach to meet the requirements of FICA, which includes the ability to distinguish between different categories of risk and apply higher levels of due diligence to riskier clients; and
- Ensure compliance with FICA, or face remedial action, which may include administrative sanctions.
Future Monitoring Mechanisms
King said that the regulators have also proposed to monitor:
- The overall market capitalisation of crypto asset;
- 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.
“Furthermore, the regulators propose very careful surveillance of the crypto asset trading platforms by monitoring, amongst other things, the flow of funds from fiat into crypto and vice versa; the services offered; the trading volume of crypto assets; the number of customers; the governance mechanisms and record-keeping of transactions etc,” she said.
For such careful monitoring to take place, the regulators (or a specific regulatory body), will either need extensive access to each of the trading platforms, or will have to impose trade reporting requirements on all crypto asset trading platforms in the future.
“How exactly the Regulators plan to monitor the trading platforms remains to be seen,” she said.
