South African officials this week announced the release of a consultation paper on crypto assets, in a joint statement from the South African Revenue Service (SARS), the Financial Intelligence Centre (FIC), the South African Reserve Bank (SARB) the National Treasury (NT) and the Financial Sector Conduct Authority (FSCA).
The consultation paper was crafted based on the findings of the Crypto Assets Regulatory Working Group, which was created in 2018 to review the government’s position on cryptocurrency. The CARWG includes members from SARS and the Intergovernmental FinTech Working Group (IFWG), which is made up of representatives from the SARB, FSCA, NT, and FIC.
The working group paper notes that its goal was to meet South Africa’s need to develop a regulatory policy response to deal with cryptocurrency’s potential impact on the country’s financial sector, provide greater clarity for regulators, address identifiable risks, and respond to the nation’s growing interest in participating and investing in the crypto space.
According to the report’s authors, the working group used a functional approach in which “the economic function of crypto assets was assessed rather than the specific technology applied or the entity involved.”
That approach led them to identify five use cases for crypto assets in South Africa: crypto purchases and sales, payment transactions, ICO fundraising, crypto derivatives and funds, and “market provisioning.” The paper focuses on the first two use cases, while acknowledging that the others would receive equal attention in future papers.
The authors include a definition of crypto assets that recognizes their ability to serve as a method of payment and an investment vehicle. They also note that these 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” – though they stop short of acknowledging them as electronic money since they “are issued electronically by decentralised entities and have no legal tender status.”
The paper identifies several “generic risks” posed by cryptocurrencies, including the fact that they threaten “central banks’ historical exclusive right to issue money and control the money supply.” Other risks include the crypto markets’ potential to grow until it poses a real risk to financial stability, and its threat to the country’s national payment system. Those risks are perceived to be small at this juncture but could become more serious as the industry matures and grows in value and reach.
More immediate risks are also identified: consumer risks, potential money-laundering and terror financing concerns, the problems associated with anonymous transactions, tax evasion, and more. The working group’s proposals focus on those existing risks.
After a brief review of the approaches taken by different countries around the world, the paper offers the working group’s suggested regulatory approach for South Africa. For example, to tighten compliance with anti-money-laundering and terror financing laws, it recommends that officials adopt what it calls “limited regulation.” That would involve an official body placing “specific requirements on providers of certain services in respect of crypto assets, without setting predefined conditions for formal authorisation to provide crypto assets-related products or services.” According to the paper’s authors, that approach would make those crypto entities accountable for complying with AML/CFT requirements.
The authors also recommend registration with the IFWG for many entities in the crypto space, including digital currency exchanges, custodial firms, cryptocurrency ATM providers, and crypto payment services.
The consultation paper also confirms that the country’s officials are not currently planning to ban crypto asset ownership, purchases, sales, or transactions. However, it reaffirms the government’s position that consumers need to be aware of the risks associated with an unregulated crypto environment and reserves the option of amending the country’s position on crypto assets in the future, “should crypto assets pose a material risk to their respective regulatory mandates.”