In recent years, Cryptocurrencies and Crypto Assets have gained significant attention and popularity. The Financial Sector Conduct Authority (FSCA) declared Crypto Assets to be financial products with immediate effect from 19 October 2022. The aforementioned means that anyone who provides financial services related to Crypto Assets will need to be appropriately licensed as a Financial Services Provider (FSP) and must apply to the FSCA for an FSP licence between 1 June 2023 and 30 November 2023.
Understanding the FSCA FAIS Notice 25 of 2023: Exemptions for Crypto Asset FSPs
To regulate the financial services provided in relation to Cryptocurrencies and Crypto Assets, the FSCA has issued FAIS Notice 25 of 2023, which will apply to all licenses Crypto Asset FSPs and took effect on the date of publication, i.e. 11 May 2023. This notice outlines certain exemptions for persons rendering financial services involving Crypto Assets. In this blog post, we will explain the key points contained in the Notice.
Exemption from General Code of Conduct and Regulatory Examinations
Crypto Asset FSPs, its Key Individuals and Representatives are exempted from maintaining suitable guarantees or professional indemnity or fidelity insurance cover, as is required in terms of section 13 of the General Code of Conduct and Board Notice 123 of 2009. This exemption applies solely to the rendering of financial services in relation to crypto assets.
Additionally, Crypto Asset FSPs and its Key Individuals are temporarily exempted from the regulatory examination requirements as captured in Part 5 of Chapter 3 of the Determination of Fit and Proper Requirements. This exemption lasts for a period of 18 months from the effective date of the notice.
Exemption for Crypto Asset Supervised Representatives
The notice also provides exemptions for Crypto Asset supervised Representatives, with different requirements based on their appointment status. If a supervised Representative was never appointed as a Representative of an FSP before the publication of this notice, they can be exempted from the Regulatory Examination requirements. However, the exemption is conditional upon the completion of the relevant regulatory examination within two years from their first appointment as a Representative for providing financial services in relation to Crypto Assets.
For those supervised Representatives who were previously appointed only to render financial services for Tier 2 financial products or perform sales execution, they must comply with the applicable regulatory examination requirements within two years from the date they were first appointed as representatives for providing financial services related to crypto assets.
Continuing Professional Development (CPD) Requirements
It is a requirement that Crypto Asset FSPs, its Key Individuals and Representatives complete a minimum of 6 (six) hours of CPD activities per CPD cycle specifically relating to crypto assets.
A Crypto Asset supervised Representative (including a supervised Representatives who were, before publication of this Notice, appointed only to render financial services for Tier 2 financial products or perform sales execution, and thereafter appointed as a representative to render financial services, other than the execution of sales, in relation to crypto assets) must also complete a minimum of 6 (six) hours of CPD activities relating to crypto assets per CPD cycle. The CPD cycle starts from the date when the supervised individual meets the applicable regulatory examination and qualification requirements for crypto assets, or after six years from their initial appointment as a crypto asset supervised representative, whichever occurs first.
It is essential for all parties involved, including Crypto Asset FSPs, its Key Individuals, Representatives and Crypto Asset supervised Representatives to comply with the conditions specified in the Notice. Failure to meet these conditions will automatically result in the exemption no longer being applicable to the respective individuals or entities.
FAIS Notice 25 of 2023 therefore provides exemptions for individuals and entities involved in rendering financial services related to crypto assets. These exemptions are subject to specific conditions, including compliance with regulatory examination requirements and fulfilling CPD activities. It is important for those operating within this sector to stay updated with any amendments or withdrawals of the exemptions that may be published by the FSCA.
Please also note that the new license application forms that now include Crypto FSP License Applications have now been published.
For any help on getting licensed contact us today to get a quote!
On 19 October 2022 Crypto Assets were declared a financial product in terms of FAIS.
This is defined as:
a digital representation of value that –
(a) is not issued by a central bank, but is capable of being traded, transferred or stored electronically
by natural and legal persons for the purpose of payment, investment and other forms of utility;
(b) applies cryptographic techniques; and
(c) uses distributed ledger technology.
One can argue this included crypto currencies, nodes as well as NFT art as well as you'll see below.
It is important to note that currently this practically does not mean much and this was likely done in an attempt to avoid possible greylisting of South Africa by the FATF. This is because one is exempt from licensing as an FSP or Financial Services Provider (section 7(1) of the FAIS Act) and can obtain a license between June 2023 and November 2023 in terms of FAIS Notice 90 of 2022. It is important to note that included in this notice is the mention of currencies, NFT's, miners and nodes specifically.
But the notice also states that one must in the meantime comply with Chapter 2 of the Determination of Fit and Proper requirements of FAIS, which is too long to repeat here verbatim but generally states:
A person must have honesty and integrity and the chapter also states in which instances one is deemed to no longer have that (i.e. convicted of fraud etc).
One must also in the meantime comply with section 2 of the General Code of Conduct which states:
A provider must at all times render financial services honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry.
Full compliance with the General Code kicks in on 1 December 2023, ostensibly after licensing has been concluded.
It is important to note that included in this notice is the mention of currencies, NFT's, miners and nodes specifically.
There is also a Draft Notice out for comment on exempting persons rendering a crypto financial service from:
Submissions on the draft Exemption must, using the submission template attached, be submitted in writing on or before 1 December 2022 to the FSCA, at FSCA.RFDStandards@fsca.co.za.
Please reach us on our Contact Us page for any assistance on licensing matters related to crypto. We are here to help you.
I am a fan of regulations and compliance that have reasons and make sense. I am also a fan of "less is more" when it comes to regulation. In that vein I do believe much of our current financial services regulation in South Africa over-corrects to protect investors at the expense of economic activity and innovation. I've written a previous blog post about it that you can find here.
It seems like Crypto is heading the same way if some voices of reason do not speak up. It is not new that a country wants to control or outright ban Crypto. China has banned, un-banned and re-banned it many times over. Other countries have seen the light and provided enabling regulations for Crypto to flourish and grow. Mainstream adoption is growing exponentially in the form of ETF's being issued and even card issuers like Visa joining the party. Some Crypto Exchanges have even listed on major stock exchanges.
So, what have our regulators done so far? They have issued zero final regulations. To their credit, there was a draft regulation on the advice and intermediary services on Cryptocurrencies issued in November of last year. But nothing has been said of that since a year ago. All that happened in the meantime is that the FSCA issued another draft regulation barring Pension Funds from holding Crypto assets. I would assume this includes NFT's (non-fungible tokens) in the form of Art which had sales of $10.7 billion in Q3 of 2021. The Reserve Bank has also reportedly pushed banks to prevent customers from buying Crypto with their cards and from buying Crypto from any company domiciled overseas.
So basically we only have confusion and frustrated businesses. I can't begin to tell you how many Crypto businesses approached us in the last two years to find out how they can comply and get licensed. Unfortunately you can't yet.
I understand that many people have been taken for a ride by Crypto scammers. But, many people have also been taken for a ride by money scammers. Does declaring investing in normal fiat money a crime, solve the problem? No, you but can rather provide trust by licensing exchanges and funds at best. One cannot eliminate all crime by force over-regulation as the criminals will still find ways to do the crime (rather beef up the criminal justice system). What you will accomplish with this heavy handed regulatory approach is overburden those that want to comply en ensure that less people are economically active in this space.
Instead, enable the industry through a measured approach with limited regulation that is both practical and that encourages new entrants to the market.
Blockchain technology is already changing the world and offering better use cases, privacy and trust for all involved. Cryptocurrency is just one use case of blockchain technology and we are at risk of getting left behind if do not create a better space for it to grow.
by: Horizon Compliance team