Move to regulate crypto-currency gains pace in SA

The South African government is making steady progress in its efforts to regulate crypto-currencies like Bitcoin.

Yesterday, the South African Reserve Bank (SARB) announced the recently-established Intergovernmental Fintech Working Group (IFWG), a group of South African financial sector regulators, has drafted a policy position paper on crypto assets.

According to the central bank, the purpose of this position paper is to provide specific recommendations for the development of a regulatory framework for crypto assets, including suggestions on the required regulatory changes to be implemented.

With the crypto space maturing rapidly, regulators around the world are accelerating efforts to either embrace or regulate crypto-currencies. The pace escalated in 2019, motivated by Facebook entering the space with its Libra project.

Last week, six local financial regulators announced the formation of an Intergovernmental Fintech Working Group Innovation Hub, to respond to the changes in the financial sector, driven in part by the fast-moving world of financial technology.

Desiree Reddy, director at Norton Rose Fulbright, comments that the Innovation Hub is intended to support the sector in introducing innovations that complement the core mandates of regulators, including financial stability and soundness, consumer protection, financial inclusion and fair lending practices.

She says the Innovation Hub offers clarification on the regulatory landscape, access to a space for testing the regulatory fit of innovative solutions, and participation in initiatives and forums helping to shape the future of financial sector regulation on emerging fintech topics.

The SARB says the position paper recommends, among other aspects, the implementation of an anti-money-laundering and counter-terrorism financing regime; a licensing and supervisory regime from a conduct of business perspective; and a regulatory regime for the monitoring of cross-border financial flows.

Commenting on the position paper, Marius Reitz, GM for Africa at Luno, says regulation of the industry is an important step because it brings transparency of requirements to operate and ensures consistency.

“It provides comfort to banks, professionals and consumers, who will know that licensed crypto asset providers have been through a vetting process.”

According to Reitz, Luno has been self-regulating in the absence of formal regulations, but regulating the crypto industry provides a legitimacy which is important for exchanges, given that they work with professional service providers and banks.

“We’ve seen that regulation in the industry can have a very positive impact. Imposing regulations in South Africa (and across the world) will enhance general trust in and stability of the market. It may also result in even more talent and investment capital flowing into the industry, unlocking more business models and bringing more advanced products to market,” he says.

Reitz explains the IFWG was formed by the SARB to address some of the risks posed by crypto-currencies.

He points out that regulators all over the world are moving away from the zero-risk-tolerance attitude of a few years ago, to one where they are now acknowledging the role crypto can play in the future of money.

“South Africa is one of a handful of countries in Africa that are looking into how crypto can slot into new regulations, or whether new bespoke regulations should be drafted. While there is some discussion in other African countries, it is leading the charge on the continent by putting forward a firm proposal for comment.”

He adds that entities providing crypto-asset services are to be regulated as crypto-asset service providers and outlines how these would be defined.

“They will be required to register with the Financial Intelligence Centre (FIC) as an accountable institution and will have to abide by all of the FIC’s legislative requirements. Similar to the requirements of traditional financial services providers, they will have to conduct risk assessments on customers and maintain information both on account-holders and where the money is heading (beneficiaries).

“Working with regulators to analyse criminal trends and assist with investigations will therefore be much more efficient,” Reitz says.

The SARB says this position paper builds on a consultation paper on crypto assets that was first issued by the IFWG on 16 January 2019.

The consultation paper highlighted the perceived benefits and risks of crypto asset-related activities, as well as policy proposals for a regulatory framework.

It also provided an opportunity for all industry participants and stakeholders to submit comments on the proposals contained in the paper.

The SARB says the comments received were carefully considered in compiling the position paper released on 14 April 2020.

Members of the public and impacted role-players and stakeholders are requested to provide comments on the position paper by 15 May 2020. Comments can be submitted by e-mail to innovation@ifwg.co.za.