South African-based crypto-currency exchanges have welcomed the South African Reserve Bank’s (SARB’s) Prudential Authority’s (PA’s) guidance notice to the big banks to start working with crypto players.
The guidance notice follows some local big banks shutting down the accounts of crypto-currency exchanges, largely fearful of the potential risks they present.
In November 2019, FNB announced it was closing down crypto-related bank accounts, much to the anger of local digital currency players.
The bank notified the crypto-currency exchanges that it will close accounts for them in 2020, citing the risks the digital currencies present.
While FNB CEO Jacques Celliers last year told ITWeb that the big-four bank was open to considering re-opening the bank accounts, there hasn’t been any change to the status quo.
Following FNB’s announcement, other big banks, such as Nedbank and Absa, followed suit in closing the accounts of crypto-currency exchanges.
According to several exchanges ITWeb spoke to, of the big-four banks, only Standard Bank remained open to dealing with the crypto dealers.
Wholesale termination
“The PA is aware that certain banks in South Africa have previously opted to terminate the bank/customer relationship with CASPs [crypto asset service providers] or discontinued banking services to CASPs,” says the PA’s guidance notice.
It says this approach of banks to CASPs may be premised on various reasons, including the uncertainty in relation to the money-laundering, terrorist financing and proliferation financing (ML/TF/PF) risk that CASPs present, or the lack of formal regulatory requirements applicable to CASPs.
According to the authority, underlying the banks’ approach to providing banking services to CASPs is the perception that CASPs’ clients generally pose a higher risk of using their CASP accounts to launder money, violate sanctions and support other illicit activities.
“Risk assessment does not necessarily imply that institutions should seek to avoid risk entirely (also referred to as de-risking), for example, through wholesale termination of client relationships which may include CASPs,” says the PA.
“De-risking may pose a threat to financial integrity in general and to the application of a risk-based approach, specifically, as it could potentially create opacity in the affected persons’ or entities’ financial conduct, and it eliminates the possibility to treat ML/TF/PF risks.”
The PA adds it is, thus, prudent for banks to be able to risk-categorise CASP-related clients through conducting a risk assessment, which will assist banks in determining the appropriate level of ML/TF/PF risk management measures necessary, as opposed to total avoidance, in line with the application of a risk-based approach.
Welcome move
Responding to the notice, David Porter of crypto-exchange AltCoinTrader, says: “On the whole, this is very positive news for the crypto asset sector. The SARB, through issuing this notice, has acknowledged what the crypto industry has long feared to be a practice of banks de-risking the entire sector.”
He adds that many of the members of industry body Crypto Asset Association of South Africa (CAASA) have expressed concerns that the banking sector has chosen “wholesale” not to bank crypto firms.
The recently-formed CAASA represents 25 crypto-currency firms across the country.
“Compliant crypto firms were worried that wholesale de-risking of our entire industry by certain banks would drive a degree of opacity into the sector as it seeks to aid in the fight against money-laundering and terrorist financing,” says Porter.
“In March of this year, CAASA sent a letter to the reserve bank requesting that this issue be addressed and to provide guidance to the banking sector. We are pleased and genuinely appreciative that the SARB has heard our industry's concerns and responded appropriately.”
Marius Reitz, GM for Africa at Luno, says: “Luno welcomes the guidance note issued by the Prudential Authority. We welcome the move by a major central bank to publicly discourage banks from severing relationships with crypto companies.
“In stark contrast to other central banks, the SARB and other authorities have shown an intent to lead the way, both within Africa and internationally, in terms of the guidance provided to the banking industry, thereby allowing the rapidly-evolving industry to flourish.”
According to Reitz, FNB unbanked Luno along with other crypto-currency platforms in March 2020 before the other banks followed.
“FNB did not provide specific detail around the risk identified other than to say its decision to close crypto-linked accounts was due to the absence of regulation of the crypto-currency industry.
“As we have seen in other markets globally, denial of banking facilities to crypto-currency companies such as Luno would move the industry underground and/or offshore, and therefore outside the reach of even the best regulation.”
He notes the crypto-currency industry has driven economic growth and financial inclusion in South Africa.
“The industry creates jobs, attracts foreign investment and generates significant tax revenues. Banks are critical service providers to crypto-currency businesses and enable the public to safely and easily purchase crypto with their local currency.”
Says Carel de Villiers, CEO of Shiftly, a local crypto arbitrage service provider: “I was pleasantly surprised when I saw this guidance note, as it will certainly have a positive impact on the CASP industry and provide banks with clear guidelines while the industry is still largely unregulated.”
He says FNB unbanked Shiftly in 2021 and Standard Bank unbanked several CASPs during 2021, while still maintaining banking relationships with the large crypto exchanges.
“This was in direct contradiction with the Financial Action Task Force updated guidance for a risk-based approach for virtual assets and virtual asset service providers (VASPs), which stated ‘level-playing field’ or ‘functional treatment’ of VASPs.
“I think this guidance note was issued in response to the threat of the Financial Action Task Force greylisting South Africa. They have made it clear in the past that the banks should not de-risk entirely but rather adopt a risk-based approach, which certain banks have evidently ignored,” De Villiers says.
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