Johannesburg, 02 Oct 2017
The rapid development of cryptocurrencies on the global stage has given rise to a regulatory quagmire for financial regulators worldwide, and South Africa is no exception, says Ashleigh Petzer, Associate, Corporate, Webber Wentzel.
As recently as September 2017, South Africa's grocery retailer Pick n Pay announced that it was testing Bitcoin payments in-store, "a world first for a major grocery retailer." There is no doubt that cryptocurrencies will explode onto the South African market and challenge traditional banking institutions in such a way that will place cryptocurrencies as a serious contender to these institutions. However, the South African authorities are still grappling with the regulatory framework that ought to govern this virtual currency world.
In December of 2014, the National Payment System Department of the South African Reserve Bank (SARB) released a position paper on virtual currencies. In that position paper, SARB highlighted what it viewed as the immediate risks associated with the current virtual currency landscape, including money laundering, financing of terrorism and increased risk to consumers. Despite having identified those perceived risks, SARB disclaimed any responsibility in relation to the acquisition, trading or use of virtual currency and stipulated that the use of virtual currency was at the end-user's sole and independent risk. SARB concluded that although at that stage it was not going to regulate the virtual currency landscape, it reserved its right to change its position.
Media reports have suggested that SARB, in response to cryptocurrencies gaining record trading momentum this year as well as in order to strengthen its regulatory approach, has recently announced that it has selected Bankymoon, a leading blockchain company, as the pioneer to test Bitcoin within a regulatory sandbox in order to understand and investigate the possibility of new regulations.
So what is a regulatory sandbox?
Simply put, a "regulatory sandbox" is a set of rules that allows innovators, such as fintech companies, to test their products/business models in a live environment for limited duration whilst being exempt from having to adhere to some or all legal requirements.
There are many positive benefits of utilising a regulatory sandbox. A few examples are:
* It promotes innovation by reducing some of the existing regulatory barriers often faced by innovators and start-ups;
* It is designed in such a way that suitable consumer safeguards are put in place;
* It has the potential to advance fintech innovations which are designed to be financially inclusive to those customers who generally face exclusion from financial institutions (such as having to have a particular credit rating in order to qualify for financing). This can be done by advancing fintech innovations that provide more affordable products and services as well as new operational efficiencies that will benefit generally financially excluded customers (for example by introducing alternative credit scoring). This can be particularly useful in the South African context where many consumers face financial exclusion; and
* It ensures safe experimentation and ensures that regulators have oversight and visibility over an emerging product or service in the fintech sector which allows regulators to suggest changes to regulations or a policy at an accelerated pace.
Who will oversee the sandbox?
SARB, by its selection of Bankymoon for the testing of Bitcoin within a sandbox (as reported in media reports), seems to be the authority which will test this particular sandbox. With the introduction of the Financial Sector Act (Act) signed into effect on 21 August 2017, SARB will, in the future, be the prudential regulator in South Africa, meaning that they will be responsible for ensuring the soundness of regulated financial institutions.
Interestingly, the Financial Conduct Authority (FCA) (the UK equivalent of the Financial Services Board (FSB), which is to be renamed the Financial Sector Conduct Authority, and whose focus will be on financial consumer protection pursuant to the implementation of the Act), has taken lead role in the UK in designing and overseeing all sandboxes. Whilst the concept of a sandbox is brand new to South Africa, it will be interesting to keep an eye out as to how the SARB and FSB decide to assign responsibilities (if they will) in the sandbox landscape. It is obviously important for sufficient consumer protections to be put in place so there may well be involvement from other regulators (as they decide), if not now, in the future.
Innovation v consumer protection
Operating within a sandbox is very attractive for innovators and you can see why it is becoming more and more popular in jurisdictions around the world. However innovation needs to be balanced with consumer protection.
There is obviously an element of risk to consumers when operating within a sandbox, however this can be mitigated by setting strict parameters that allows innovators the ability to test new solutions but at the same time ensure that the necessary consumer safeguards are in place. Some considerations taken into account by the FCA when designing a sandbox include (i) testing the sandbox for limited duration; (ii) sourcing the right customers for testing in the sandbox (ie perhaps certain sandboxes should only be open to sophisticated customers who have agreed to limit their claim for compensation should the sandbox fail); and (iii) possible disclosure about the fact that they are being tested in a sandbox. Sandbox designs in South Africa will need to be sculpted to cater for the individual South African consumer market.
How does one enter a sandbox?
Currently it seems that if a company wishes to enter a sandbox in South Africa they would need to approach the SARB themselves, such as was the case with Bankymoon. The FCA has a portal on its website that invites applicants to apply to enter a sandbox and such applicants then undergo a selection criteria. As sandboxes become more popular in South Africa, it may be practical for a similar method to the FCA approach to be followed such as setting up a portal that allows applicants to apply to enter the sandbox in order to ensure easier access to the sandbox.
Conclusion
It is important to watch the sandbox which will be operated by Bankymoon and the SARB closely as it may very well set a trend of future sandboxes in South Africa. It will also be interesting to see what will happen to companies after they exit the sandbox - whether new regulations will be implemented or whether the company will be allowed to continue to operate its business without regulations.
Contact: ashleigh.petzer@webberwentzel.com; (011) 530 5541.
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