The Financial Sector Conduct Authority (FSCA) will soon be investigating local crypto asset service providers (CASPs) that did not apply to acquire operating licences.
This, after the financial regulator revealed during the FSCA Conference 2024 that it had approved 59 operating licences for crypto-currency operators in SA.
Crypto companies that wanted to continue operating in the country were obligated to apply for a licence with the FSCA from 1 June until 30 November 2023.
Speaking at the event, Felicity Mabaso, divisional executive for licensing and the business centre at FSCA, said the regulator received applications from 355 CASPs since it set the ball rolling on the implementation of the crypto-asset reporting framework last year.
Mabaso warned those that did not submit operating licence applications and continue operating unlawfully: “Any entity out there that did not apply for a licence before 30 November 2023 and continues with crypto asset activities or services will be investigated and there will be consequences for running illegal operations.
“We have a couple of collaborations that exist between the different regulatory authorities. We have an effective engagement model that ensures we collaborate and have eyes and ears everywhere. We understand what is happening and where it is happening relating to activities of unauthorised businesses.”
FSCA’s licensing and business centre department is engaging the organisation’s enforcement department on some of the complaints received from the public on the unauthorised businesses.
“There will be further communication provided by FSCA on those investigations in due time,” she noted.
Licence applications received to date relate to a range of crypto-related categories, including advisory services, exchanges, digital custodial/wallet services, payment gateways, crypto asset arbitrage and tokenisation services, Mabaso stated.
After years of saying it would not regulate the crypto-currency industry, the South African Reserve Bank (SARB) made a U-turn in 2022 and announced it was working to introduce a regulatory framework to govern crypto transactions.
Crypto assets are declared a financial product in SA under section one of the Financial Advisory and Intermediary Services Act No 37 of 2002 (FAIS Act).
Instead of drafting a separate regulatory framework for the crypto industry, SARB and regulatory partners regulate the industry under the FAIS Act.
Discussing the licensing procedure, Mabaso highlighted the significance of ongoing engagement and guidance with each applicant. This included the pre-licensing visitations, which entailed FSCA visiting the offices of each business to get a thorough understanding of their operations and consumer protection principles.
The robust and intense application procedure saw some operators exit their application process, to better prepare themselves to meet the criteria, she continued.
“The outcome of these engagements resulted in 38 applicants voluntarily withdrawing their applications because of the acknowledgement that they don't meet the competence requirements to operate a crypto business.
“This is one of the key issues that we faced – where there was inability to demonstrate compliance with competency requirements. The second issue is related to a lack of a comprehensive business plan, which details processes and procedures that incorporate crypto asset activities.”
During an interview with ITWeb, Wiehann Olivier, partner and fintech and digital assets lead at financial services firm Mazars, stressed the necessity of ensuring the licensing process is rigorous.
“The CASP [licence] application process aligns with the FSCA's approach to approving traditional financial service providers, with the stringency varying according to the licence category being applied for.
“The stricter these on-boarding processes, the greater the protection they offer to investors in the sector. Ideally, the regulator’s aim is to balance fair and stringent regulations to ensure adequate protection, while fostering a regulated environment that does not hinder innovation. While the application process is crucial, the FSCA's ability to effectively monitor the sector for ongoing compliance is even more paramount,” he noted.
According to Olivier, crypto-based digital assets and the overall industry have been at the forefront of innovation, challenging the traditional financial sector and contributing to various industries.
“As such, regulators and lawmakers must acknowledge that the technology used by CASPs and their product offerings will continue to evolve. This necessitates a regulatory framework that is agile enough to keep pace with innovation, rather than relying on traditional laws and regulations that are potentially insufficient to govern an evolving industry.”
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