Smaller crypto players to feel pinch of new licensing regime
South African crypto-currency exchanges believe the smaller players will be negatively impacted by the licence requirements recently imposed by the country’s financial regulators.
The Financial Sector Conduct Authority (FSCA) declared crypto assets to be financial products from 19 October 2022.
It recently issued a directive 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 and 30 November 2023.
While local players have largely welcomed the move, saying it will legitimise the industry and help in weeding out the bad actors, they fear smaller crypto asset service providers (CASPs) will not be able to comply with the new requirements.
Speaking to ITWeb following the FSCA directive, the industry says day-to-day operations will not be impacted.
“Firstly, we expect the costs of compliance to increase, particularly for firms who may have under-invested in their compliance functions up to this point. Regrettably, these costs may push some of the smaller players out of the market,” comments David Porter, GM of AltCoinTrader.
Secondly, Porter says while there are exemptions in place, many CASPs are going to struggle to find the right personnel to fulfil the compliance officer roles. These require specific tertiary qualifications from an approved list that largely focuses on commerce-type qualifications and not the technical qualifications the industry finds so prevalent among fintech leaders.
“We are hopeful the licensing regime will increase market transparency, ensuring investors are able to accurately assess the risk/reward trade-offs and identify legitimate players from the crowd.
“Lastly, we believe licensing will improve investor protection and marginalise bad actors in the sector through ensuring adequate financial resources and improved financial reporting,” Porter says.
Jonathan Ovadia, CEO of Ovex, points out the CASP licensing will not impact the firm’s day-to-day operations. He says Ovex and its related companies have been operating as regulated entities within financial services, credit, foreign exchange and related environments for many years.
Asked if the 30 November timeframe is long enough for the players to prepare, he says: “For the more sophisticated existing CASPs like Ovex, the time is adequate.”
However, he concurs with Porter that this may not hold true for the smaller, under-resourced CASPs, which constitute the majority of current industry participants based on sheer numbers.
Says Porter about the deadline: “The initial view following the announcement was no, there wasn’t enough time. However, since the regulator recently announced a number of temporary exemptions, we believe the timelines to be fair.”
Farzam Ehsani, CEO and co-founder of VALR, adds: “We feel the regulators have given ample time to players in the industry to apply for the FSCA licence.
“VALR was one of the first – if not the first – crypto asset service provider to submit its application to the FSCA at the beginning of June when the application window opened.”
According to Ehsani, since the firm’s establishment in 2018, every customer at VALR has had to verify their identity before being allowed to do a single rand of trading.
“When we started, there was no regulatory obligation on VALR to do this, but we engaged with regulators to understand what would be most appropriate, and decided it was best for VALR to stay several steps ahead of the regulatory requirements at the time.
“This approach of constant engagement with regulators, and anticipating what a regulatory framework may require of us, has placed VALR in a favourable position, where our day-to-day operations will remain largely the same.
“We are excited about the licensing process announced by the FSCA, as this validates the tremendous effort and costs we have incurred to ensure VALR remains a compliant and responsible platform for the public to use,” Ehsani says.
Commenting on crypto-currency regulation in SA, Porter is of the view there is a thin line between effective regulation and over-regulating.
“One would be hard-pressed to find a firm that wholeheartedly agrees with all the local regulatory requirements. South Africa’s exchange control regulations, drafted before the invention of the computer, are one example where we feel the decentralised and borderless nature of the crypto industry is being particularly hampered.
“However, on balance, we feel a significant step in the right direction has been made and it’s now important that the industry and regulators alike monitor the effects and strive to not cross that thin red line into over-regulating and stifling what could become a thriving industry.
“When one looks abroad, we see many examples of regulating via enforcement. One thing that is encouraging to AltCoinTrader and many members of the Crypto Asset Association of South Africa is the obvious willingness of the local regulators to connect with crypto firms, taking a more measured approach to understand their business models and work together to find effective solutions instead of knee-jerk regulatory actions,” Porter says.
Innovation vs public interest
For Ehsani, SA has made great strides in its approach to crypto assets. He says the South African Reserve Bank (SARB), National Treasury, South African Revenue Services, FSCA and other regulatory bodies have been engaging with the public on crypto assets for the last decade.
“The need to register and/or license crypto asset service providers has been in the pipeline for some time and we are excited to see this come to fruition. As the technology and services in the crypto industry advances, there will be a need to ensure our regulatory frameworks in SA remain appropriate and ensure the public interests are safeguarded, while ensuring innovation flourishes on our shores.
“Particularly at this difficult time for SA, it is imperative that we, as a nation, put in place policies and regulatory frameworks that attract capital and talent to our shores, to ensure job creation, capital formation, contribution to the fiscus and protection of the public interest,” Ehsani states.
Ovadia believes there is now a relatively clear regulatory treatment of crypto assets in SA from a tax, AML/CTF and financial services perspective, which is a significant milestone in terms of overall regulatory certainty.
“The regulatory approach is thankfully not one of regulation by enforcement (as seen in the US, for example) but rather one of collaboration and guidance. At the moment, the SARB does appear to be an outlier, and more industry engagement and guidance would be welcome.
“The elephant in the room is exchange control and financial surveillance regarding crypto assets,” Ovadia says.
Christo de Wit, Luno SA country manager, says the crypto firm has already submitted its licence application to FSCA.
He notes Luno is in the fortunate position that it operates in a number of markets globally, some of which already have regulatory regimes in place. “Compliance, therefore, will not require a change in terms of how we operate.”
De Wit points out that regulation is a vital part of the crypto-currency ecosystem. “It raises standards, sets barriers to entry for operators and provides consumer protection by making it possible to easily identify those providers that satisfy regulatory requirements.
“For crypto-currency companies, it also lays the groundwork to develop the relationships with key partners that are needed to succeed.”
He adds that the SARB adopted a proactive approach to crypto regulation by forming the Crypto Assets Regulatory Working Group, and including industry in its discussions from the beginning.
“This regulation is timely – with millions of crypto users, people need to be protected as soon as possible. The SA regulation is also pragmatic – by treating crypto-currencies as financial assets, it is crypto asset providers which are being regulated, rather than attempting to regulate crypto itself, which would not be practical.
“The regulatory space doesn’t always move at the same pace as technology, and for most regulators, crypto is uncharted territory. However, South Africa is ahead of its peers, particularly on the continent, in terms of regulators engaging with industry and tabling regulatory proposals.”
De Wit adds Luno is delighted with these positive steps in the right direction for SA and it looks forward to further progress.
“Finding the right balance between regulation and innovation is a complex challenge that regulators, industry participants and stakeholders must navigate together to foster a healthy and sustainable crypto ecosystem.”