South Africa’s financial regulators are laying the groundwork for the “phased and structured” regulation of cryptocurrencies. The move presents a reversal of the largely hands-off approach taken for the past seven years and has been driven by increasingly high levels of retail interest in crypto in the country.
In a position paper published on June 11, the country’s Intergovernmental Fintech Working Group , or IFWG, under the aegis of the Crypto Assets Regulatory Working Group, laid out a roadmap for introducing a regulatory framework that will center on crypto asset service providers, or CASPs.
South Africa’s initial national policy towards crypto has until now been one of wariness but also noninterference. Back in 2014, the National Treasury issued a public statement dedicated to the issue, together with the South African Reserve Bank and the country’s financial regulator and financial intelligence and tax agencies. Its tone was cautionary but unintrusive, warning the public that they could trade crypto at their own risk and would be offered no legal protection or recourse in case of difficulties.
Commentators have noted that several factors, including the South African crypto market’s surge to in excess of 2 billion rand ($147 million) in daily traded value earlier this year, have rendered this former policy untenable.
IFWG’s new paper emphasizes that even though a structured regulatory framework is set to be phased in, crypto assets remain “inherently risky and volatile” and the prospective financial losses incurred by crypto trading activities remain high.
Six overarching principles will inform the country’s evolving approach. These entail taking an “activities-based perspective” that will ensure that a principle of “same activity, same risk” orients regulators’ decisions; implementing measures proportional to risk; taking a collaborative approach to crypto asset regulation; staying up to date with international best practices and encouraging digital financial literacy among consumers.
The paper also puts forth 25 recommendations for how to regulate crypto in relation to three main areas of concern: Anti-Money Laundering and Combating the Financing of Terrorism, cross-border financial laws and the application of financial sector laws. This last implies that South Africa’s Financial Sector Conduct Authority will be tasked with aiming to prevent market abuses, e.g. fraud and market misconduct, and taking action against relevant perpetrators in the industry.
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Alongside the published paper, IFGW issued a press release outlining its strategy, which gave space to its concerns about the nature of the asset class and surrounding ecosystem. IFGW pointed to decentralization as a downside, not a plus, which leaves consumers and traders without recourse to an authority or centralized entity that could resolve user errors, e.g. using the wrong crypto wallet address.
IFGW also remains concerned about the manipulative nature of much crypto marketing material, assets’ price volatility and scam activities, such as Ponzi schemes. Indeed, this year the country’s largest-ever Ponzi scheme involved a company targeting Bitcoin (BTC) traders, which amassed 23,000 BTC in investor holdings from a reported 26,000 members worldwide.