FSCA TAKES AIM AT CRYPTO ASSETS
26 November 2020
Crypto assets, the industry’s stakeholders as well as those persons who render advice or guidance in relation thereto, have been the talk of the town in recent times. Unfortunately, as is the case with many unregulated and rapidly adopted new technologies, many unsuspecting investors seeking to make large returns (in an otherwise fairly gloomy looking global economic market) have fallen foul of unscrupulous practices and made headlines for the wrong reasons all too often. For this reason, those seeking to increase crypto asset investor trust, add credibility to the industry and create accountability for advisors in the crypto assets arena, have called for regulation of the industry for some period of time now.
The Financial Sector Conduct Authority (“FSCA”) has heeded the call for regulation and now initiated steps for purposes of bringing those persons who render advice in relation to crypto assets within the realms of regulation by a statutory body. On 20 November 2020, the FSCA issued a draft declaration (“the Declaration”) in terms of which it seeks to classify “crypto assets” as a “financial product” to bring these unique digital assets within the ambit of the Financial Advisory and Intermediary Services Act No. 37 of 2002 (“FAIS”).
The Declaration is the result of joint considerations and recommendations undertaken by National Treasury, the South African Reserve Bank, the FSCA, and the Financial Intelligence Centre as part of a special working group, termed the Crypto Assets Regulatory Working Group (“CARWG”).
In order to properly comprehend the effects which would be brought about, should the Declaration be promulgated into law, an overview of FAIS is required.
Section 7 of FAIS states that “a person may not act or offer to act as a financial services provider, unless such person has been issued with a licence. Similarly, a person may not render financial services to a person unless such person has been appointed as a representative of an authorised financial services provider. For purposes of this newsletter, section 7 of FAIS must be read with a proper understanding of the terms “financial services provider”, “advice” and “financial product” as set out in section 1 of FAIS.
A ‘financial services provider’ is essentially defined to mean any person, who as a regular feature of the business of such person, furnishes advice and / or renders any intermediary service.
‘Advice’ is turn refers to, any recommendation, guidance or proposal of a financial nature furnished, by any means or medium, to any client or group of clients:
- in respect of the purchase of any financial product; or
- in respect of the investment in any financial product; or
- on the conclusion of any other transaction, including a loan or cession, aimed at the incurring of any liability or the acquisition of any right or benefit in respect of any financial product; or
- on the variation of any term or condition applying to a financial product, on the replacement of any such product, or on the termination of any purchase of or investment in any such product,
and irrespective of whether or not such advice-
- is furnished in the course of or incidental to financial planning in connection with the affairs of the client; or
- results in any such purchase, investment, transaction, variation, replacement or termination, as the case may be, being effected;
The term “financial product” has a fairly far reaching ambit and is too voluminous to include in this newsletter. The term (in its current construct) does however not extend to crypto assets. Resultantly, a person who renders “advice” in relation to crypto assets would not fall within ambit of FAIS as the subject matter of the advice does not constitute a “financial product”.
The Declaration is proposed to be made in terms of sub-paragraph (h) of the definition of “financial product” as set out in section 1 of FAIS, which states that a financial product includes “any other product similar in nature to any financial product referred to in paragraphs (a) to (g), inclusive, declared by the FSCA by notice in the Gazette to be a financial product for the purposes of this Act”
The most significant effect of the Declaration is that persons rendering advice and/or intermediary services in relation to crypto assets would be required to be licensed and comply with the fairly onerous obligations prescribed by FAIS on account of the fact that crypto assets would be deemed to fall within the definition of the term “financial product”.