Breaking New Ground: South Africa Pioneers Crypto Regulation by Mandating Exchange Licenses

Your Guide to Complying with the FSCA's New Licensing Requirements

South Africa, with its diverse economy, abundant natural resources, and strategic location at the crossroads of continents, presents a compelling landscape for business ventures. This nation, known for its rich history and stunning landscapes, has evolved into a dynamic hub offering a range of opportunities across industries.

From the bustling financial centers to the flourishing technology sector, South Africa’s allure lies in its multifaceted advantages that beckon both local and international entrepreneurs. The Government of South Africa is diligently aligning its legal framework with contemporary technological advancements and actively pursuing competitiveness on a global scale, just like its counterparts across different continents. The article will analyze the recent regulatory developments and how these changes affect the businesses in the crypto industry. 

Crypto Assets  = Financial Products

On 19th of October of 2022, South African Financial Sector Conduct Authority (hereinafter:- “FSCA”) officially classified the Crypto assets as Financial Products under its Financial Advisory and Intermediary Services Act, 37 of 2002 (“FAIS Act”). In its official declaration, FSCA warned about the risks associated with the use of Crypto assets and emphasizes the importance of dealing only with authorized Financial Service Providers. The statement goes on saying that the Businesses offering financial services related to crypto assets must apply for a license with the FSCA starting from June 1, 2023. Importantly, the statement mentions that consumers are not required to wait until a specific date (in this case, November 30, 2023) to lodge complaints against businesses. This suggests that clients and consumers have the right to voice their concerns and report issues related to crypto asset services before the specified date, underscoring the importance of consumer protection and transparency.

South Africa’s financial regulatory authority has declared that all cryptocurrency exchanges operating within the country must obtain licenses by the end of 2023. The commissioner of the FSCA in its interview with Bloomberg stated that approximately 20 license applications have already been received since the recent commencement of this process, and additional applications are anticipated before the November 30th deadline. The commissioner additionally mentioned that in case crypto exchanges persist in functioning without licenses after the set deadline, the regulatory body aims to take “enforcement measures,” which could involve penalties or even the shutdown of non-compliant businesses, according to the provided information.

The introduction of a regulatory framework for cryptocurrency products is a prudent step considering the potential risks to financial consumers in the country. The necessity for time to gauge the effectiveness of these measures was also emphasized, with an assurance of ongoing cooperation with the industry to refine and implement any required adjustments. This development establishes South Africa as the first nation on the continent to mandate licensing for digital asset exchanges, aligning with the global trend of increasing oversight and control over the cryptocurrency sector. 

According to a representative from FSCA, individuals offering financial services related to crypto assets, with certain exceptions like crypto miners and NFT service providers, are obligated to obtain official authorization. Failure to adhere to this requirement constitutes a breach of the law, potentially leading to regulatory actions by relevant authorities. FSCA has been actively involved in shaping crypto and fintech regulations, collaborating with a “inter-governmental fintech working group” comprising major financial regulators and policymakers such as the National Treasury and the South African Reserve Bank.

The trend of tightening regulations is not limited to South Africa alone. On July 3rd, the Monetary Authority of Singapore announced a similar requirement for crypto service providers in the country to secure customer assets in a statutory trust for secure storage by the end of the year. This underscores the global movement towards more rigorous cryptocurrency regulation.

Getting a FAIS License for Businesses

Getting a Financial Advisory and Intermediary Services (FAIS) license in South Africa involves several steps to ensure compliance with the regulatory framework. Here’s a step by step guide on how to obtain a FAIS license:

Step 1: Understand the Requirements

Before you begin the application process, ensure you fully grasp the requirements for obtaining a FAIS license. This includes possessing the necessary qualifications, meeting the fit and proper criteria, and having a thorough understanding of the financial products and services you intend to provide advice or intermediary services for.

Step 2: Qualifications

Verify that you hold the appropriate qualifications recognized by the FSCA for the specific financial services your business plans to offer. Keep in mind that different categories of financial services have distinct qualification requirements.

Step 3: Regulatory Exam

Pass the regulatory exam(s) that correspond to the specific category of financial services your business intends to provide. These exams are administered by approved exam bodies. Register for the exams relevant to your business and adequately prepare for them.

Step 4: Register as an FSP

To initiate the FAIS license application, your business must first be registered as a Financial Services Provider (FSP). Use the FSCA’s online application portal to register and submit all the necessary documentation.

Step 5: Fit and Proper Assessment

As part of the registration process, your business will undergo a fit and proper assessment to ensure integrity, competence, and financial soundness. This assessment involves furnishing detailed personal and financial information as required.

Step 6: Compliance and Documentation

Compile all essential documentation, including your business’s qualifications, regulatory exam results, evidence of compliance with fit and proper criteria, and any other pertinent documents. It’s crucial that all documentation is accurate and up to date.

Step 7: Apply for a FAIS License

Submit your business’s FAIS license application via the FSCA’s online portal. Be sure to pay the necessary application fee, which may vary based on the category of financial services your business intends to provide.

Step 8: Await Processing

Following the submission of your application, the FSCA will review your materials and conduct the requisite checks. This part of the process may take some time, so it’s important to be patient and thorough.

Step 9: Compliance Monitoring

Once your business obtains the FAIS license, it will be subject to ongoing compliance monitoring by the FSCA. It’s imperative to consistently meet all regulatory requirements to maintain your license.

To Conclude

It can be understood that South Africa is committed to embracing technological change as a testament to their forward-thinking approach, aiming to harness the power of innovation while maintaining a regulatory environment that encourages responsible development. This proactive stance facilitates a better navigation of the challenges and opportunities that emerge from the digital revolution. No two businesses are the same. If you are interested in doing business in South Africa, our team is ready to analyze your unique business model and help you through the process of entering the market and our individualized approach will help you to better understand compliance requirements to effectively operate your business. 

The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation.

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