South Africa gets first crypto licences

Law firm Allen & Overy says the Financial Sector Conduct Authority (FSCA) has issued South Africa’s first batch of crypto asset service provider licences.

According to the firm, up to 60 licences were issued by 31 March 2024.

This comes after the FSCA revealed in mid-March that it had approved 59 licences and expected to issue them by the end of the month.

Thusfar, only two providers — Jaltech and Luno — have publicly announced that they have been approved for a licence.

On 26 March, Jaltech announced that it was one of the few investment product providers that would receive a crypto asset service provider (CASP) license.

Jaltech said the FSCA’s approval shows South Africa is in step with global trends.

It also believes this gives the green light for institutional and retail acceptance and adoption of the asset class within the South African financial sector.

The FSCA told Bloomberg last month that more than 300 crypto-asset providers sought approvals.

It had given crypto providers until 30 November to apply for licenses or risk facing enforcement action.

“We are processing those licensing applications and we’re doing so in a phased kind of manner given the numbers,” said FSCA Commissioner Unathi Kamlana.

The regulator opted not to develop a separate framework for crypto operators and instead will oversee the firms under the existing Financial Advisory and Intermediary Services Act.

With crypto exchanges falling under the FAIS Act, consumers will also have recourse and protections that don’t exist right now, with the regulator being able to take enforcement action if an operator breaches any of the law’s requirements.

“As we license and supervise, we will discover that perhaps there are gaps that cannot be closed by the existing regulatory framework, the FAIS Act. We might need to build on that as we discover what those are,” said Kamlana.

“If you wait for the Rolls-Royce kind of regulatory framework, you still have those risks anyway.”

Kamlana believes the current law will cover most gaps.

“By regulating Crypto Asset [financial service providers], the FSCA has shown it understands that South Africans rely on these service providers and invest significant trust and assets in them,” said Allen & Overy counsel Kelle Gagné.

“Crypto asset providers will now be subject to similar licensing hurdles and ongoing compliance requirements to obtain and keep their licenses as other financial services providers,” she explained.

“Part of this compliance includes reporting breaches, incidents, and financial weaknesses to allow for intervention.”

Gagné agreed with Kamlana that no licensing regime is foolproof but said these first steps are important.

“When entrusting crypto assets to a service provider, South African consumers can now check whether [it] is licensed by the FSCA and take some comfort that [it] is not beyond the reach of the law in South Africa.”

Another consequence is that CASPs must now ‘FICA’ their customers (known as KYC elsewhere), report suspicious transactions, and otherwise comply with South Africa’s anti-money laundering regulations.

To obtain a license, a crypto asset FSP must meet several requirements to ensure compliance and protect consumers.

Gagné summarised them as follows:

• Provide routine business information and disclose details about their directors, trustees, partners, members, key individuals and representatives.
• Individuals must meet the ‘Fit and Proper requirements for Financial Services Providers’ demonstrating qualities of honesty, integrity, competency and engagement in continuous professional development.
• Applicants and their key individuals and representatives must have no history of legal or professional misconduct and must not be under investigation or proceedings that could result in conviction.
• Competence is assessed based on experience, qualifications, and performance in regulatory exams.
• If not already regulated as a bank or insurer, the applicant must demonstrate financial soundness, with different requirements depending on whether the applicant will hold or receive client assets.
• All applicants must meet working capital and liquidity requirements, with higher thresholds for those holding client assets.
• Operational ability is also vital, requiring applicants to submit a comprehensive business plan for at least three years, along with risk management, governance, remuneration, business recovery, and compliance frameworks.
• If any functions are outsourced, the applicant must disclose this to the FSCA.

These stringent measures ensure that Crypto Asset FSPs operate ethically, competently, and with financial stability, said Gagné.

She said this safeguards the interests of consumers and the integrity of the financial system.

MyBroadband contacted the FSCA to confirm that it has issued the first CASP licences.

It acknowledged our enquiry but has not provided feedback in two weeks.