South Africa To Regulate Crypto Service Providers To Protect Investors

News, Regulation | January 18, 2019 By:

The South African Reserve Bank (SARB), the central bank of the country, said that the local crypto industry should be regulated to protect the public.

In a recently published consultation paper, the SARB provided an overview of the perceived risks and benefits associated with crypto assets, discussed the available regulatory approaches, and presented policy proposals to industry participants and stakeholders.

According to the paper, one of the most pertinent reasons why cryptocurrencies are challenging to regulate is because they operate at a global level and could potentially be classified under various economic functions. As a result, responsibility for regulation often cuts across various different regulators and national jurisdictions.

“If there is no coherent regulatory approach at a national level, regulatory arbitrage could challenge the effectiveness of regulatory actions,” the paper said. “Crypto assets are borderless and their pseudonymous and anonymous nature increases the difficulty of implementing the correct regulatory and monitoring tools.”

The SRB clarified that it does not intend to ban the buying, selling or holding of crypto assets, or to ban crypto assets for payments. However, because cryptocurrencies are not recognized as a legal tender, customers may be exposed to harm in an unregulated environment. As such, the central bank proposes to include crypto assets service providers as an accountable institution that will be under legal obligation to comply with anti money laundering and countering financing of terrorism (AML/CFT) requirements of the Financial Intelligence Center Act.

The SARB said that the appropriate regulatory framework will be developed through three phases: registration process for crypto asset service providers, review of existing regulatory frameworks followed by new regulatory requirements or amendments to existing regulations, and assessment of regulatory actions implemented. The first phase is expected to be implemented by first quarter of 2019 and the subsequent phases will follow thereafter.

Registration is required for all entities performing crypto asset activities, such as crypto asset trading platforms, custodial wallets, custodial services, and crypto asset payment service providers.

“Institutions that are subject to the requirements of the FIC Act must apply a risk-based approach in their implementation of measures to meet these requirements,” the paper said. “This includes the ability to distinguish between different categories of risk and to apply enhanced customer due diligence where business with customers is deemed as higher risk and simplified customer due diligence where business with customers is deemed as lower risk.”