Crypto assets are now financial products – what does that mean?

Laura du Preez | 21 October 2022

Laura du Preez has been writing about personal finance topics for more than 20 years, including eight years as personal finance editor for two leading media houses. 

The Financial Sector Conduct Authority (FSCA) has declared crypto assets to be financial products.

Declaring crypto assets financial products in terms of the Financial Advisory and Intermediary Services (FAIS) Act with immediate effect gives the regulator the ability to act against those who mis-sell cryptocurrencies and criminals operating scams where previously it has been unable to, Unathi Kamlana, the Commissioner of the FSCA says.

Increasing complaints from consumers who have lost money made a strong case for the regulator to take action, he says. Explaining the declaration made in the Government Gazette this week, Kamlana points out that: “Because the regulator had not set out the rules, we were unable to say when the rules had been broken and that limited what we were able to do as a regulator”.

This does not mean that the regulator thinks these are great investments for you. Rather, it wants to ensure you get full disclosure on the risks of investing in legitimate cryptocurrencies and that those who offer them to you ensure they are suitable for you and don’t mis-sell them.

No protection for the greedy

Kamlana warned, however, that the regulator cannot protect you from your own greed. If you fall for a too-good-to-be-true offer by a scam artist to, for example, double your money in a week or month, you can lose your money, and the regulator may not be able to help you.

The FSCA hopes by making crypto assets financial products it can gather information about what is happening in the crypto market, and educate you on what crypto assets are and the risks involved.

Not a stamp of approval

Eugene du Toit, the head of regulatory frameworks at the FSCA, explains that the FSCA was neither giving cryptocurrencies a stamp of approval nor regulating the cryptocurrency as a product. The declaration only enables the FSCA to regulate the way those offering these products behave.

According to Kamlana and Du Toit, the declaration of cryptocurrencies as a financial product DOES NOT MEAN:

  • Cryptocurrencies become legal tender or a legal way to pay. Only the South African Reserve Bank can decide what is a legal tender, Du Toit says. Kamlana says the FSCA has avoided using the term cryptocurrency because its own work has not convinced it that crypto assets are currencies.

  • Cryptocurrencies are good investments. Kamlana says cryptocurrencies are highly volatile and risky investments, but by declaring them financial products those who provide them to you will have to make full disclosure of these risks.

  • Unit trusts can invest in cryptocurrencies. The Collective Investment Schemes Control Act still does not provide for crypto assets to be underlying investments in unit trusts and other collective investment schemes.

  • Your retirement fund can invest in cryptocurrencies. Retirement funds may only invest in assets in line with regulation 28 of the Pension Funds Act. The regulation was recently amended with a lot of thought and no provision was made for funds to invest in cryptocurrencies, Kamlana says.

  • You can use crypto assets to take money out of the country. You are still subject to exchange controls and must use your R1 million discretionary allowance or get tax clearance to use the R10 million investment allowance to do so, Du Toit says.


Licensing, disclosure and advice

The declaration of crypto assets as financial products DOES MEAN that:

  • You will be able to look for licenced providers. Crypto asset providers, including cryptocurrency exchanges, will have to register as financial services providers in South Africa. They will have to do this between June and November next year, Du Toit says. Engaging in crypto asset activities without registering will thereafter be a criminal offence and the regulator will be able to refer fraudulent platforms for prosecution.
  • Providers must abide by the Act. Crypto asset providers and advisers will have to abide by the Financial Advisory and Intermediary Services Act and its General Code of Conduct. This will immediately mean they must offer you cryptocurrencies honestly, fairly and with due skill, care and diligence in your interests, according to Du Toit.
  • You can complain. If a provider or adviser fails to act honestly, fairly, with due skill, care and diligence in your interests, you will be able to complain to the FAIS Ombud. Until now, the ombud has been unable to deal with complaints about cryptocurrencies. Du Toit says now consumers will have an easier and cheaper way to resolve complaints. The ombud can order compensation of up to R800 000 for losses you have suffered.

  • Providers must be fit and proper. All providers will have to meet the fit and proper requirements which means that with immediate effect they must be honest and have integrity, and the regulator can stop those who are found to have been dishonest or involved in any fraudulent activities.

    Initially those involved in crypto assets will not be required to meet certain qualifications, but in time minimum qualifications may be introduced, Du Toit says.
  • You can make better decisions. Initially those involved in cryptocurrencies will enjoy exemptions from other provisions of the FAIS Act and its code of conduct, but once licensed Du Toit says they will have to, among other, things:
    • Provide a record of advice;
    • Make full disclosure on all the things you should know about the product;
    • Do a needs analysis when providing advice to determine if the product is suitable for your financial needs; and
    • Disclose any conflicts of interest the provider has.

What is a crypto asset?

The declaration of crypto assets as financial products defines a crypto asset as a digital representation of value that is not issued by a central bank, but can be traded, transferred or stored electronically, applies cryptographic techniques and uses distributed ledger technology.

Du Toit says crypto mining activities are excluded as they do not involve consumers. Non-fundable tokens (NFTs) are also excluded as they typically do not involve financial products.

According to Du Toit and Kamlana, cryptocurrencies may be regulated further in future - through the Financial Markets Act currently under review and the Conduct of Financial Institutions (COFI) Bill.

The regulator is also watching international regulatory developments and will take cues from these on future regulation of cryptocurrencies.