Introduction

The crypto assets industry is primarily driven by the belief that its underlying technology will revolutionise an archaic, exclusionary, cumbersome and inefficient financial services sector. The zeitgeist of this revolution is decentralisation and disintermediation. Decentralisation away from the control of central banks and large financial institutions, and disintermediation away from roleplayers that add barriers to accessing financial products through layers of unnecessary costs, time and administration. Despite the fact that this is an arena for great innovation, it is also an arena where ill-conceived projects have flourished. Moreover, due to the lack of regulatory controls, unethical actors have exploited a public with little knowledge and understanding of the crypto assets industry. 

The key features of the financial services industry are centralisation, controls, risk management, reporting, monitoring, data generation and security. While some of the crypto asset industry has enjoyed operating outside these metrics, the industry will soon face a day of reckoning. Crypto asset service providers (CASPs) and trading platforms are increasingly being held to the same standards and principles as any other financial services actor. Although authorities worldwide recognise the need to avoid stifling innovation, it is abundantly clear that the international Financial Action Task Force’s (FATF) recommendations and standards - concerned primarily with combating money laundering and terrorist financing -  will apply to the crypto assets industry and do so without a special dispensation with relaxed controls.

The South African landscape

Crypto assets remain largely unregulated in South Africa. The primary forces of regulation in this sector are aimed at anti-money laundering measures (AML) and at installing supervisory, reporting and monitoring measures to ensure market stability and participation by credible and vetted service providers (prudential regulation).

In our view, this economic, political and legal reality spells out a clear reality for the crypto assets industry: adapt or slowly disappear in a dwindling and unregulated black market. With this in mind, it is clear that the crypto assets industry is set to split into two streams: regulated and unregulated. We believe that the unregulated market is not sustainable or scalable and that only those entities that build a bridge between the innovation of this emerging sector and the traditional financial services industry will survive and thrive in the long term. 

The South African Reserve Bank’s latest issue to the market

The South African Reserve Bank (SARB)’s Prudential Authority has issued a guidance note to banks for dealing with transactions by CASPs. 

Fundi Tshazibana, the CEO of the Prudential Authority, stated that the central bank is aware that some banks have previously terminated their relationship with CASPs.

According to the note, the banks opted for this termination because of the risks of money laundering (ML), terrorism financing (TF) and proliferation financing (PF) that come with the CASPs’ lack of formal regulatory requirements. Although it acknowledges the banks’ reasons for termination, the central bank goes on to state that risk assessment by banks should not imply that they should seek to avoid risk entirely by cutting off CASPs from their services (also known as de-risking).

The SARB states that de-risking may threaten the country’s financial integrity. In addition, the report cautions against de-risking in order to avoid creating a lack of transparency in the affected parties' or entities' financial conduct, thus preventing those risks from being treated.

What can we take from this?

In our view, the SARB’s Guidance Note is a positive development and consistent with the approach outlined in the policy proposals of the Crypto Assets Regulatory Working Group (CARWG). These proposals are also consistent with the approach outlined by the International Financial Action Task Force (FATF). South Africa is currently under review by the FATF and has a deadline to respond by late 2022. This obligation is the primary driving force behind the sudden regulatory consensus regarding crypto assets in South Africa. The FATF favours supervision, surveillance and enforcement above prohibition, and South Africa will follow its lead. As a result, the SARB has now exercised its power against the banks in order to comply with its new strategy. In conjunction with all of this the FIC will soon declare CASPs as Accountable Institutions (a company that is required to report to FIC). Likewise, the FSCA will soon take legislative action to incorporate crypto assets within the FAIS framework. The regulatory roadmap is becoming more explicit, and talk of general bans and prohibitions is a thing of the past. The crypto asset industry is here to stay, and the regulatory approach reflects that.

That said, although this is a positive development, it does mean that CASPs will now be under increasing regulatory scrutiny by regulators and banks. The Guidance Note foresees a vital role for the banks in indirectly regulating the industry. To that end, the Note recommends that banks design and implement bespoke policies and risk matrix frameworks to cover CASPs. It further urges the banks to ensure that their CASP clients not only have appropriate measures in place but also to ensure that these measures are implemented. This “top-down” approach will lighten the enforcement workload of the FSCA and FIC, and ultimately mean that CASPs will have to quickly adapt or find themselves in increasingly compromised positions with their banking partners.

Where does this leave CASPs?

The reality is that the crypto assets industry will now be held to the same standards that apply to the traditional financial services sector. This is positive for consumer protection and is much needed to eliminate bad actors and disreputable service providers. This regulatory drive will, unfortunately, stifle innovation to some degree. Many small players may not be able to absorb the immense cost of regulatory compliance, but that is a small price to pay for ensuring the long-term viability of the crypto assets industry.

Where does this leave Altify?

Altify has always prioritised collaboration with traditional financial institutions. Our business is backed by a Johannesburg Stock Exchange (JSE) listed entity, Sabvest and our banking partner is Standard Bank. As a result of the latter, our proprietary online brokerage platform - and the related onboarding of our customers - is leveraging off the fiat deposit and withdrawal infrastructure of the largest bank in Africa.

At Altify, although we are committed believers in the revolutionary potential of crypto assets, we nevertheless recognise that the trend towards democratising access to finance is defined by giving clients said access to a broader spectrum of products and services. Accepting that reality means that Altify recognises the importance of entering the soon-to-be-regulated crypto market with the necessary registrations, licenses and approvals and with the backing of a robust integrated compliance back-end system.