By Katherine Gibson – Deputy Commissioner (FSCA)
With almost 10% of South Africans estimated to own a crypto asset, and a projected 43% of the population expected to own one by the end of the decade, the need for deeper insight into the local market and appropriate regulation has never been more compelling.
Against this backdrop, the Financial Sector Conduct Authority (FSCA) recently commissioned a study into the market in South Africa to gain insight into the activities and business models of service providers in the crypto asset space. The significant growth in crypto assets in South Africa has been tracked by Singapore blockchain company Triple-A. However, we are not unique on the continent, as there are significant crypto asset users in both Nigeria and Kenya. In fact, Africa is emerging as one of the fastest-growing crypto markets in the world.
Our research reveals that some R520 million is traded each month via South African crypto asset service providers. The highest monthly transaction value reported in the study amounted to R8 billion and was traded during November 2022. In the context of the financial ecosystem these numbers might be relatively modest, but retail customers are driving the growth in this asset class by using them for transactions, speculation or investment.
This unprecedented access to assets is enabled by the proliferation of online trading platforms. For instance, some 50% of SA’s crypto asset service providers (CASPs) polled in our study are completely focused on the retail customer. This creates heightened risks around consumer protection, money laundering and other illegal activities, all of which create challenges in monitoring the stability of the financial system. International trends suggest that in the interests of protecting consumers, some risky products and services may have to be prohibited from being marketed to higher risk and more vulnerable customers.
In grappling with this issue, countries are faced with three choices: banning the assets outright (as is the case in China, Algeria, Egypt and Bolivia); recognising crypto as a legitimate asset due for regulating (as is the case in the USA, EU, Canada and Australia); or simply doing nothing at all, as is the case in Ireland. The vexing issue of regulation still echoes in the public domain, especially following the spectacular collapse and loss of billions of dollars for investors in the Bahamas-based FTX crypto exchange and the November conviction of its founder and former CEO Sam Bankman-Fried on various charges.
In South Africa, the regulatory route chosen was outlined when the Intergovernmental Fintech Working Group published a position paper in June 2021 which flagged 25 recommendations for crypto assets - access here. The paper also proposed the FSCA as the regulatory authority to license and supervise the crypto asset sector, which led to the official declaration in October 2022 of crypto assets as a financial product in terms of South African law. The consequence is that anyone who provides financial advice or other services relating to these assets must be registered as a financial service provider and must be licensed and subject to the FSCA’s oversight.
The commissioned study into the activities of crypto service providers in South Africa is intended to provide a factual framework to support the FSCA’s regulatory efforts to always balance protection of consumers without stifling innovation. The research invited crypto asset service providers to respond to a detailed questionnaire about their activities. It was found that:
- Most service providers in South Africa used unbacked crypto assets
- Most of the businesses operated an exchange; followed by advisory services and wallet custody services, amongst other activities.
- Most service providers (46%) are based in Cape Town (46%) followed by Johannesburg (33%), Tshwane (7%) and Durban (4%) in Durban. The remaining 10% were based offshore.
Alarmingly, the study also found that service providers often outsourced key services like “know your customer”, anti-money laundering and other core responsibilities to ensure the fair treatment of customers. Not only will these service providers need to comply with regulatory requirements relating to outsourcing, they must also ensure that all outsourcing is to licensed entities in order to mitigate the risk of “regulatory arbitrage”.
Interestingly, the research showed that while the business models of crypto service providers might be diverse, they effectively mirrored what traditional service providers expect for the technology. This leads us to a regulatory approach of “same activity, same risks, same rules” – an approach adopted by other regulators globally.
The FSCA will use the insights gained from the research to inform its risk-based supervision and regulatory framework in an attempt to mitigate the significant risks that an exploding crypto assets market characterised by volatility and high gearing poses to vulnerable customers.
To read the full Crypto Assets Market Study please click on the link below:
Crypto Market Study
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