130 crypto groups applied for SA licences

South African retail investors who speculate in crypto assets should ensure that the platform they use to buy and sell digital tokens like bitcoin or ethereum are licensed with the Financial Sector Conduct Authority (FSCA) or risk being scammed.

The financial conduct regulator released its South African crypto market study in which it said it remains of the view that crypto asset-related activities pose significant risks to financial customers, particularly at the retail or consumer level. While a legal framework is in place the FSCA said it was not necessarily tailored around crypto assets services providers and the specific risks they posed, highlighting the need for South Africa to further refine its regulatory framework to address crypto-specific risk.

"For the retail consumer, for the retail market, you must make sure that the financial product service provider that you’re conducting business with it must be licensed and authorised by the FSCA," Katherine Gibson, deputy commissioner of the FSCA, told media in a webinar. "If it is not, you run a really big risk of being scammed. That risk is amplified in the digital space and we see so much of it in the crypto space as well."

The FSCA said it had so far received 128 applications from crypto asset financial service providers to be licensed and brought under its regulatory auspices as of Thursday, the final deadline for such companies to do so. While the regulator said almost all South African providers of financial services linked to crypto assets claimed to disclose the risks related to their activities it said there was a need for it to more closely monitor whether these warnings were effective.

Regulation

The FSCA officially declared crypto assets a financial product in terms of the Financial Advisory and Intermediary Services Act (FAIS) in October 2022. That declaration put in place a regulatory and licensing regime meaning any individual or business that provides financial advice or intermediary services related to crypto assets is required to register as a financial service provider (FSP).

However, given the FSCA’s concerns around crypto asset-related activities it issued an information request in December 2022 asking crypto service providers to provide it with information on their businesses and business practices. This was done to assist the regulator in its development of a more comprehensive licensing, supervision and regulatory frameworks for crypto asset service providers.

"I think this work will be critical in helping South Africa get off the greylist," said Gibson. "I know there are many pillars to that battle but this is a really important one."

The FSCA said 47 crypto asset FSPs responded "substantively" to its information request allowing it to compile a report on the sector’s activities in South Africa. Its findings show that 60% of crypto asset FSPs in South Africa make use of unbacked crypto assets, followed by stablecoins (26%) such as USD Coin and Binance Coin as well as security tokens (7%) and NFT tokens (4%).

Cape Town leads the way in head office location with 46% of crypto asset FSPs having their headquarters in the Mother City followed by Johannesburg (33%) and Pretoria (7%). The majority of crypto asset FSPs earn their revenue through trading fees (38%) followed by administration fees (25%) and advice (20%).

Revenue

Interestingly, a significant proportion (38%) of crypto asset FSPs earn less than R1 million in annual revenue with 46% making revenue of between R1 million and R50 million. About 10% of crypto asset FSPs derive their income from both regulated and unregulated financial services.

The FSCA report also cited a separate 2022 study by Singapore-based blockchain company Triple A, which found that more than 5.8 million South Africans, or about 9.44% of the population, own crypto assets. South Africa’s crypto asset penetration is expected to grow further with the study indicating that 43% of the country’s total population will be using the digital tokens by 2030.

The FSCA report also indicated that 86% of South Africa’s adult population had heard of crypto assets while 83% of crypto asset owners in the country were aged between 18 and 44 years. The report said 46% of South African crypto asset owners hold a bachelor’s degree or higher.

The FSCA report also flagged that the coming Conduct of Financial Institutions Bill (COFI), which constitutes the future consolidated legal framework governing the conduct of all financial institutions, is expected to include further regulatory developments on crypto assets. Financial services related to crypto assets will likely be included in the licensing activities under the COFI Bill, potentially expanding the scope of crypto asset activities currently regulated under the FAIS Act, the FSCA said.-Fin24