South Africa’s Crypto Firms Face Registration Requirement or Risk Heavy Fine
In a move to regulate the cryptocurrency sector, crypto companies operating in South Africa will be required to apply for a license from the country’s Financial Sector Conduct Authority (FSCA) within a six-month period starting from June 1, 2023. Failure to register within the designated timeframe may result in a fine of $510,000 or imprisonment, as announced by the government.
While the new licensing regime has been welcomed by South African crypto firms, concerns have been raised about the potential impact of the fine on smaller companies and the potential deterrence for firms seeking to enter the market after the deadline. South Africa currently lags behind other African nations like Nigeria and Kenya in terms of crypto usage, ranking 30th on Chainalysis’ global adoption index last year. Regulatory authorities in the country, like those in other jurisdictions, have been striving to oversee the sector, which experienced a staggering crash in 2022 after reaching a global market capitalization of nearly $3 trillion in 2021.
In November 2020, the FSCA proposed that crypto should be treated as financial products and that companies offering crypto-related services should obtain a license. Following a consultation on the drafted legislation, the FSCA published the final declaration on the licensing requirement on October 19, 2022.
Nick Taylor, the head of public policy at Luno for Europe, Middle East, and Africa, described the FSCA’s classification as an “extremely positive step” for both the crypto industry and South Africans. He emphasized that the licensing requirements will enhance standards, protect consumers, and provide businesses with the confidence to invest, innovate, and generate employment opportunities.
The aim of the new regime is to safeguard consumers, a crucial aspect according to Mpumelelo Ndamane, CEO of South Africa-based crypto wallet provider Nuud Money. Instead of enforcing the requirement immediately after the declaration, South African regulators set June 1, 2023 as the start date for seeking approval. During the application process, companies that have applied for registration will be allowed to continue their operations while awaiting a decision from regulators. To sustain operations, these firms must demonstrate compliance with the country’s norms for financial service providers, including requirements such as operating with integrity, diligence, and providing requested information to the FSCA.
However, it should be noted that crypto derivatives services providers are not eligible for the exemption that permits companies to continue operating while their applications are being processed, as stated in the declaration.
Although the exact registration fees for crypto companies with the FSCA have not been specified, typical application fees range from 2,544 South African rand ($132) to 46,251 ($2,395), depending on the category of the firms. Crypto companies are expected to fall under category one, which incurs the lowest fee and applies to firms not fitting into any other categories. However, if applicants meet the criteria for multiple categories, they may need to submit several applications, explained Meiran Shtibel, associate general counsel at crypto custody platform Fireblocks.
The consequences of not applying for registration are more severe. Companies that continue operating without registering by the November deadline could face a fine of 10 million South African rand ($510,000), a prison sentence of up to 10 years, or both, as outlined in the declaration. Ndamane stated that a $510,000 fine would be unfeasible for Nuud Money, which is currently raising a seed round of $350,000. Shadrack Kubyane, co-founder of South Africa-based blockchain company Coronet, warned that while a 10 million South African rand fine might be a mere slap on the wrist for other financially robust sectors, it could “sink the entire operation” of a new industry like crypto in an emerging market.
It is worth mentioning that these fines are not specific to the crypto sector but are part of the existing penalties under the Financial Advisory and Intermediary Services Act (FAIS), which also applies to other financial firms. Shtibel noted that the fact that these fines are not tailored to the crypto sector may present a challenge.
The FSCA defended the regulations, stating that the benefits to the financial services industry outweigh the potential cost implications.
While some companies felt that the allocated timeframe to prepare for the new regime was insufficient, the FSCA settled on a six-month period instead of the requested eight months to two years. According to the declaration, extending the timeframe to two years was not justifiable.
Companies will still have the option to apply for registration after November. However, they will not be permitted to operate until their application has been approved by the regulator. Such an approach, similar to that adopted in the United Kingdom, has led some companies to exit the market in search of more lenient regulatory regimes. Ndamane expressed concerns that companies setting up closer to the deadline might find it challenging to meet the requirements in time to complete the necessary paperwork.
Insufficient time for preparation could prove to be a significant barrier for firms aiming to comply, emphasized Kubyane.
To obtain a license, crypto companies will be required to complete application forms that request information on their business activities, shareholders, and financial soundness, as stated in the declaration. Companies in the digital asset sector that apply within the allocated timeframe will only be required to cease operations if their application is rejected. The FAIS Act does not clarify whether rejected companies can reapply, but they do have the option to submit an application for reconsideration under existing regulations.
Ultimately, once the Conduct of Financial Institutions (COFI) bill becomes law, crypto asset-related financial services will fall under its purview, replacing the FAIS Act as an interim measure. The declaration indicated that the COFI bill includes consumer protection provisions.
Non-fungible token providers will not be required to register at this stage and will be addressed in a future framework, according to the declaration. Additionally, mining nodes and node operators will not be included in the registration requirement.
Kubyane expressed his desire for regulators to continue collaborating with the industry to establish appropriate measures for all crypto participants.
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Ndasi Tata is a Bitcoin entrepreneur from Cameroon, who holds an M.Sc in Blockchain and Digital Currency from the University of Nicosia. He is an advocate of Bitcoin in Africa and uses various social media platforms to promote his ideas and ventures. Tata has a background in state journalism and has established himself as a significant figure in the Bitcoin community.