As of June 2024, the Financial Sector Conduct Authority (FSCA) has issued 138 crypto asset service provider (CASP) licences.
With the rolling out of licences, the discussion around the crypto industry shifts. Crypto regulation discussions now move from whether crypto assets should be regulated, to more detailed topics around “what should be regulated?” and “how should it be regulated?”
FSCA vs FIC rules
There are currently two pieces of legislation in relation to crypto assets that require some form of registration or approval.
On one hand, CASP financial service provider licences are issued by the FSCA in terms of the Financial Advisory and Intermediary Services Act. On the other hand, the Financial Intelligence Centre (FIC) requires CASPs to register as accountable institutions under the Financial Intelligence Centre Act.
Now that South Africa has decided the initial material question of whether it wants to regulate crypto assets, the discussion progresses. The regulatory debate now turns to other areas that require clarity.
One of the emerging discussions is whether all tokens (i.e., crypto assets) should be regulated in the same manner. In the crypto community, people often discuss the distinction between coins and tokens. Coins are understood to be digital currency, while tokens are digital assets developed or issued for specific projects and may have various uses.
Fungible vs non-fungible tokens
At a high level, you typically encounter fungible or non-fungible tokens in the digital asset market.
Fungible tokens are digital assets that are identical and interchangeable. In contrast, non-fungible tokens are digital assets that are unique and represent a specific item on a blockchain. However, to determine the type of token in question, one must analyse the rights attached to that token.
Put differently, what is the holder of a particular token entitled to? Unlike Europe’s Markets in Crypto-Assets Regulation (MiCAR), which categorises crypto assets within its regulatory regime, South Africa takes a different approach.
South Africa adopts a broad definition of crypto assets and does not currently provide any sub-categories. To add complexity, the two regulatory frameworks that cover crypto assets in South Africa do not use the same definition.
The definitions are similar, however, they are not identical. The crux of the matter is this: a person must assess whether they require a licence with the FSCA.
They must do so if they deal with a crypto asset that:
- is a digital representation of value;
- is not issued by a central bank;
- is capable of being traded, transferred, or stored electronically;
- is used for payment, investment, or other utility purposes;
- applies cryptographic techniques; and
- uses distributed ledger technology.
Similarly, a person must assess whether they need to register with the FIC as an accountable institution.
This applies if they deal with a crypto asset that:
- is a digital representation of value or perceived value;
- can be traded or transferred electronically within a community of internet users;
- is considered by a community of users as a medium of exchange, unit of account, or store of value and is used for payment or investment; but does not include a digital representation of fiat currency or a security as defined in the Financial Markets Act.
Future of crypto regulation
Due to the broad definitions set out for crypto assets in South Africa’s regulatory regime, both digital currency and digital assets (i.e., coins and tokens) potentially fall within these definitions.
These definitions are technology-neutral and intentionally broad. They aim to capture a wide range of digital assets and digital currencies. Since South Africa remains at the beginning of its crypto asset regulatory journey, further clarity is expected in the future.
Specifically, authorities will need to clarify which crypto assets and activities will be exempt from licensing requirements. In the meantime, the most pressing regulatory question for crypto industry players is clarity on South Africa’s stance on exchange control.
Lerato Lamola | Partner | Webber Wentzel | mail me |
