Crypto Asset Registration
From Compli-Serve
The Financial Sector Conduct Authority (FSCA) has announced that the period for crypto asset Financial Service Providers (FSPs) to apply for authorisation will open on 1 June 2023. The FSCA has also made available updated licensing application forms to accommodate crypto asset FSPs. The FSCA forms that need to be completed and submitted include FSP 2, FSP 4C, FSP 4D, and FSP 5, which have been amended to include the crypto asset product sub-category.
To assist crypto asset FSPs in the application process, the FSCA has published all 16 licence forms in a single PDF file, along with FAIS Notice 29 of 2023, which repeals and replaces FAIS Notice 1 of 2018. Interested parties can download the new licence form pack from the FSCA’s website. The PDF includes instructions on the application and submission process. Alternatively, the forms can be downloaded individually in PDF or Word format from the FSCA website.
Applicants are required to pay an application fee based on the category of licence applied for, as well as the number of key individuals (KIs) and representatives associated with the FSP. The window period for crypto asset FSPs to apply for authorisation extends from 1 June to 30 November of this year.
It is important to note that any entity engaged in rendering financial services related to crypto assets as a regular feature of their business can continue to do so without being licensed under section 7(1) of the Financial Advisory and Intermediary Services (FAIS) Act, provided they submit a licence application between 1 June and 30 November. This exemption was granted by the FSCA when it declared crypto assets as financial products in October 2022. The exemption remains valid until the licence application submitted within the window period is approved or declined. If a crypto asset FSP fails to submit a licence application within the specified period, the exemption will lapse, and the business will be required to cease providing crypto asset-related financial services.
During the licence application process, crypto asset FSPs must demonstrate that they meet the ‘fit and proper’ requirements outlined in the Determination of Fit and Proper Requirements for FSPs, including on supervision. These requirements encompass factors such as honesty, integrity, good standing, competence (qualifications and experience), continuous professional development, operational ability, and financial soundness. Compliance with the Determination and the General Code of Conduct for Authorised FSPs and Representatives is essential, as these regulatory instruments govern financial and intermediary services in South Africa, subject to the FAIS Act.
Failure to obtain authorisation and operate without a licence constitutes an offense under the FAIS Act, with penalties including fines of up to R10 million or imprisonment for up to 10 years.
Additionally, the Financial Intelligence Centre Act (FICA) imposes obligations on crypto asset service providers (Casps), who are now classified as accountable institutions according to the amendments to Schedule 1 of FICA. Casps are defined as individuals or entities engaged in activities such as exchanging crypto assets for fiat currency, conducting transactions involving the transfer of crypto assets, or providing financial services related to the offer or sale of crypto assets. Crypto asset FSPs falling under this definition must register with the Financial Intelligence Centre (FIC) using the online registration system called goAML. It is important to note that FICA does not include transitional provisions, meaning the requirement for Casps to register as accountable institutions became effective on 19 December 2022.
In addition to FIC registration, accountable institutions must fulfil various regulatory obligations, including identifying and verifying new clients, conducting ongoing due diligence for existing clients, appointing a compliance officer, providing training on FICA compliance and money laundering, conducting business risk assessments, and formulating and implementing a risk management and compliance programme.
To determine if a licence application is necessary, it is crucial to understand the definition of ‘crypto asset’ as outlined by the FSCA. A crypto asset is defined as a digital representation of value that can be traded, transferred, or stored electronically by individuals or legal entities for payment, investment, or other forms of utility. It utilises cryptographic techniques and distributed ledger technology. It’s important to note that crypto assets are not considered legal tender in South Africa, and the term ‘crypto assets’ is intentionally broad and technology-neutral.
Activities related to crypto assets that do not require a licence include crypto asset mining (verifying and adding transactions to the blockchain using computers or specialised hardware), node operation (keeping a version of the blockchain and broadcasting transactions), and financial services related to non-fungible tokens (NFTs) (crypto assets associated with unique identification and real-world objects). However, the FSCA’s view on NFTs may change in the future, potentially requiring licensing for NFT providers.
It should be noted that traders in crypto asset derivatives have always been required to be licensed under the Financial Markets Act (FMA). Crypto asset derivatives, which are contracts whose value depends on the value of one or more underlying crypto assets, fall under the definition of a derivative instrument and are subject to the FAIS Act.
While crypto asset FSPs have been granted an exemption to operate temporarily without a licence, there are conditions attached to this exemption. These include immediate compliance with the honesty, integrity, and good standing requirements outlined in the Determination of Fit and Proper Requirements and compliance with the General Code of Conduct. Full compliance with the General Code of Conduct must be achieved by 1 December 2023. Additionally, crypto asset FSPs must provide the FSCA with relevant information regarding their financial services activities upon request. Failure to comply with these conditions may result in the withdrawal of the exemption.
The FSCA has published the final notice outlining the exemptions from the General Code of Conduct and the Determination of Fit and Proper Requirements that apply to licensed crypto asset FSPs, as well as their key individuals and representatives. The notice provides guidance on various requirements, including qualification recognition, guarantees or indemnity insurance, regulatory examinations, and continuous professional development (CPD) obligations. Crypto asset FSPs, KIs, and representatives are required to hold qualifications recognised by the FSCA.
Furthermore, licensed crypto asset FSPs are exempt from the requirement to have guarantees, professional indemnity insurance, or fidelity insurance cover specifically for the provision of financial services related to crypto assets. However, this exemption does not apply to other financial products that the FSP may be licensed for.
Crypto asset FSPs and their KIs are also exempt from completing and passing regulatory examinations for 18 months from 11 May 2023, as specified in the FAIS Notice. Additionally, specific provisions apply to crypto asset supervised representatives, who are subject to different requirements based on their previous appointments and the nature of their financial services activities.
Regarding CPD requirements, licensed crypto asset FSPs, KIs, and representatives are obligated to complete a minimum of six hours of CPD activities related to crypto assets per CPD cycle, in addition to the general CPD requirements. Crypto asset supervised representatives have specific timeframes within which they must fulfil CPD obligations, depending on their qualifications and appointment dates.
Crypto asset service providers must also consider their obligations under the Financial Intelligence Centre Act (FICA). They are now classified as accountable institutions and must register with the Financial Intelligence Centre (FIC) using the goAML online registration system. Compliance with FICA requirements, such as client identification and verification, ongoing due diligence, appointment of a compliance officer, and implementation of a risk management and compliance programme, is crucial for FICA compliance.
The definition of crypto assets encompasses a wide range of activities related to digital representations of value, including trading, investment, and payment. Certain activities, such as crypto asset mining, node operation, and financial services related to non-fungible tokens (NFTs), do not currently require a licence, but this may change in the future.
Crypto asset derivatives, on the other hand, have always required licensing under the Financial Markets Act (FMA) and the FAIS Act.
Licensed crypto asset FSPs, their key individuals, and representatives are subject to specific conditions and exemptions outlined by the FSCA. These include compliance with the honesty, integrity, and good standing requirements, adherence to the General Code of Conduct, provision of relevant information to the FSCA, and fulfilment of continuous professional development (CPD) obligations specific to crypto assets.
The final notice published by the FSCA provides guidance on qualification recognition, exemptions from guarantees or indemnity insurance, temporary exemptions from regulatory examinations, and CPD requirements. It is important for crypto asset FSPs, key individuals, and representatives to review and comply with the specific requirements and exemptions applicable to them.
South Africa’s Financial Sector Conduct Authority (FSCA) has taken a significant step in regulating crypto assets, declaring them a financial product under the Financial Advisory and Intermediary Services Act (FAIS) in November 2022. As the industry undergoes a transformative shift, the FSCA has now released the licensing requirements for financial service providers (FSPs) operating in the crypto asset space.
Licensing Requirements for FSPs
To ensure compliance with the FAIS Act and facilitate a regulated environment, FSPs providing financial services in relation to crypto assets or those intending to offer such services in an advisory/administrative capacity, are now required to obtain the relevant license.
Only the following individuals or entities need not register:
Individuals or entities engaged in the mining of crypto assets are not required to obtain a licence under the FAIS Act.
Financial Services for Non-Fungible Tokens (NFTs).
Node operators.
Crypto Asset Derivatives: financial services provided in relation to crypto asset derivatives are already subject to the requirements of the FAIS Act, and FSPs offering these services must comply accordingly.
The licensing requirements apply to FSPs engaged in other financial services related to crypto assets beyond the exemptions mentioned above.
More on Licensing
As South Africa embraces the regulation of crypto assets under the Financial Advisory and Intermediary Services Act (FAIS), financial service providers (FSPs) seeking to obtain the relevant licence must begin the process to ensure compliance. To initiate the facilitation of the licensing effort, we call upon clients who intend to obtain the licence to reach out to Compli-Serve via email at compliance@compliserve.co.za. Here, we highlight the importance of taking this crucial step and initiating the licensing process.
Why Initiate the Licensing Effort?
Compliance with Regulatory Framework – By obtaining the required licence, FSPs demonstrate their commitment to complying with the FAIS regulations governing crypto assets. Initiating the licensing effort is the first step towards ensuring compliance with the regulatory framework set forth by the FSCA.
Facilitating a Smooth Transition – Initiating the licensing process early allows FSPs to ensure a smooth transition into the comprehensive regulatory regime. By proactively starting the process, FSPs can allocate sufficient time and resources to meet the requirements and deadlines set by the FSCA.
How to Commence the Licensing Effort
To initiate the facilitation of the licensing effort, FSPs intending to obtain the licence should follow these steps:
Contact Compli-Serve – Send an email to compliance@compliserve.co.za, expressing your intention to commence the licensing process. Provide your details and any relevant information about your crypto asset services.
Prepare the Documentation – Compli-Serve will outline the necessary documentation you need to prepare for the licensing application. This may include financial statements, compliance policies and procedures, risk management frameworks, and other relevant information.
Submit the License Application – Once you have gathered the required documentation and complied with the necessary regulatory standards, submit your licence application to the FSCA within the designated timeframe. Compli-Serve will assist you in ensuring that your application is complete and accurate.
Initiating the licensing effort is a crucial step for FSPs operating in the crypto asset space in South Africa. By reaching out to Compli-Serve via compliance@compliserve.co.za, FSPs can commence the facilitation of the licensing process, ensuring compliance with the FAIS regulations. Engaging professional expertise and following the guidance provided by Compli-Serve can contribute to a smooth transition into the comprehensive regulatory regime and demonstrate a commitment to responsible and compliant crypto asset services. Don’t delay — take the first step towards obtaining your licence today.
Implications for FSPs
The introduction of licensing requirements for FSPs operating in the crypto asset space carries significant implications:
Regulatory Compliance – FSPs must ensure adherence to the licensing requirements outlined by the FSCA. This includes meeting compliance standards, maintaining proper documentation, and implementing internal controls to protect investors and consumers.
Consumer Protection – The licensing regime aims to enhance consumer protection within the crypto asset industry. FSPs that obtain the relevant license demonstrate their commitment to transparency, accountability, and ethical business practices, which can foster trust among clients.
Industry Professionalism – By requiring licensing, the FSCA promotes industry professionalism and encourages FSPs to uphold the highest standards of integrity and competence. This can contribute to the overall growth and maturity of the crypto asset market in South Africa.
Enhanced Market Reputation – FSPs that obtain the necessary licence can build a strong reputation in the market, distinguishing themselves as compliant and trustworthy service providers. This can attract a broader customer base and potential business partnerships.
The release of licensing requirements for FSPs operating in the crypto asset sector marks an important milestone in South Africa’s regulatory framework. FSPs must familiarise themselves with the specific licensing requirements and ensure compliance to operate legally and responsibly.
By obtaining the relevant licence, FSPs demonstrate their commitment to consumer protection, industry professionalism, and market integrity. The regulated environment aims to foster trust, encourage responsible practices, and contribute to the development of a robust and sustainable crypto asset ecosystem in South Africa.