Crypto Assets as Regulated Financial Products

12 Apr 2023

As with everything in modern times, the crypto asset environment is constantly changing. And, because it is so new, unregulated, and exists in the virtual world, it is open to abuse, mismanagement, and cybercrime. This is evident from the recent collapse of one of the largest global crypto exchanges, FTX, and the arrest of the FTX founder. Even before the collapse of FTX, it was clear that there was a need for regulation of crypto assets.

This is further evidenced by the recent SEC charges against, and fines paid by, a group of celebrities in the US, including Lindsay Lohan, rapper Akon, singer Ne-Yo, boxer and internet personality Jake Paul, and adult film performer Michelle Mason, who were accused of illegally promoting cryptocurrency companies to their millions of followers on social media.

On 19 October 2022, the Financial Sector Conduct Authority (‘FSCA’) took a much needed first step in the regulation of crypto assets in South Africa, by declaring crypto assets as a financial product in terms of the Financial Advisory and Intermediary Services Act (‘FAIS Act’).

What does this mean for the crypto asset market in South Africa?

Essentially, any business offering crypto asset-related services in South Africa will have to register, and will be subject to the same regulations, as a financial services provider, and will be under the watchful eye of the related regulators and ombuds.

Further, the Financial Services Providers Ombud now has jurisdiction over crypto asset service providers and their actions, and may request that any crypto asset service provider provides it with information regarding the crypto assets and related services that it provides to consumers. This will provide protection to consumers, and the ability for consumers to access and search all relevant information on the FSCA website beforehand to ensure that they are dealing with a licensed crypto asset service providers. Consumers will also have an avenue for recourse against non-compliant service providers.

Crypto asset service providers have until 30 November 2023 to register with, and apply for a licence from, the FSCA, and until 1 December 2023 to comply with (i) Chapter 2 of the Determination of Fit and Proper Requirements for financial services providers and their representatives, and (ii) Section 2 of the General Code of Conduct for Authorised Financial Service Providers and representatives, as though they are a licensed financial service provider, or a representative of a financial service provider pending the approval of their applications and licences being granted by the FSCA.

However, consumers must be reminded that this does not mean that crypto currencies will now be recognised as legal tender for making payments (only the South African Reserve Bank has the power to make determinations relating to legal tender), but rather allows for the FSCA to regulate those who are offering crypto asset related services. Consumers must still ensure that they do their homework, before transacting with a crypto asset service provider, even if it is registered and licensed.

Following the declaration by the FSCA, many crypto asset platforms in South Africa took a positive step toward self-regulating other aspects of crypto assets. On 23 January 2023, South Africa’s Advertising Regulatory Board (‘ARB’) along with leading crypto companies in South Africa took the initiative to self-regulate themselves and others within the crypto asset space. To give effect to this, the ARB inserted an additional provision in Section III of its Code of Advertising Practice (‘Code’).

The new provision requires the following from crypto asset service providers when they advertise their crypto assets:

1. Adverts must clearly state that investments in crypto assets can be very volatile and could result in the loss of capital.
2. Wording of the advert should communicate that risk, by including a statement along the lines of “Investing in Crypto assets may result in the loss of capital”, and the overall message of an advert must not contradict this wording.
3. The specific crypto asset product/service must be explained clearly to the intended target audience along with both the risks and the benefits of the product/services.
4. Calculations of rates of returns, projections or forecast must be clearly substantiated and communicated.
5. It must be stated and communicated that the historical or past performance of the product/services is not indicative of future performance.
6. Where influencers are used in the advertisement of a crypto asset product/services, such influencers may only share factual information and may not provide financial, trading, or investment advice, or the promise of a return or benefit.

Although joining the ARB, and being bound by its Codes, is voluntary, the ARB does have authority to consider, on behalf of its members, complaints in respect of advertisements published by non-members. If the ARB determines that specific advertising does not comply with its Codes, it may publish its determination, which may result in the National Association of Broadcasters refusing to accept (and flight) any non-compliant advertisement.

While the above shows that the crypto market is finally coming under some scrutiny, there is still a long way to go before there is adequate regulation of the crypto environment. If you believe that the FSCA declaration or the ARB’s new provision may affect you or your business, or just want to know more about crypto asset regulation, you can get in touch with our Technology, Media, and Telecommunications team, who can assist you with any queries.

Article sourced from Eversheds Sutherland.

See also:

• Clarity for crypto asset service providers
• South Africa takes steps to regulate crypto assets
• Crypto asset declared financial product
• Advertising watchdog gets its teeth back

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)