DealMakers - Q3 2023 (released November 2023)
FinSurv’s concerning silence on the regulation of crypto assets
by Bright Tibane and Andani Thovhakale | Bowmans
Despite the Financial Sector Conduct Authority’s (FSCA) declaration and regulation of crypto assets as a financial product – in terms of the Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS) – late last year, the Financial Surveillance Department (FinSurv) of the South African Reserve Bank (SARB) has still not shared its position regarding crypto assets.
Crypto assets undoubtedly qualify as capital in terms of Exchange Control Regulations issued under the Currency and Exchanges Act 9 of 1933 (Exchange Control Regulations). Regulation 10 of the Exchange Control Regulations prohibits the transfer or exportation of capital or any right to capital from South Africa, unless such transfer or export has been approved by FinSurv (per its authority delegated by the National Treasury).
FinSurv has indicated that this prohibition extends to transactions where an individual purchases crypto assets in South Africa and uses them to externalise any right to capital.
The qualification of crypto assets as ‘capital’, and therefore Regulation 10’s application to crypto assets, does not mean that cross-border transactions pertaining to crypto assets are prohibited. It simply means that South African residents require exchange control approval from FinSurv to transfer crypto assets or rights to crypto assets offshore or cross-border.
A challenge is FinSurv’s position that it does not approve crypto asset-related transactions because such transactions are currently not reportable on the FinSurv Reporting System.
FinSurv’s position does not only restrict the transfer of crypto assets or right to crypto assets offshore, but it also restricts the offshore transfer of actual money to purchase crypto assets offshore. The only exception to this restriction is that individuals (natural persons) are permitted to transfer money using their annual allowances (R10 million foreign investment allowance and R1 million foreign discretionary allowance) for purposes of buying crypto assets offshore.
Corporates and institutional investors (including asset managers or discretionary financial services providers licensed under FAIS) are restricted from using their foreign investment allowances to transfer money offshore to buy crypto assets.
The above stance was sensible at the time when it was made, as it was understandably driven by the fact that there were no dedicated laws or regulations specifically governing the use of crypto assets in South Africa.
However, it has now been almost a year since the FSCA declared crypto assets as regulated financial products in South Africa, making the providers of crypto asset-related services subject to the FAIS regulatory framework, and FinSurv has yet to communicate to the public its response to the regulatory developments from an exchange controls perspective.
This begs the question whether FinSurv will update its Reporting System to allow Crypto Assets Service Providers (CASPs), regulated as financial services providers under FAIS, pursuant to the declaration of crypto assets as financial products, to be involved in transactions where crypto assets or the right to crypto assets are directly or indirectly exported from South Africa.
Another question is whether FinSurv will allow institutional investors, particularly CASPs regulated under FAIS, to transfer funds that they hold on behalf of their clients (assets under management) for purposes of buying crypto assets offshore.
Sooner rather than later, FinSurv will have to communicate its plans to address what one can consider to be a regulatory disconnect / lacuna with regards to crypto assets (regulation of crypto assets under FAIS v exchange controls).
Tibane is a Partner, and Thovhakale a Candidate Attorney | Bowmans South Africa.