Regulator brings clarity to status of crypto assets

Janice Geel

Werksmans Attorneys

In 2022, the regulator of financialservices inSA (FSCA) published a notice that extendsthe definitionof financial products to cover crypto assets

Thislong awaitedand simplechange hasfar-reaching consequences for parts of theinvestment fundssector andthe provisionoffinancial services. Soon no person may provide recommendations, guidance or proposals in relation to cryptoassets or to manage crypto assetsor provideany intermediaryser- vices in relation to such crypto assets without a licence.

Since 2002, alicence has been requiredby anyone who wishesto provide clients withadvice, discretionary management or intermediary servicesin relation to financial products . This hasmeant that most serviceproviders to investors and investment funds, includingthe managers, generalpartners, investment advisersand administrators, have required a licence to provide these services. Anyonewho wishes, for example, to give recommendations on what stocksa clientshouldbuy requires an FAIS licence”— a licence issuedunder the Financial Advisoryand Intermediary Services Act.

No suchlicence is requiredin relationtoassets thatare notdefined as financial products”— for example real estate. Prior to October 19 2022,anyone could,without any licence, provide advic e to clients in respect of crypto assets(which includes cryptocurrencies). Infact,a person could evenmanage a fund consisting of crypto currencies on behalfof clients without holding any licence and overSunday lunchmany a grandchild became a crypto adviser or manageras a result.

The government s Crypto Assets RegulatoryWorking Group produced apaper in June 2021 in which they took the position that financial services in relationto crypto assetsshould beregulatedto protect consumers from scams. Thishas nowbeen achieved throughthe notice published recently.What this means is that itis no longer possible toprovide recommendations, guidance or proposalsin relationtocrypto assetsor tomanagecrypto assetsor provideanyinter- mediary servicesin relation tosuch assetswithouta licence.

Consequently, many of the casualarrangements that have beenunregulated to date investment clubs investing intocrypto assets, for example will soon become regulated. Service providers tofunds holding crypto assets willnow also be regulated.

The change inthe law also represents an opportunity.

The FSCAis generally reluctantto grantlicencesto those who do not require them. Thischange therefore legitimises the crypto industry, paving the wave for more formal arrangements between investors,product issuers andservice providers andthe formationofmore structured fundsand similar relationships tothat which alreadyexist inrespectof more traditional assets. In anticipationof this changeto thestatus ofcrypto assets, the Werksmans Investment Fundsteam has been involvedin advising crypto assetmanagers and advisors, crypto product issuers and platformson the structuring oftheir businesses and their regulatory compliance obligations in SA.