The National Treasury is putting the final touches to a bill that will regulate how consumers and the financial system deal with trading in cryptocurrencies and similar assets, but without stifling innovation.
Financial Sector Conduct Authority (FSCA) commissioner Unathi Kamlana said the Conduct of Financial Institutions (CoFI) Bill would allow regulators to license new categories of financial services that the existing regulatory framework might not have made provision for.
The bill seeks to establish a framework for new financial products and services along with a code of conduct for people trading in newer asset classes such as crypto assets. It requires traders to clearly explain the terms, fees, and risks associated with the asset classes they trade to their clients.
Kamlana, speaking at North-West University this week, said the emergence of crypto assets and blockchain technology had revolutionised access to financial services for people in South Africa and around the world. As a result, regulators needed to protect the financial system and consumers in a way that did not stifle innovation in the sector.
“Regulation ... is a necessary mechanism to ensure stability, to protect consumers, to maintain the integrity of the financial system. While innovation drives progress and offers numerous benefits, it also brings new risks and challenges that need to be managed effectively. This is where the case for regulation becomes compelling.”
Kamlana said crypto assets and blockchain technology had not only created a new asset class in South Africa but also driven investment in new sectors such as decentralised finance and blockchain infrastructure.
The South African Banking Risk Information Centre reported a 24% increase in digital banking fraud between 2022 and 2023
“For example, countries which have embraced blockchain technology, such as Switzerland, with its own blockchain and crypto hub equivalent to Silicon Valley in the US, have seen a rise in start-up activity and investment, positioning themselves as leaders in financial innovation.
“Here at home, since we declared crypto assets as financial products under the existing Financial Advisory and Intermediary Services Act, we have received over 300 applications from potential crypto asset providers. Out of these applications, we have processed and approved just over a hundred.”
However, he said, the jury is out on the true value-creation potential of these innovations compared to traditional forms of finance, especially when their high-risk profile is taken into consideration. But he said South Africa needed to prioritise financial service inclusion for its unbanked population.
The South African Banking Risk Information Centre reported a 24% increase in digital banking fraud between 2022 and 2023, resulting in gross losses escalating from R440m to R740m year-on-year.
“The lack of transparency in complex financial products and services is another significant risk which underscores the need for regulation. Without adequate regulatory oversight these products could pose substantial risks to consumers who may not fully understand the implications of their financial decisions. This issue is particularly concerning in the crypto assets market space,” Kamlana said.
While the CoFI bill is being processed, the intergovernmental fintech working group including FSCA, the Reserve Bank, the National Treasury, the Competition Commission and the National Credit Regulator, would create a regulatory guidance unit and innovation accelerator to eliminate barriers to entry for innovative fintech start-ups.
Kamlana said regulation of the financial sector was doubly important as South Africa continued its efforts to be removed from the Financial Action Task Force’s (FATF) greylist for countries vulnerable to money laundering, terror financing, and proliferation — the funding of activities that facilitate the trade of nuclear, biological or chemical weapons.
The FATF meeting met this week in Singapore and announced on Friday that South Africa would remain on the greylist.
“We’ve got two subsequent periods of reporting between now and February 2025 when it will be decided whether we are getting off the greylist,” Kamlana said.
In its latest annual report released this week, the Reserve Bank said it would support the FSCA and the Financial Intelligence Centre in their efforts to regulate crypto assets.
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