South Africa’s Crypto Firms Required to Register or Face Severe Penalties
In an effort to regulate the cryptocurrency industry, crypto companies in South Africa must now seek a license from the Financial Sector Conduct Authority (FSCA) within six months starting from June 1, 2023. Failure to register within this timeframe may lead to a penalty of $510,000 or imprisonment, as declared by the government.
Although South African crypto firms have generally welcomed the new licensing requirements, there are concerns about the potential impact of the fine on smaller companies and the discouragement it may pose for new firms entering the market after the deadline. Compared to other African nations like Nigeria and Kenya, South Africa ranks 30th in terms of crypto usage based on Chainalysis’ global adoption index from last year. Regulatory authorities in the country, along with those in other regions, have been working towards overseeing the crypto sector, which faced a significant crash in 2022 after reaching a global market capitalization of nearly $3 trillion in 2021.
In November 2020, the FSCA suggested that cryptocurrencies should be treated as financial products and that companies providing crypto-related services should acquire a license. After seeking input through consultations on the proposed legislation, the FSCA officially announced the licensing requirement on October 19, 2022.
Nick Taylor, the head of public policy at Luno for Europe, Middle East, and Africa, expressed his approval of the FSCA’s classification, considering it a highly beneficial move for both the crypto industry and South Africans. He emphasized that the licensing requirements would improve standards, safeguard consumers, and instill confidence in businesses to invest, innovate, and create job opportunities.
The primary objective of the new regulations is to protect consumers, which is considered essential by Mpumelelo Ndamane, the CEO of Nuud Money, a South Africa-based crypto wallet provider. Rather than implementing the requirement immediately after the announcement, South African regulators have set June 1, 2023 as the starting date for companies to seek approval. Throughout the application process, companies that have applied for registration will be allowed to continue their operations while waiting for a decision from regulators. To sustain their operations, these firms must adhere to the country’s financial service provider standards, which include operating with integrity, diligence, and providing requested information to the FSCA.
It’s important to mention that crypto derivatives service providers are not eligible for the exemption that allows companies to continue operating during the application process, as stated in the declaration.
While the specific registration fees for crypto companies with the FSCA have not been explicitly mentioned, the usual application fees vary from 2,544 South African rand ($132) to 46,251 rand ($2,395), depending on the category of the companies. It is anticipated that crypto companies will fall into category one, which incurs the lowest fee and applies to firms that do not fit into any other categories. However, if applicants meet the criteria for multiple categories, they may need to submit multiple applications, as explained by Meiran Shtibel, associate general counsel at the crypto custody platform Fireblocks.
Not applying for registration can lead to more severe consequences. Companies that continue operating without registering by the November deadline may face a fine of 10 million South African rand ($510,000), a maximum prison sentence of 10 years, or both, as stated in the declaration. Ndamane expressed that a $510,000 fine would be impractical for Nuud Money, which is currently raising a seed round of $350,000. Shadrack Kubyane, co-founder of Coronet, a blockchain company in South Africa, cautioned that while a 10 million South African rand fine might be insignificant for financially robust sectors, it could have a devastating impact on the entire operation of a new industry like crypto in an emerging market.
It is important to note that these fines are not unique to the crypto sector but are part of the existing penalties outlined in the Financial Advisory and Intermediary Services Act (FAIS), which applies to various financial firms. Shtibel pointed out that the fines not being specifically designed for the crypto sector could pose a challenge. The FSCA, on the other hand, justified the regulations, stating that the advantages for the financial services industry outweigh the possible costs involved.
Some companies expressed their concerns about the given timeframe to prepare for the new regulations, considering it too short. The FSCA, however, decided on a six-month period instead of the requested longer timeframe of eight months to two years. The declaration stated that extending the timeframe to two years was not deemed reasonable or justified.
Companies will have the option to apply for registration even after November. However, they won’t be allowed to operate until their application is approved by the regulator. This approach, similar to the one used in the United Kingdom, has caused some companies to leave the market in search of more flexible regulatory environments. Ndamane raised concerns that companies starting near the deadline might struggle to meet the requirements and complete the necessary paperwork in time.
The limited time for preparation may pose a major obstacle for firms trying to meet the requirements, Kubyane highlighted. To obtain a license, crypto companies need to fill out application forms that ask for details about their business activities, shareholders, and financial stability, as stated in the declaration. Digital asset companies that apply within the given timeframe will only need to stop operations if their application is denied. The FAIS Act doesn’t specify whether rejected companies can reapply, but they can choose to submit a reconsideration application based on existing regulations.
In the future, when the COFI bill becomes law, financial services related to crypto assets will be regulated by it instead of the FAIS Act. The COFI bill includes provisions to protect consumers, as mentioned in the declaration.
According to the declaration, providers of non-fungible tokens (NFTs) do not currently need to register, but this will be addressed in a future framework. Furthermore, the registration requirement does not apply to mining nodes and node operators.
Kubyane expressed the importance of regulators working together with the crypto industry to create suitable measures for all participants in the sector.
Important: This article is intended solely for informational purposes. It should not be considered or relied upon as legal, tax, investment, financial, or any other form of advice.