A crypto asset is a digital representation of value that is not issued by a central bank but is traded, transferred and stored electronically by natural and legal persons for payment, investment and other forms of utility, and applies cryptography techniques in the underlying technology.
In addition, Crypto Assets are applications that are associated with blockchain technology.
One of the most pertinent reasons why crypto assets are challenging to regulate is because they operate at a global level and could potentially be classified under various economic functions.
It has been a focus in the media for some time; as a result, The Position Paper on Crypto Assets was published by National Treasury in April 2020 (the "Paper").1This paper made many suggestions on how the regulatory framework in South Africa should be updated.
According to the Paper:
"The danger of a fragmented international regulatory approach and national authorities reacting with varying degrees of regulatory stringency is that crypto asset-related activities might potentially migrate towards jurisdictions that are regulated less stringently in a 'race to the bottom' as crypto assets are borderless. A coordinated global approach is therefore vital.
Similarly, if there is no coherent regulatory approach at a national level, regulatory arbitrage could challenge the effectiveness of regulatory actions. Crypto assets are borderless, and their anonymous and pseudonymous nature increases the difficulty of implementing the correct regulatory and monitoring tools."
These suggestions include:
That entities providing crypto-asset services should be termed A Crypto Asset Service Provider or "CASPs" and that the following entities and activities are to be classified within CASP functions (diagram courtesy of the Paper):
|
Crypto asset service provider |
Services offered |
|
Crypto asset trading platform (or any other entity facilitating or providing the mentioned services) |
These are CASPs providing the following: · intermediary services for the buying and selling of crypto assets; · the trading, conversion or exchange of fiat currency or other value into crypto assets; · the trading, conversion or exchange of crypto assets into fiat currency or other value; · the trading, conversion or exchange of crypto assets into other crypto assets; and · remittance services using crypto assets as a means of facilitating credit transfers (remitter or value transfer provider). |
|
Crypto asset vending machine provider |
Providing intermediary services for the buying and selling of crypto assets (including any of the above-mentioned services). |
|
Crypto asset token issuer |
These are CASPs conducting token issuances, including: · ICOs; · the issuance of stablecoins; · the issuance of global stablecoins; and · the participation in, and provision of, financial services related to an issuer's offer or sale of crypto assets. |
|
Crypto asset fund or derivative service provider |
These are entities offering investment funds or derivative products with crypto assets as the underlying asset. |
|
Crypto asset digital wallet provider (custodial wallet) |
These entities offer a software program with the ability to store private and public keys that are used to interact with various digital protocols which enable the user to send and receive crypto assets, with the additional ability to monitor balances and execute control over the customers' crypto assets. |
|
Crypto asset safe custody service provider (custodial service) |
These entities safeguard, store, hold or maintain custody of crypto assets belonging to another party. |
In addition, the following suggestions were made:
- That Schedule 1 to the Financial Intelligence Centre Act 38 of 2001 as amended ("FIC Act") be updated by adding CASPs to the list of accountable institutions.
- The Financial Intelligence Centre ("FIC") should assume the supervisory role and duties to ensure compliance by those CASP business entities that would become accountable institutions with the requirements of the FIC Act.
- Crypto assets remain without legal tender status and not be recognised as electronic However, the adoption of a uniform definition of crypto assets within the South African regulatory framework, if required and appropriate.
- The Financial Surveillance Department of the South African Reserve Bank ("SARB") should assume the supervisory and regulatory responsibility for the monitoring of illicit cross-border financial flows in respect of crypto asset
Conclusion
The framework would give much-needed clarity in regards to the framework; however, the financial nature or classification would need to be carefully considered. We will be watching for developments and will keep you informed. Contact SchoemanLaw for any technology law needs.
Footnote
http://www.treasury.gov.za/comm_media/press/2020/20200414%20IFWG%20Position%20Paper%20on%20Crypto%20Assets.pdf: accessed 20 June 2020
Originally published July 2, 2020.
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