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THE INTERGOVERNMENTAL Fintech Working Group (IFWG) published a position paper on crypto assets on Friday that provides a framework for how the assets will be regulated in future in a “phased and structured manner”.
The National Treasury initially issued a statement on crypto assets in 2014 as a joint initiative with the South African Reserve Bank (SARB), the Financial Services Board (now the Financial Sector Conduct Authority), the South African Revenue Service and the Financial Intelligence Centre.
The statement warned about the risks associated with the use of crypto assets for the purpose of transacting or investing, and advised users to apply caution in this regard.
The cautionary tone was adopted because there was no specific legislation for the use of crypto assets, and at the time there was no legal protection or recourse for users of or investors in crypto assets.
Subsequently, many thousands of South African investors have lost money in crypto-currency scams.
“It is, however, reiterated that, with or without regulation, crypto assets remain inherently risky and volatile, and consumers’ chances of incurring financial losses through investing in crypto assets remain high,” the IFWG said on Friday.
Daily crypto-asset trading values in South Africa exceeded R2 billion for the first time in January, providing some anecdotal evidence that significant value might be moving into crypto assets without the SARB’s Financial Surveillance Department having oversight over such flows, or the requisite powers to direct market behaviour appropriate for South Africa, the IFWG said.
The IFWG’s position paper makes 25 recommendations on how to bring crypto assets into the South African regulatory universe.
The IFWG said the decision to regulate crypto assets did not signal the endorsement of crypto assets by the government, the South African regulators and/or individual IFWG members, but it was aimed at promoting “responsible innovation”.
They said the decision formally to bring crypto assets within the domestic regulatory remit was driven by a combination of market developments, including strong retail interest in crypto assets and the need to protect consumers to the extent possible; the growing challenge by regulators to maintain line of sight of crypto asset-related activities and the associated compulsory reporting and information requirements; and requirements imposed by international standard-setting bodies such as the Financial Action Task Force and the Basel Committee on Banking Supervision.
The IFWG said because there was no central intermediary, issuer or ledger-keeper for crypto assets, consumers had no recourse to any authority or entity to address user errors (for example, using the wrong crypto asset address, or sending Bitcoin to an Ethereum address).
The already high risks were compounded by scam activity, while crypto asset marketing material was often strongly biased towards highlighting only the potential upside of crypto assets, with little or no consideration of the massive potential downside.
In addition, the crypto asset ecosystem was evolving, and developments continued to challenge the applicability of existing legislation and regulations to emerging activities.