FSCA strengthens crypto licensing and regulation

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JIMMY MOYAHA: Yesterday the Financial Sector Conduct Authority [FSCA] provided us with an update on the licensing and supervision that relate to crypto asset service providers (Casps).

For those who don’t know the background here, South Africa has gone on quite a journey to ensure that crypto asset service providers are regulated properly in line with South African legislation.

We are going to take a look at this in a bit more detail and try and get a sense of where we stand on licensing and supervision. I’m joined on the line for this conversation by the head of licensing at the Financial Sector Conduct Authority, Diketso Mashigo, to see if we can make sense of this.

Dr Mashigo, lovely having you on the show. Thanks so much for taking the time. Now the crypto licensing regime as we know it today is very different from when we initially started to recognise cryptos as assets.

Let’s go back to that time, perhaps, where there was a bit of grey and misunderstandings around how we deem cryptos. Kind of take us from there to where we are today and how this product is being dealt with from a licensing perspective.

DIKETSO MASHIGO: Thanks, Jimmy. It’s great to be on your show. Thanks for the invite and good day to your listeners as well.

Quite right. I think we’ve come full circle and have gone through a steep learning curve as well, as a regulatory agency, in terms of regulating cryptos.

But over the last couple of years we have refined our frameworks approach, and certainly from a licensing point of view, I think, have licensed about 310 Casps at the moment.

There have been some insights – some great insights – and some learnings. That has translated into improved frameworks, et cetera. The hands-on practical experience dealing with the guys face to face has obviously created a lot of value for us; and not just for us, but for the consumers we are protecting as well.

We are able to improve on the necessary guardrails that we think are necessary in rendering these services for the crypto asset service providers.

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So it’s a constant improvement and refinement as we go.

JIMMY MOYAHA: Diketso, you and I have had conversations around the importance of ensuring that the right institutions are licensed in the correct manner. Those who are part of the SAfm community know that I love doing our segments on Wednesdays with the FSCA, where we protect consumers by warning them about certain things.

I want to look at the framework for licensing and regulation in South Africa and on the African continent. I often brag that the FSCA is the best financial services regulator on the continent – and that’s a very biased view that I will continue to hold.

But Diketso, take us through the rigorous processes that go into licensing Casps, especially for an asset class that didn’t exist before this.

DIKETSO MASHIGO: Sure. When we first started off I think we grappled with the concept, and as we picked up the momentum through engagement and consultations we started getting a firmer grasp on what these things are, what crypto assets are.

Each time we did a meeting, a visit, et cetera, we would come back to the drawing board and refine [the] approach, look at the legislation.

To your point, our primary legislation that we apply to the Casps is largely principles-based. But there are rules built in, and there are specific requirements that the Casps need to comply with.

While that is the case, our approach varies, depending on the types of business we are looking at.

As an example, we may have an advisory business that’s applying for a licence, and we may have an exchange that’s applied for a licence. These are completely different business models and business cases, [with] different risks for clients.

As a result, we vary our approach and there are additional things we would ask when we look at an exchange or an online trading platform, for example.

But basically there are very strict requirements that these guys need to comply with, and we apply them across the board, across all of these FSPs [financial services providers], as I indicated. So something like competency is key.

There has to be a demonstration of competence – and competency comprises a couple of things. it comprises practical experience, and qualifications that are aligned to what the applicant is applying for.

As you would know, we have a predefined list of qualifications that recognise REs [regulatory examination requirements]; class of business requirements. So it’s quite strict.

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We look at things like operational ability – do they have the means to conduct the business that they want to conduct? Do they have the necessary processes, systems, risk-management frameworks, et cetera, that are commensurate with the type of business that they’re looking to conduct?

Financial soundness is another one. They have to demonstrate to us that they are financially sound and that they’ll be able to be so for the foreseeable future.

Those are the some of the things we look at and apply very, very rigorously to these guys.

You would have picked up from our media release there are probably, I think, 124 applications that have been voluntarily withdrawn.

Applicants would launch the applications, and we would have discussions with them. We would point out shortfalls and areas where they are not meeting the requirements, and give them the opportunity to go and rectify those things.

Now, that’s a big number. We’ve had one-on-one engagements with all of those 124 applicants.

We are not lenient; we apply the rules and the requirements as they apply strictly, to ensure that we get the right calibre of participants into the system. And not only that, but to protect financial customers as well.

I’ll leave it at that. You are very familiar with our requirements, and you know we apply them. We have not declined many – I think probably around 17, as per the release.

But those are obviously cases where there were material findings and material shortcomings that could not be resolved. The applicants were persistent in going through the process, and we declined them.

But in the future, once they’ve rectified those things together with the 124 entities I referred to, we will have a look at them again and we will have discussions with them to see how they’ve gone about doing that.

So every single applicant that applies with us either gets to have an on-site visit down at the offices, or there is a face-to-face conversation or a Teams call with them to go through their business model.

So it is a rigorous process.

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JIMMY MOYAHA: A rigorous and thorough process at that, Diketso. Before I let you go, can you take us through where we stand now in terms of the next steps going forward?

I know that the regulatory exemption that we had in place before we defined crypto assets will now be falling away and we have clearly defined that crypto assets are financial products.

I imagine this will be further emphasised when the Conduct of Financial Institutions [Cofi] Bill comes out. But where do we stand now on cryptos moving forward?

DIKETSO MASHIGO: So crypto for now and until we get to Cofi, which is our future framework, the Fais [Financial Advisory and Intermediary Services] Act will continue to apply to the Casps.

The exemption that you refer to, which is the regulatory exams [REs] exemption that we had granted the Casps and they can be provisional initially – that we have not renewed, so it has fallen away.

It has now become a full-fledged requirement. So anybody that’s applying or anybody that has been granted a Casp licence now has to make sure that they write those REs and they pass those REs, otherwise the normal process of enforcement kicks in for non-compliance with those regulations. So that’s where we are.

And part of the work that’s going on – and not necessarily within the fiscal space – we participate in that space, and the WG [working group] space.

We are looking at things like tokenisation. We’re looking at things like stablecoin arrangements, et cetera, and how we better regulate these business cases going forward and the entities that are participating in these two areas going forward.

So that’s going to be the next significant part of the work that’s going to go on in the coming months. Thanks, Jimmy.

JIMMY MOYAHA: Regulation and compliance-focused and aimed at protecting consumers and ensuring that there are safe operating conditions for those who wish to provide financial services in South Africa. This is why we love the FSCA.

Thank you so much to the head of licensing at the FSCA, Diketso Mashigo, for joining us to provide us with an update on where we stand on crypto assets and their regulation.

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