Crypto companies planning to operate in South Africa will soon face a new licensing requirement imposed by the country’s Financial Sector Conduct Authority (FSCA), with a six-month deadline starting June 1. While this move has been welcomed by the industry for setting standards and protecting consumers, concerns have been raised about the consequences for firms that fail to register in time and the implications for smaller companies entering the market after the deadline.
In late 2020, FSCA proposed treating crypto as a financial product, requiring companies offering crypto-related services to obtain a license. Following consultations on the drafted legislation, the licensing rule was officially declared on October 19, 2022. It is seen as a crucial step toward boosting South Africa’s position in the global crypto adoption index, where it currently ranks 30th behind countries like Nigeria and Kenya.
The FSCA has given companies six months to apply for registration, during which they may continue operating while awaiting approval. To do so, they will need to demonstrate compliance with local regulations for financial service providers, including integrity and diligence in operations, as well as providing the FSCA with requested information. However, crypto derivatives service providers are excluded from this exemption.
It remains uncertain how much companies will need to pay to register with the FSCA. Application fees generally range from 2,544 South African rand ($132) to 46,251 rand ($2,395), depending on the category. Crypto companies are expected to fall under category one with the lowest fees. Nonetheless, the cost for failing to comply can be substantial: a fine of up to 10 million South African rand ($510,000), a 10-year prison sentence, or both.
Some companies argue that the six-month timeframe for application is insufficient, with requests previously made for extensions of up to two years. Nevertheless, the FSCA has not budged, asserting that a two-year period could not be justified. It has been cautioned that this tight deadline might hinder some firms from properly complying and completing the necessary paperwork.
While the new licensing requirement is regarded as beneficial to the financial services sector, the potential costs and tight deadlines pose significant challenges to smaller and newer crypto companies. Moreover, the non-specific nature of the penalties under the existing Financial Advisory and Intermediary Services Act, which also applies to other financial firms, may contribute to these concerns.
In the long run, crypto financial services will likely fall under the forthcoming Conduct of Financial Institutions (COFI) bill, which outlines consumer protections, instead of the current interim FAIS Act. However, it is essential that crypto firms and regulators continue to work together to develop appropriate measures for all market players, ensuring the sustainability and growth of the industry in South Africa.