South Africa ranked 30 on Chainalysis’ global adoption index last year, and is behind other African countries like Nigeria and Kenya in terms of crypto use. But regulators in the country, like those elsewhere, have been trying to supervise the sector, which hit close to $3 trillion in global market capitalization in 2021 before crashing spectacularly in 2022.
In November 2020, South Africa’s FSCA proposed crypto should be treated like financial products, and that firms offering crypto-related services must apply for a license. Following a consultation on the drafted legislation, on October 19, 2022, the FSCA published the final declaration on the licensing requirement.
"This is an extremely positive step for both the crypto industry and South Africans,” Said Nick Taylor, head of public policy at Luno for Europe, Middle East and Africa. Luno, like CoinDesk, is owned by the Digital Currency Group.
“The licensing requirements that will flow from the FSCA’s classification will drive up standards, protect consumers, and give businesses the certainty to invest, innovate and create jobs,” Taylor added.
The regime is being set up to protect consumers and that is really important, Mpumelelo Ndamane, CEO of South Africa-based crypto wallet provider Nuud Money, told CoinDesk.
Instead of enforcing the requirement immediately following the declaration, South African regulators set the start date for seeking approval on June 1.
Firms that apply for registration in the designated six months will be allowed to continue operating while regulators make a decision on approval. To continue operating, firms will have to show they comply with the country's norms for financial service providers, including conditions that firms should operate with integrity, be diligent and provide the FSCA with information they request.
However, crypto derivatives services providers do not qualify for the exemption, which allows companies to keep operating while applications are being processed, the declaration said.
The cost of not applying
It's not yet clear exactly how much crypto companies have to pay to register with the FSCA but the application fees that companies usually pay the regulator usually range from 2,544 South African rand ($132) to 46,251 ($2,395), depending on the category firms fall under.
Crypto companies will likely fall under category one, which has the lowest fee, and is for firms that don't fit into any of the other categories. But if applicants fall under multiple categories, they may have to do several applications, Meiran Shtibel, associate general counsel at crypto custody platform Fireblocks said.
The cost of not applying is much heavier.
If crypto companies do not apply to register, but continue operating after the November deadline, they could face a fine of 10 million South African rand ($510,000), up to 10 years in prison, or both, the declaration said.
Nuud Money is raising a seed round of $350,000, and a $510,000 fine would be unfeasible for it to pay, Ndamane said.
A 10 million South African rand fine may be a slap on the wrist for other capital-rich financial sectors, but for a new industry like crypto in an emerging market, a fine like that could "sink the entire operation," Shadrack Kubyane co-founder of South Africa-based blockchain company Coronet told CoinDesk.
The fines are not specific to crypto and are a part of the existing penalties under the Financial Advisory and Intermediary Services Act (FAIS), which also applies to other financial firms, Shtibel said, adding the fact that they’re not tailored to the crypto sector may be part of the problem.
However, the regulations' benefit to the financial services industry outweighs the potential cost implications, the FSCA said in the declaration.
Some companies felt that the timeframe allocated to prepare for the regime was not enough. Crypto companies had actually asked for the application period to be between eight months to up to two years, but the FSCA settled for a six month time frame instead because two years could not be justified, the declaration said.
Companies should still be able to apply to register after November, but they will not be able to operate until they have been approved by the regulator, Shtibel said. In countries like the U.K., this approach, where companies have to register before they can operate in the country, has driven firms out of the market in search of more lenient regimes.
For those who choose to set up closer to the deadline, it may feel near impossible to get themselves ready in time to be able to fill out the paperwork properly, Ndamane said.
When it comes to applying, insufficient time "might just be the barrier," as it could take some firms time to be able to properly comply, Kubyane said.
Crypto companies wishing to get licensed will need to fill out forms asking for information on business activities and shareholders, as well as the financial soundness of the business, the declaration said.
Digital asset companies that have applied within the allocated time will only have to cease operating if they get rejected, the declaration said. The FAIS act is unclear about whether or not companies can apply again if they are rejected, but they can file an application for reconsideration under existing regulations.
Eventually, crypto asset-related financial services will fall under the Conduct of Financial Institutions (COFI) bill once this comes into law, instead of the FAIS Act, which is an interim measure, the declaration said. The COFI bill sets out protections for consumers.
Non-fungible token providers will not need to register at this stage and will be considered in a “future framework,” the declaration said. Mining nodes and node operators would also not be considered.
Kubyane said he wants regulators to continue to work with the industry to develop appropriate measures for all crypto players, not just big ones.
The FSCA did not respond to a CoinDesk request for comment by press time.