South African crypto landscape poised for TradFi growth after FSCA ruling

South African financial services providers have been poised to offer cryptocurrency products and services to customers following regulatory changes in the country.

This comes after South Africa’s Financial Sector Conduct Authority amended its Financial Advice Act 2002 on October 19, defining crypto-assets in the country as financial products. Most importantly, the definition means that cryptocurrencies can now be offered by financial service providers, both domestically and internationally, given that they are licensed in South Africa.

South Africa already has a growing number of cryptocurrency users estimated to include as many as six million individuals. The country’s Reserve Bank has also taken a measured approach in its regulatory stance on the sector in an attempt to ensure investor protection without stifling innovation.

Cointelegraph touched base with two prominent cryptocurrency exchanges in the country, with both Luno and VALR serving significant user bases in South Africa. The companies are well positioned to offer insight into the latest regulatory move, given that they cater to both private and institutional clients in the country.

VALR CEO Farzam Ehsani labeled the FSCA’s move as “good news for South Africa which sets a path towards regulating crypto asset service providers in the country”, while ensuring that “they serve the public with integrity.”

Marius Reitz, Luno’s Managing Director for Africa, echoed these sentiments by highlighting the importance of regulatory clarity, not just for investors, but for financial service providers in the country:

“The licensing requirements that will result from this classification will drive high standards in the industry, particularly in relation to consumer protection, with potential investors able to easily identify those suppliers that satisfy regulatory requirements.”

Reitz also flagged the key benefit, which now allows financial advisors to formally advise clients on cryptocurrency investments. Before the FSCA changed the definition of cryptoassets, financial advisers were not allowed to advise on unregulated investment opportunities.

“The regulatory framework paves the way for wider institutional adoption. How this plays out will depend on the ability of more traditional finance companies and even banks to fully support this newly classified financial product.”

Chris Becker, managing director of online banking at Tyme Bank, also provided insight to Cointelegraph. The South African digital bank welcomed regulating cryptocurrencies within existing frameworks as it looks to drive digital money services and payments.

Becker believes the move may provide some comfort to individuals who may have been wary of interacting with crypto asset service providers due to concerns about a lack of regulation, having worked for private wealth manager Investec as a blockchain executive in his previous role.

Becker also agreed that the regulatory move could support greater adoption in the long term if financial service providers use the new product category to offer crypto-asset products to their large customer bases.

Nevertheless, regulatory uncertainty has not stopped companies and institutions from gaining exposure to cryptocurrencies in South Africa. Both exchanges already work with a number of institutional clients.

VALR serves more than 700 businesses and institutions, which include a number of large traditional financial institutions in South Africa. Ehsani said the firm has been focused on building its infrastructure over the past five years to bridge traditional finance in the country to cryptocurrency markets. Luno also allows corporate customers to use their platform.

Meanwhile, Becker highlighted the reality that traditional financial service providers are not necessarily investing in cryptocurrencies as a result:

“Other regulations such as the Pension Fund Act and the Exchange Control Act do not yet provide for crypto-assets.”

VALR’s CEO also believes that the country could see cryptocurrency-related exchange-traded funds (ETFs) and similar financial products being developed and released in the coming months now that regulatory oversight is becoming clear:

“I think we’ll start to see a lot more financial products related to crypto in the near future. A lot of people have been working on this for a while, and now with the announcement we should expect to see a lot of that work become visible to the public.”

Reitz offered a more targeted view on the subject, highlighting the FSCA announcement as a first step in creating a broad regulatory framework for cryptoassets in South Africa. He believes there is a need for more clarity around the broader application of the regulation with respect to permitted cryptocurrency financial products, highlighting the US position as an example:

“In the US, Bitcoin ETFs can only hold BTC futures contracts or shares of companies and other ETFs with exposure to cryptocurrencies, as the SEC continues to evaluate the approval of ETFs that own BTC directly.”

Meanwhile, the FSCA delivered a more sober message at a press conference accompanying the announcement on 19 October. As Reuters first reported, FSCA Regulatory Frameworks Department head Eugene Du Toit made it clear that cryptocurrencies are not recognized as legal tender in South Africa.

The regulator also stressed the importance of being able to tackle fraud and fraudulent activities in the area in an effort to protect local investors.