South African central bank releases note on crypto risk assessment

The South African Reserve Bank has issued guidelines for local banks to do business with cryptocurrencies and cryptocurrency companies.

The document, released by the Reserve Bank’s Prudential Authority, advises banks to use anti-money laundering and anti-terrorist financing for all crypto transactions.

Last year, South Africa’s financial watchdog, the Financial Sector Conduct Authority, announced plans to issue a regulatory framework in 2022 in partnership with the Prudential Authority and the Financial Surveillance Board to govern how trading of Ethereum, XRP and Litecoin will proceed.

At the time, FSCA Commissioner Unathi Kamlana said the aim was to allow the FSCA’s discretionary powers to step in if consumers were offered a product of significant risk.

Risk assessment, not avoidance

The regulator’s guidelines draw from guidance issued by the Financial Action Task Force regarding the need for a bank to assess its vulnerabilities to money laundering, terrorist financing and proliferation financing.

Suppose the PA believes that a bank’s processes for managing risk are inadequate. In that case, it can intervene and ask the bank to strengthen its guidelines, procedures, processes or internal controls.

Some South African banks have already terminated banking relationships with what the PA calls Crypto Asset Service Providers (CASPs) due to the inability to quantify risks or the lack of a regulatory framework for the service provider. Banks perceive CASP as having a higher risk profile.

PA, however, warns the banks against avoiding risk instead of carrying out proper risk assessments. This approach opens the door to greater criminal anonymity and prevents proper treatment of AML/TF deficiencies.

Proper risk assessment includes understanding what drives risk within a cryptoasset or service provider, including the pedigree of a CASP’s clientele, their transaction activity and cross-border fund flows. Internal controls must be flexible enough to adapt to new technologies, the PA said.

Banks must report suspicious activity to the Financial Intelligence Centre.

CBDC many years away, says deputy governor

In July 2022, the deputy governor of the SARB, Kuben Naidoo, said that the central bank would view cryptocurrencies as assets rather than a means of payment.

He said the bank could already consider licensing some crypto exchanges, although regulations could take between 12 and 18 months.

In addition, Naidoo noted that the central bank could offer a digital version of the fiat currency, the South African rand (ZAR). The bank has carried out two pilot projects, including a sandbox experiment with the new CBDC. However, the introduction could take years, Naidoo believed.

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