FSCA Gets 93 Crypto License Applications

Johannesburg, South Africa – In a significant development for South Africa's financial sector, the Financial Sector Conduct Authority (FSCA) has received 93 applications for crypto asset service provider licenses. This marks a pivotal step in the country's strategic efforts to enhance financial regulation and exit the Financial Action Task Force (FATF) grey list.

As the November 30 deadline for crypto asset financial service provider (FSP) license applications approached, the FSCA reported a substantial response from entities seeking to enter the crypto market. Of these applications, 19 were subsequently withdrawn for various reasons, leaving 74 applications currently under review. The FSCA's executive committee is now diligently assessing these applications, and it is anticipated that the first batch of licenses will be granted in the near future.

Katherine Gibson, Deputy Commissioner at the FSCA, emphasized the significance of this initiative, stating, “This licensing process is not only crucial for the development and regulation of the crypto market but also plays a pivotal role in safeguarding consumers against potential fraudulent activities. It aligns with our commitment to compliance with international financial standards and contributes to our concerted efforts to ensure the integrity of South Africa's financial sector.”

Crypto Adoption in South Africa

A market study commissioned by the FSCA provides fresh insights into South Africa's burgeoning crypto industry. The study reveals that nearly 10% of South Africans are currently engaged in cryptocurrencies.

Furthermore, projections indicate that this figure could surge to encompass 43% of the population by the year 2030. While these statistics demonstrate a substantial and growing interest in cryptocurrencies among South Africans, it is important to note that the asset class has not yet fully integrated into daily financial activities.

According to Awelani Rahulani, Head of Fintech at the FSCA, “Crypto, while gaining traction, has not yet substituted traditional financial products and services.”

Insights into Crypto Business Models

Keith Sabilika, Senior Fintech Specialist at the FSCA, shed light on the business models adopted by crypto companies applying for licenses in South Africa. He explained that approximately half of the revenue generated in South Africa's crypto industry comes from crypto exchange activities. Furthermore, advisory services contribute to 19% of the industry's revenue, followed by crypto brokerage at 15%, and currency exchange at 9%.

Entities seeking a crypto asset service provider license must meet stringent criteria outlined under the Financial Advisory and Intermediary Services (Fais) Act. These criteria encompass various facets, including the fitness and propriety of the market services provider, the provision of multiple services, and the availability of market support services such as custody and payments. Operational policies must comprehensively cover essential areas such as Know Your Customer (KYC) and Customer Identification and Verification (CIV) processes, client data protection, cyber risk management, conflict of interest management and resolution, complaints handling, and credit counterparty risk management.

Additionally, applicants must pass due diligence checks conducted in collaboration with the Payments Association of South Africa and the South African Reserve Bank Financial Surveillance Department.

Managing Counterparty Risks

In light of the recent collapses of major international crypto exchanges, such as FTX, the FSCA is maintaining a vigilant stance on counterparty risks. It is essential to note that entities engaged in “mining nodes,” such as bitcoin miners, and those offering security tokens and non-fungible tokens (NFTs), are currently exempt from licensing requirements.

The FSCA has conducted a comparative analysis of crypto asset service providers (Casps) and Accountable Institutions (AIs) involved in crypto asset activities. This analysis aims to ascertain whether the population of Casp applicants aligns with that of registered AIs. According to Sabilika, “This comparison is essential to ensure that all operating entities meet the necessary legal and regulatory standards.” The analysis revealed that as of the end of October 2023, there were 73 registered AIs with the Financial Intelligence Centre, relative to the 93 Casp applicants. Notably, only 16 registered AIs have applied for Financial Advisory and Intermediary Services (FAIS) licenses. This disparity underscores the need for a suitable response to curb unregistered or unauthorized crypto-related business activities.

Katherine Gibson emphasized that the FSCA's efforts are globally pioneering. She stated, “We are diligently identifying and responding to the risks affecting the retail market. Our commitment to ensuring the safety and integrity of South Africa's financial sector remains unwavering.”

The Way Forward

The FSCA's initiative to license crypto asset service providers signifies a significant stride in aligning South Africa's crypto asset market with global regulatory standards. Beyond regulatory compliance, this endeavor underscores the commitment to consumer protection, transparency, and the responsible growth of the crypto market within South Africa. The FSCA's actions play a vital role in bolstering the integrity and trustworthiness of South Africa's financial sector.

Bottom Line

The FSCA's proactive stance in processing crypto asset service provider license applications is a pivotal advancement in fortifying South Africa's financial sector's integrity while fostering consumer confidence and security. This undertaking sets the stage for the sustainable growth of the cryptocurrency industry within the nation and demonstrates South Africa's commitment to regulatory excellence and international compliance.