In a bid to regulate the cryptocurrency industry, cryptocurrency companies operating in South Africa are now required to obtain a license from the Financial Sector Conduct Authority (FSCA) within six months, starting from June 1, 2023. Failure to register within this timeframe may result in penalties of up to $510,000 or imprisonment, as declared by the government.
While the new licensing requirements have been generally welcomed by South African crypto firms, there are concerns regarding the potential impact of the hefty fine on smaller companies and its discouraging effect on new firms entering the market after the deadline. South Africa currently ranks 30th in terms of crypto usage among African nations, trailing behind countries like Nigeria and Kenya, according to Chainalysis‘ global adoption index from the previous year. Regulatory authorities in South Africa, along with those in other regions, have been actively working to oversee the crypto sector, which experienced a significant crash in 2022 after reaching a global market capitalization of nearly $3 trillion in 2021.
In November 2020, the FSCA proposed that cryptocurrencies should be classified as financial products and that companies providing crypto-related services should be licensed. Following consultations on the proposed legislation, the FSCA officially announced the licensing requirement on October 19, 2022.
Nick Taylor, the head of public policy for Europe, the Middle East, and Africa at Luno, expressed his approval of the FSCA’s classification, viewing it as a highly beneficial move for both the crypto industry and South Africans. He stressed that the licensing requirements would elevate standards, protect consumers, and instill confidence in businesses, encouraging investment, innovation, and job creation.
The primary aim of the new regulations is to ensure consumer protection, an aspect deemed crucial by Mpumelelo Ndamane, the CEO of Nuud Money, a crypto wallet provider based in South Africa. Rather than implementing the requirement immediately after the announcement, South African regulators have set June 1, 2023 as the starting date for companies to initiate the approval process. During this application period, companies that have applied for registration will be allowed to continue their operations while awaiting a decision from regulators. To maintain their operations, these firms must adhere to the financial service provider standards of the country, which encompass operating with integrity, diligence, and providing requested information to the FSCA.
It’s important to note that crypto derivatives service providers are not eligible for the exemption that permits companies to continue operating during the application process, as outlined in the declaration.
While the specific registration fees for crypto companies with the FSCA have not been explicitly mentioned, the typical application fees range from 2,544 South African rand ($132) to 46,251 rand ($2,395), depending on the company’s category. It is expected that most crypto companies will fall into category one, which incurs the lowest fee and applies to firms that don’t fit into any other categories. However, if applicants meet the criteria for multiple categories, they may need to submit multiple applications, as clarified by Meiran Shtibel, associate general counsel at the crypto custody platform Fireblocks.
Failure to apply for registration can result in more severe consequences. Companies that continue to operate without registering by the November deadline may face a fine of 10 million South African rand ($510,000), a maximum prison sentence of 10 years, or both, as stipulated in the declaration. Ndamane expressed that a $510,000 fine would be impractical for Nuud Money, which is currently in the process of raising a seed round of $350,000. Shadrack Kubyane, co-founder of Coronet, a blockchain company in South Africa, cautioned that while a 10 million South African rand fine might not have a significant impact on financially robust sectors, it could be devastating for an emerging industry like crypto in an emerging market.
It’s worth noting that these fines are not specific to the crypto sector but are part of the existing penalties outlined in the Financial Advisory and Intermediary Services Act (FAIS), which applies to various financial firms. Shtibel pointed out that the fact that the fines were not specifically tailored for the crypto sector could present a challenge. However, the FSCA justified the regulations, stating that the benefits to the financial services industry outweigh the potential costs involved.
