Crypto firms in South Africa must register or face a large fine

Crypto companies that want to operate in South Africa must apply for a license from the country’s Financial Sector Conduct Authority (FSCA) within six months starting from June 1st. Although South African crypto companies have welcomed the new licensing regime, they are concerned that the fine waiting for those who fail to register on time may sink smaller companies or drive away firms that want to enter the market after the deadline has passed. South Africa ranked 30th on Chainalysis’ global adoption index last year, and is behind other African countries like Nigeria and Kenya in terms of crypto use. However, regulators in the country, like those in other countries, 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 that 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.

“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,” said Nick Taylor, head of public policy at Luno for Europe, Middle East and Africa. The regime is being set up to protect consumers and that is really important, according to Mpumelelo Ndamane, CEO of South Africa-based crypto wallet provider Nuud Money.

Instead of enforcing the requirement immediately following the declaration, South African regulators set the start date for seeking approval on June 1st. 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.

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. 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.

Although 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, they could be a heavy burden for new industry players in an emerging market. 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.

The South African regulator, the Financial Sector Conduct Authority (FSCA), has announced that all crypto-related businesses operating in the country must be registered before November 2021. According to Shtibel, a spokesperson for the FSCA, companies can still apply to register after November, but they cannot operate until they have been approved by the regulator. However, this approach has led to firms leaving the market in countries like the UK, where companies must register before they can operate. For those who choose to set up closer to the deadline, it may be difficult to get everything ready in time, says Ndamane. Some firms may face difficulties complying with the regulations, according to Kubyane.

Crypto companies wishing to be licensed will have to provide information on their business activities, shareholders, and financial soundness. If a company is rejected, they may be able to file an application for reconsideration under existing regulations, although the FAIS act does not clarify this. Eventually, crypto assets will come under the Conduct of Financial Institutions (COFI) bill instead of the interim FAIS act, which will provide consumer protections.

Non-fungible token providers and mining nodes and node operators will not be considered at this stage, according to the declaration. Kubyane hopes that regulators will work with the industry to develop appropriate measures for all crypto players, not just big ones. The FSCA has not yet responded to a request for comment from CoinDesk.

Read more: South Africa Adds Crypto Businesses to List of Accountable Institutions

Edited by Sandali Handagama and Nikhilesh De.