South African Reserve Bank Begins To Plan Crypto Regulations

The South African Reserve Bank (SARB), in collaboration with the Intergovernmental Fintech Working Group (IFWG), has published a consultation paper proposing crypto regulations for exchanges and walletproviders. The paper specifies that these propositions are intended for “non-governmental or non-central-bank-issued crypto assets,” rather than “central bank crypto currencies.”

The paper includes a matrix for classifying approaches to regulating crypto assets worldwide, rating countries from the laissez-faire attitude of Level 0 (“Ignoring”) to the attentive, proactive Level 5 (“Ban or integration”). South Africa is classified as Level 2 (“Recommendation”). For a country to be classified as Level 2, it means that an “official body has released a statement proposing an approach to deal with crypto assets.” Currently, there are 25 Level 2 countries.

The SARB paper proposes taking steps to move up several levels – somewhere between Level 3 (“Guidance”) and Level 4 (“Regulation”) – to a level it calls “limited regulation.” At this level, the paper states:

“…the [Financial Intelligence Centre] (FIC) will include crypto assets service providers as an accountable institution and, as such, the accountable institutions will be under legal obligation to comply with [anti-money laundering]/[combating the financing of terrorism] requirements in the FIC Act. However, the FIC does not set predefined conditions or market entry requirements for such business – therefore, South Africa will fall under a ‘limited regulatory’ framework.”

The SARB seeks a balanced approach that asks innovators to “adapt to the prevailing regulator environment” but also maintains a “do-not-harm” stance where the country is “highly cognisant of not letting overregulation stifle innovation.”

It’s very Goldilocks-esque: a just right attitude toward crypto regulation. And just like the bears’ three porridges, chairs, and beds, the paper proposes three phases of evolution for the regulations.

The first phase will be registration. Crypto asset service providers operating in South Africa will be asked to register with the FIC, allowing the appropriate South African authorities to “gain further insights from the market participants.” The list of providers that will need to register includes trading platforms, wallet providers, safe custody services, and payment services. According to the paper, the registration documentation will be implemented by the first quarter of 2019, with the subsequent phases to follow.

Phase two involves taking the information gathered in phase one and assessing which legal frameworks can apply as-is, which need to be amended, and what new laws need to be drafted, if any. At this stage, the collected information will be used to ensure anti-money laundering and counter-terrorist financing laws are consistent.

The final phase will “assess the effectiveness of the regulatory actions that were implemented.” The regulatory actions amended or implemented in phase two will be judged based on whether or not they met their intended objectives.

At the beginning of January, the SARB, along with other South African financial authorities, joined the IFWG, the country’s crypto assets regulatory group. The group was created to research and develop a regulatory framework for cryptocurrencies. If nothing else, the approach taken by the group is compelling, especially compared to the regulate-wait-and-seemethod of the US Securities and Exchange Commission, China’s strict control, and Switzerland’s amendment-heavy technique. Has South Africa found just the right amount of regulation? Time will tell.