TerraLex Cross-Border Guide to Crypto Assets

On 19 October 2022 the Financial Sector Conduct Authority (FSCA) issued General Notice 1350 of 2022 in terms of which it declared a crypto asset as a financial product under the Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS Act). A crypto asset is defined as a digital representation of value that:

• Is not issued by a central bank, but is capable of being traded, transferred, or stored electronically by natural and legal persons for purposes of payment, investment, and other forms of utility;
• Applies cryptographic techniques; and
• Uses distributed ledger technology.

The South African FSCA considers crypto assets to be financial products. From the 19th of October 2022, crypto assets are subject to FSCA regulation. The recent decision by the FSCA to bring under its regulatory ambit the providers of crypto asset-related services does not mean that the FSCA now recognises crypto assets as a currency, and it is not equivalent to the rand. Once a financial service (advice and/or intermediary services in relation to a financial product) has been brought under the ambit of the FAIS Act, nobody is allowed to render such financial services “as a regular feature of [their] business without being authorised as a financial services provider or appointed as a representative of an authorised provider”. The provision of services relating to these assets has been brought under the ambit of the FAIS Act, which simply means that anyone rendering crypto-related services must be licensed under the FAIS Act and comply with its requirements of good governance and transparency, suitable competency, and the fair treatment of customers.

See the response above. The recognition by the FSCA does not mean that crypto assets themselves are regulated or akin to money for the purposes of being used to effect payments. Rather, the FSCA has sought to regulate the conduct of crypto asset service providers. They are regulated by the FAIS Act, subordinate legislation and FSCA regulations.

South African Financial Sector Conduct Authority is the main regulatory authority.

Yes. Section 7 of the FAIS Act states that as of 19 October 2022, any person who as a regular feature of their business, renders financial services as defined by section 1 of the Act, in relation to crypto assets must have a licence under section 8 of this Act in that it must be a registered Financial Services Provider - or be appointed as a representative of an authorised Financial Services Provider as per section 13 of the Act.

Providers have from 1 June 2023 until 30 November 2023 to obtain the licence. Section 7(1) of the Act states that unless a person has been exempted of obtaining a licence, not having one constitutes an offence under section 36(a) of this Act and a person shall be liable for a fine not exceeding R10 million or a period of imprisonment not exceeding 10 years or both a fine and imprisonment.

The regulation regarding this is still being developed. However, the FAIS Act does not apply to blockchain in the following respects: 1. Crypto asset miners that use computors or speacialized hardware to partipate in blockchain processing by verifying and adding new transactions to the blockchain. 2. Node operators that run software that keep a complete or pruned version of the blockchain and broadcasts transactions across the network; and 3. Persons rendering financial services in respect of crypto assests recorded on a blockchain with unique identification that distinguish them from each other and can be associated with real – world objects (i.e., NFTs).

South African tax laws apply to crypto assets in the same way they do to regular assets. In this jurisdiction, the taxpayer must report any taxable income attached to cryptocurrencies as soon as it has accrued or has been received. The South African Revenue Service (‘SARS’) does not treat crypto assets as money for the purposes of income or capital gains tax, but rather as intangible assets, so you may pay capital gains tax or income tax depending on the transaction and the intention of your investment activities.

SARS has identified three scenarios which involve crypto assets giving rise to tax consequences:

• Mining: The “mining” of crypto assets, which is achieved by solving complex computer algorithms.
• Cash exchanges: The exchange of local currency for a cryptocurrency (or vice versa) by using cryptocurrency exchanges.
• Barter transactions: The use of crypto assets to pay for goods or services.

As far as tracing crypto assets go, SARS has been given a range of collection powers in terms of the Income Tax Act, including a requirement for third – party service providers to submit financial data. Enforcement and audit processes are confidential and not shared with members of the public.

Yes, it can be classified as incorporeal property.

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South African law is not clear on smart contracts transferring ownership in a crypto asset – this area of our law is yet to be developed accordingly.

This has not been addressed by a court in our jurisdiction as of yet – however, crypto assets would likely fall into the category of incorporeal assets as mentioned above and will represent assets which are of value to it owners.

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Not at present. The FSCA’s approach is similar to that of other countries where regulators have taken steps to protect consumers by regulating the conduct of the providers of various crypto asset services as they continue to work on how best to deal with the growth in crypto assets and their associated risks.

This means that in this jurisdiction, the approach to crypto assets must be one of caution, as it would be with any highly risky and complex financial product.