South Africa’s financial services industry currently awaits the release of cryptocurrency guidelines and regulations from the Financial Services Conduct Authority (FSCA). The UK authorities, meanwhile, a little further down the line to regulating crypto-assets, have announced intentions to ‘widen the scope of the financial promotions’ regime in so far as it applies to crypto-assets’ including the Financial Conduct Authority (FCA) publishing a consultation paper to enhance the rules for promoting high-risk investments. Could these developments be an indication of what the FSCA may determine for the local crypto-asset space?
The proposals from the FCA’s consultation paper, currently under comment and review until 23 March in the UK, consider ‘qualifying crypto-assets’ to be classified as high-risk and treated in the same way as peer-to-peer loans and non-readily realisable securities. Proposals include scrutinising potential crypto customers too. Financial promotions relating to crypto-assets will only be permissible for certified sophisticated investors and high net worth individuals, and this applies to only those who respond to a promotional offer to invest. The FCA further intends to add crypto-assets to a new category of ‘restricted mass market investments – RMMI’, ensuring no incentives are allowed to encourage investment into crypto-assets, and they intend to request data to check if warnings of high-risk had any impact on investment into crypto-assets. The FCA has also promised a policy statement and Handbook rules’ amendments by the British summer time (June/July), taking effect in the following months.
These steps are interesting clues as to where the FSCA may go towards governing local crypto-assets. The FSCA has to date likewise concluded that cryptocurrencies are high-risk and that they cannot currently offer consumer protection for any lost funds as they remain unregulated.
What about NFTs?
Non-fungible tokens (NFTs) are an increasingly popular asset development in the financial services sector – and others (for example, a rhino horn NFT artwork sold last year with proceeds going towards rhino conservation). These unique digital assets will require some form of governance, and in terms of how the UK is incorporating this, security tokens are within its regulatory perimeter at present but proposed amendments to the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 would add the following to its list of controlled investments:
“crypto-graphically secured digital representation of value or contractual rights, which is fungible and transferable” (i.e “Qualifying Crypto-assets”)
This essentially means that previously unregulated cryptocurrencies and crypto-assets will, for the first time, fall under the financial promotion regime.
While the guesswork continues into local compliance requirements to come, another theory as to how the FSCA may manage the road to crypto-asset regulation is how hedge funds, also deemed highly risky, were regulated some years ago. Sophisticated investors are able to access hedge funds under different regulatory requirements to those hedge funds now available to retail investors. Crypto-assets may very well go the same way, with varying levels of compliance required dependent upon the target industry / investor demographic.
Whichever way the FSCA goes with crypto regulation, there will almost certainly be more requirements to meet for crypto-asset providers.
The days of the crypto industry operating outside of the regulatory net are coming to an end and this will no doubt be welcomed by the majority of participants in this space.
Richard Rattue is managing director of Compli-Serve SA.