Recently, we have been approached by several people who wanted to know how and whether South African financial services legislation applies to persons who wish to provide advice to third parties who are interesting in investing in cryptocurrencies. Specifically, they want to know whether or not they need to be licensed as “financial services providers” in terms of the Financial Advisory and Intermediary Services Act, 2002 (FAIS).
FAIS is intended to regulate the providing of advice and rendering of intermediary services as respects financial products. FAIS defines ‘advice’, in sum, as a recommendation, guidance or proposal of a financial nature in respect of the purchase of any financial product or in respect of an investment in a financial product. People who wish to advise third parties interested in investing in cryptocurrencies are providing advice as commonly understood. What brings that advice within the definition of ‘advice’ in FAIS is whether those people are providing advice with respect to ‘financial products’ (also as defined in FAIS).
FAIS defines ‘financial products’ as including shares in a company, debentures, money-market instruments, participatory interests in one or more collective investment schemes, or foreign currency denominated investment instruments, among others. Do cryptocurrencies fall into any of the recognised categories of ‘financial products’ as defined in FAIS? To answer this, we need to determine what cryptocurrencies are.
Most of us have heard of cryptocurrency, or of examples like “Ethereum” or “Bitcoin”; but it can be difficult to explain what cryptocurrency is. Merriam-Webster’s Dictionary defines a ‘cryptocurrency’ as:
“any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions.”
The South African Crypto Assets Regulatory Working Group (comprising of members from across the financial sector regulatory services at the South African Reserve Bank, National Treasury, Financial Intelligence Centre, Financial Sector Conduct Authority and South African Revenue Services) (IFWG) has proposed the following definition in its Consultation Paper on Policy Proposals for Crypto Assets, released earlier this year:
“Crypto assets are digital representations or tokens that are accessed, verified, transacted, and traded electronically by a community of users. Crypto assets are issued electronically by decentralised entities and have no legal tender status, and consequently are not considered as electronic money either. It therefore does not have statutory compensation arrangements. Crypto assets have the ability to be used for payments (exchange of such value) and for investment purposes by crypto asset users. Crypto assets have the ability to function as a medium of exchange, and/or unit of account and/or store of value within a community of crypto asset users.”
What is immediately apparent is that cryptocurrency is not issued by any state authority. There is no central body making sure that it is not fake. Therefore, cryptocurrency is not money as we commonly understand it, but it can be used as a means of exchange. The IFWG describes cryptocurrency just as types of digital representations or tokens.
Cryptocurrencies do not fit neatly into any of the categories of ‘financial products’ defined in FAIS. Given this, it is arguable that cryptocurrencies are not “financial products” in terms of FAIS.
Accordingly, it is not certain whether a person providing advice regarding that cryptocurrency would need to be licensed as a financial services provider in terms of FAIS.
However, importantly, if a person provides ‘advice’ regarding a ‘financial product’ that referenced a cryptocurrency or in which cryptocurrency was the underlying asset (perhaps as an underlying asset in an exchange traded fund), that person would still be required to be licensed as a financial services provider in terms of FAIS. This is consistent with how cryptocurrencies are being treated in the United Kingdom and the USA.
It is not yet certain when specific regulation governing cryptocurrencies will be drafted which will give an indication as to whether cryptocurrencies are treated as ‘financial products’ for purposes of FAIS. In any event, we recommend that anyone seeking to provide any financial advice on cryptocurrencies get appropriate legal advice regarding FAIS first.