Major update on crypto asset service provider licensing in South Africa
The Financial Sector Conduct Authority (FSCA) says it received 128 applications for crypto asset service provider licences as of 30 November 2023.
Today is the last day for already-operating providers to submit their applications.
In a presentation to give an update on the licensing of cryptocurrency services in South Africa, the FSCA said it had received 93 applications by 31 October 2023.
Nineteen were withdrawn due to lack of experience and appropriate operational policies and procedures.
The FSCA provided the following timelines for the 74 licence applications that remain under consideration:
- 36 completed assessments to be presented at the 12 December 2023 Licensing Executive Committee meeting
- 22 applications pending for various reasons to be presented at the 13 February 2024 Licensing Executive Committee meeting
- 14 applications with analysis yet to begin to be presented at the 12 March 2024 Licensing Executive Committee meeting
- 2 undisclosed
The FSCA said it considered several factors while analysing each prospective licensee.
These include the criticality of market services, whether they provide multiple services, and whether they offer market support services (e.g. custodial and payment rails).
It also evaluated applicants’ operational policies and procedures, including know-your-customer onboarding (“FICA” in South Africa), data protection, cyber risk management, conflict of interest management, complaints handling, and credit counterparty risk management.
The FSCA also conducted due diligence checks with other regulatory authorities, such as the Payments Association of South Africa and the Reserve Bank Financial Surveillance department.
The regulator noted that different types of business models exhibit different risk profiles and complexities. These are summarised in the following table.
| Types of services | Description of services |
|---|---|
| Advisory services | Advice only given to clients on the different crypto assets |
| Exchanges | Provision of a marketplace for multiple buyers and sellers of multiple crypto assets |
| Crypto asset arbitrage | The purchasing of crypto assets from an offshore exchange trading at a discount (i.e., less than in South Africa) and the immediate sale of the same crypto asset in South Africa (i.e., trading at a premium) resulting in profit made from the price discrepancies |
| Digital custodial/wallet services | Digital service that enables electronic payments as well as storage of digital or crypto assets |
| Payment gateway | The provision of payment rails by payment processors in the digital or crypto asset environment, thus enabling the payment in and receipt of digital payments and receiving fiat in exchange |
| Tokenisation services | The creation of tokens that serve as reference instruments referencing a real-word asset such as a share, a share index etc. |
| Crypto-to-fiat (and vice versa) & crypto-to-crypto conversion | The provision of a service that enables clients to convert and offer fiat (e.g., Rand) for a crypto asset and vice versa as well as converting and offering one crypto asset for another crypto asset |
| Provision of index-based products | The creation of reference instruments which track the performance of a baskets of crypto assets |
In addition to giving an update on crypto asset service provider licensing in South Africa, the FSCA also released the results of its crypto asset market study.
The FSCA said that 47 service providers responded substantively to its information request.
Of these, 34% operated exchanges, 15% offered custody services, and 13% custodial wallet services.
However, 49% relied on their exchange as their primary business model. Only 2% said custodial services were their business model.
Most had head offices in Cape Town (46%), followed by Johannesburg (33%). 10% said they had off-shore head offices.
The data showed 38% generated annual revenue under a million rand, while 46% earned between 1 and 50 million rands in revenue per year.
5% of respondents reported seeing R151–R200 million in revenue annually.
FSCA crypto market survey 2023 — Financial services offered
FSCA crypto market survey 2023 — Summary of business models
FSCA crypto market survey 2023 — Head office locations
FSCA crypto market survey 2023 — Revenue
Another interesting statistic was that South African crypto asset service providers recorded their highest monthly transaction value — over ZAR8 billion — in November 2022.
“The average crypto assets traded were approximately R520 million per month during the year,” the study found.
“Monitoring changes in trading patterns may be an important conduct risk indicator,” the FSCA noted.
“For example, substantial increases in trading volumes may bring additional operational risk, and unusual trading could signal market abuse.”
FSCA crypto market survey — Value of assets traded in 2022
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