Good news for people buying and selling NFTs in South Africa

The Financial Sector Conduct Authority (FSCA) says crypto asset platforms that offer financial services related to NFTs have been exempted from requiring a financial service provider licence.

“This exemption was granted based on the risk assessment at the time, with the FSCA determining that financial services related to NFTs should not fall under its oversight at that point,” the regulator told MyBroadband.

“However, the crypto asset market evolves rapidly, and the FSCA retains the discretion to withdraw this exemption should there be a need to regulate NFT-related financial services under the FAIS Act in the future.”

Non-fungible tokens (NFTs) are a type of crypto token on blockchains that can represent arbitrary data.

In the context of digital artwork, they have been used to try and generate a form of scarcity, create uniqueness, and track provenance.

The best-known examples are so-called profile picture NFTs like Cryptopunks and the Bored Ape Yacht Club.

During the last crypto craze that peaked in 2021, these types of NFTs exploded in value, with some selling for millions of rands.

Celebrities including Jimmy Fallon, Paris Hilton, Seth Green, Madonna, and Justin Bieber bought into the craze.

When prices came crashing down, many of them became the target of a proposed class-action lawsuit.

The lawsuit was amended in 2023 with allegations that Bored Ape Yacht Club developer Yuga Labs colluded with respected fine arts broker Sotheby’s to run a deceptive auction.

MyBroadband recently asked the FSCA for comment on South Africa’s policy regarding regulating crypto assets like memecoins and NFTs.

A memecoin is a type of cryptocurrency that is inspired by Internet memes, jokes, or cultural references. Dogecoin is an early example of a cryptocurrency based on an Internet meme that was also created as a satirical critique of crypto.

The FSCA explained that it declared crypto assets a financial product under the Financial Advisory and Intermediary Services (FAIS) Act on 19 October 2022.

It also disclaimed any feedback it provided, saying it did not constitute a binding regulatory position and that it reserved the right to amend or update its stance based on market developments.

“Entities and individuals engaging in financial services related to crypto assets are encouraged to seek independent legal and compliance advice regarding their specific obligations under applicable laws,” it said.

Rules for crypto assets in South Africa

The FSCA explained that the effect of declaring crypto assets a financial product was that any person giving advice or rendering intermediary services involving them must be an authorised financial service provider (FSP).

“It is important to note that the FAIS Act does not regulate financial products themselves but rather the services and advice related to these financial products, in this case, crypto assets,” it stated.

The FSCA explained that financial services consist of two key components under the FAIS Act:

• Advice — Any financial recommendation, guidance, or proposal furnished to a client regarding financial products or transactions.
• Intermediary services — Any act performed on behalf of a client or product supplier that results in a client entering into a transaction in respect of a financial product.

“The definition of intermediary services under section 1 of the FAIS Act is broad and captures various activities,” the FSCA said.

These include buying, selling, managing, administering, or servicing financial products on behalf of a client.

“If any of these services are performed concerning a crypto asset, the service provider would be required to submit a licence application.”

The FSCA said it defined crypto assets as something that used cryptographic and distributed ledger technology to represent value, and could be stored and traded for payment purposes.

It said that memecoins clearly met this definition, although it did not regulate the issuing of memecoins. The regulation only applies to financial services performed in relation to crypto assets.

On the other hand, NFTs were treated differently due to their non-fungibility.

“NFTs are a unique type of cryptographic token that cannot be exchanged on a one-to-one basis, as each NFT represents something distinct,” the FSCA said.

“The FSCA issued FAIS Notice 90 of 2022, which exempts persons rendering financial services related to NFTs from requiring an FSP license at this stage.”