FIC puts crypto transfers under the microscope

You can also listen to this podcast on iono.fm here.

JIMMY MOYAHA: In last week’s budget speech the minister announced that crypto assets would be included under the Currency and Exchanges Act – effectively under exchange control regulations within South Africa, as they would be defined as cross-border transactions.

This is off the back of some of the recommendations that we’ve previously seen, following the Financial Action Task Force’s (FATF’s) grey list outcomes. Off the back of those outcomes, the Financial Intelligence Centre, the FIC, has issued a directive to crypto asset service providers to make sure that they themselves, as service providers, obtain certain information from you and me as parties that are transacting in crypto transactions.

We’re going to look at this in a bit more detail with the acting director at the FIC, Pieter Smit. He joins me on the line now to see what we make of these developments.

Oom Pieter, lovely having you on the show, as always. Thanks so much for the time. Let’s perhaps start with the directive that’s been issued by the FIC off the back of the recommendations from the FATF.

Take us through the specific objectives of this directive and how they will affect the sector.

PIETER SMIT: Good evening, Jimmy. The directive is South Africa’s implementation of a specific requirement under the FATF recommendations for crypto asset service providers to include the same information about the parties involved in transactions that flow cross-border – as is currently required of financial institutions when they send money in or out of the country.

So this requires the crypto asset service provider to have the name and certain details of its client, which it must then provide to its counterpart on the other end of the transaction, whether it’s sending or receiving the crypto assets on behalf of its client.

This is to give transparency to the parties involved in moving funds across jurisdictions by means of crypto transactions – as they would otherwise have done in normal financial transactions involving fiat currency.

JIMMY MOYAHA: Oom Pieter, if we look at the crypto market, we know that from a South African perspective we govern and we speak of crypto assets under current regulation within the FSCA [Financial Sector Conduct Authority]. But also, now that we have a clear directive from National Treasury that it would form part of the Currencies and Exchanges Act, clearly we are not going to de-recognise this asset class. We’re going to look to see how we manage the flows.

How much of a risk have crypto flows been in the past towards our efforts to stay off things like the grey list?

PIETER SMIT: Yes, crypto assets present a unique challenge relating to the nature of the asset.

Maybe it is not necessarily higher or lower risk, but the risk relates to the information about the parties involved in transactions buying and selling the asset.

And the nature in which those transactions are captured in decentralised ledgers rather than through the systems of regulated financial institutions.

So because of that, the FATF has taken the position that service providers that enable these transactions should be treated in the same way that financial institutions are.

You don’t have to recognise them as financial institutions, but you should require the same compliance and regulatory framework of crypto asset service providers.

And these initiatives that you’ve mentioned via the FSCA – now, the Financial Surveillance Department in the Reserve Bank and previously also under the FIC Act, are all parts of the system to put in place a similar regulatory system that would treat the activity of financial transactions in crypto assets in a similar way to that with normal fiat currency.

JIMMY MOYAHA: Speaking of the ‘fair treatment’, I see that – from a Financial Intelligence Centre perspective – part of the directive would also involve service providers being able to freeze crypto assets and file reports with the FIC. This is obviously in line with what we see other financial services providers doing already – the likes of authorised dealers performing enhanced due diligence, the banks freezing funds where questions are asked by the FIC – this kind of action or this directive for service providers. It’s nothing new from what we’re doing in the industry, but clearly to enhance safety.

PIETER SMIT: Yes, exactly. And this regulatory framework under the FIC Act has been in place for some time now for crypto asset service providers, where they have to comply with the same due diligence requirements and reporting requirements for financial institutions.

If I look through the directive and the guidance that we are working on now, this will be expanded to provide more details about the customers involved in those transactions that have to be shared with their counterparts.

JIMMY MOYAHA: Oom Pieter, from a Financial Intelligence Centre perspective obviously this has ramifications for crypto assets, but I can imagine we would likely see this type of directive being expanded to include other forms of transactions that take place which might not necessarily be limited to cryptocurrencies at the stage. But given that we live in a digital age, we could be looking at other forms of transactional payment methods forming part of a directive like this.

PIETER SMIT: Yes. There is a similar directive that was issued previously by the Reserve Bank, under the powers of the FIC Act given to the Reserve Bank, to make directives that regulate electronic fund transfers and digital payments with fiat currency.

So that’s a parallel to this directive that would apply now to crypto transactions in a similar way.

In future, who knows what further developments we will be looking at.

The next thing on the radar is, for instance, stablecoins, which are for all intents and purposes currently treated in the same way as any other crypto asset, but which present, again, new unique challenges because of their link to a valuation of the fiat currency.

JIMMY MOYAHA: Cryptocurrencies are definitely mainstream in South Africa, and various organisations are going to be doing their parts to ensure that they are properly regulated, properly managed and properly monitored.

We’ll leave the conversation on that note. Thanks so much to the acting director at the Financial Intelligence Centre, Pieter Smit, for joining us to look at the directive put out by the FIC related to crypto transfers.