CRYPTO ASSETS AND REGULATORY INSTRUMENTS

1. CRYPTO ASSETS AND REGULATORY INSTRUMENTS 19 August 2019

2. Background on the FIC International Standard-Setting Instruments Risks associated with crypto assets Responses AREAS COVERED

3. Background

4. FIC role and function Data Sources Gather and analyse broad-spectrum financial information Sharing Identify of proceeds of crime and financial flows relating to money laundering and the financing of terrorism. Exchange financial intelligence with competent authorities in South Africa and foreign counterparts. Monitoring Monitor, provide guidance and ensure compliance to regulations contained in the FIC Act

5. International Standard-Setting Instruments FATF: International standard-setting body for measures to combat money laundering and the financing of terrorism and the proliferation of weapons of mass destruction 1 2 3 4 General requirement Definition Specific requirements Guidance • Countries should ensure that virtual (crypto) asset service providers are • regulated for purposes of combatting money laundering and terrorist financing • licensed or registered • subject to effective systems for monitoring and ensuring compliance • Virtual asset services: • exchange between virtual assets and fiat currencies; • exchange between one or more forms of virtual assets; • transfer of virtual assets; • safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; • participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset • Countries should • identify, assess, and understand the money laundering and terrorist financing risks emerging from virtual asset activities • ensure that there is a range of effective, sanctions, whether criminal, civil or administrative, available to deal with service providers that fail to comply with requirements • require service providers to apply customer due diligence for business relationships and occasional transactions • Customer due diligence implies having in place effective procedures to identify and verify, the identity of a customer • Public information on a distributed ledger may provide a foundation for recordkeeping • Service providers that suspect that funds are the proceeds of crime or are related to terrorist financing must report their suspicions promptly to the relevant FIU.

6. Risks associated with crypto assets 2 3 1 Money laundering/terrorist financing Monetary policy Market conduct • Users can take advantage of pseudonymous or anonymous transactions, thereby inhibiting an institution’s ability to identify the beneficiary • Transactions are conducted using “non-face-to-face business relationships • Payment[s] received from unknown or un-associated third parties • Can be used to quickly move funds globally or in a wide geographical area with a large number of counterparties, as with other mobile or Internet-based payment services and mechanisms • Exposure to IP anonymizers such as TOR or I2P further obfuscate transactions or activities • Challenge central banks’ historical exclusive right to issue money and control the money supply • Large movements in price - volatility is an indispensable part of the price discovery process of crypto assets • No firm understanding of the intrinsic value (if any) of crypto assets • Create parallel – and ultimately fragmented – payment system competing directly with national payment systems, but without the same level of regulatory oversight • No consumer protection exists for payments in crypto assets • Unclear whether payments can be reversed • Uncertain whether a customer has recourse in cases of errors, overpayment or fraud

7. Responses Deciding whether crypto assets require completely new regulation, or be regulated in line with existing regulations, or refining of existing mechanisms

8. Recommendations for South Africa: Crypto assets should remain without legal tender status and are not recognised as electronic money either.  An appropriate regulatory framework should be developed through three phases Phase 1 – Registration process for crypto asset service providers – could lead to formal authorisation/licensing Phase 2 – Authorities should assess whether crypto asset activities fit into existing regulatory frameworks – where no legal authority or mandate exists for certain crypto assets-related activities, authorities will have to determine what amendments are required to bring the relevant activity into the supervisory ambit  Phase 3 – Once in place, authorities should assess the effectiveness of the regulatory actions that were implemented and if the regulatory actions meet the intended objectives Responses

9. Pieter Smit Pieter.Smit@fic.gov.za