The Intergovernmental FinTech Working Group (IFWG) has released a report on its inaugural market outreach workshop.
Held in April, the workshop gave a platform for regulators and policymakers to engage with industry, and to identify key considerations, working toward developing a harmonised approach to FinTech-driven innovations for the benefit of all South Africans.
One of the key focuses of the report was cryptocurrencies and government’s role in regulating them.
While there seems to be no silver regulatory bullet, there are a few issues that should be considered when thinking about how to regulate cryptocurrencies in South Africa, the report said.
Below are the seven key issues that were discussed.
How cryptocurrencies and tokens should be classified
Delegates put forward a view that regulation should consider the activity and purpose of an underlying token.
As tokens can perform a multitude of functions, the delegates are of the view that regulators would be ill-advised to regulate the blockchain technology.
Delegates discouraged new definitions and new regulation as the technology is evolving at pace and this could make any new piece of regulation obsolete quickly. Advocacy bodies are helping to coordinate the industry and campaign for an aligned view on regulation.
Regulation should also be proportional to the risk.
Regulators were encouraged to review the possibility of introducing thresholds.
“Key operational risks across the cryptocurrency value chain should be identified and solved, including ‘Know Your Customer’, anti-money laundering, and the governance and processes around the conversion between cryptocurrency and fiat currency,” the delegates said.
Consumer and investor protection is necessary
There was immense support for the protection and education of investors.
As exchanges were the most common touch-points for public investors in cryptocurrencies and as such, the delegates believed they should be accredited and regulated.
It was suggested that a centralised platform, where all ICOs eligible for the South African public could be listed would be a starting point and an opportunity to standardise information flows and create a set of minimum expectations in terms of white papers published, disclosure of key information and source code.
The idea of registering all ICOs with a central body was also put forward as a way to monitor the quality and creditability of issuers.
Appropriate and purposive regulation
During the workshop, the fintech firms present were calling for light-touch regulation that is clearly communicated.
The South African Revenue Service (SARS) guidance note on the taxation of cryptocurrency earnings was cited as a positive and effective example of communicating a regulatory position.
Guidance notes defining what is considered acceptable and not acceptable in terms of ICOs were discussed as a favoured approach going forward.
Alignment and leverage of current legal frameworks versus new regulation
South Africa has a well-established legal framework that governs the financial services industry.
The role and impact of cryptocurrencies was discussed in reference to the SARB Act; the National Payment Systems Act; the Banks Act; the Financial Markets Act; the Financial Adivisory and Intermediary Services Act; the Financial Intelligence Act ; tax laws; the Collective Investment Schemes Control Act; and the Companies Act.
As such, regulators have two options at their disposal: to either amend existing legislation by changing current definitions to cater for emerging innovation or to create new regulations, the delegates said.
Pursuing the former option requires significant coordination among regulators and there is a risk that changes to legal definitions could have material knock-on effects on existing financial instruments, products or services.
While the crypto-industry is still budding, defining crypto-activities may risk limiting the extent of the regulation as the technology evolves.
Creating an altogether new piece of regulation aimed at start-ups or fintechs also risks creating a potential un-level regulatory playing field where existing or incumbent players involved in similar financial activities (perhaps using different instruments) are subject to more onerous regulation.
Some delegates at the workshop were of the view that the existing regulatory framework could sufficiently meet the needs of the cryptocurrency industry. Regulators did, however, clarify that they needed to understand what they were trying to regulate, whether and how a fintech activity was covered in existing regulation, and where any regulatory adjustments were needed.
Delegates also noted that these needs could be clarified through position papers or guidance notes on particular subjects.
The application of blockchain technology in the wider financial services market and the impact of incumbent banks was also discussed.
The South African Financial Blockchain Consortium (SAFBC) articulated some of the benefits of developing a blockchain ecosystem. These include improved convenience and efficiency, a decrease in the cost of transfers, and safety and privacy protection.
The importance of perspective and balance – is this time different?
Cryptocurrencies are often promoted as a way to transform financial services as it is known, as a way to improve inclusion and provide access to finance to the millions that are excluded.
However, an important question debated at the workshop included whether cryptocurrencies were an answer to financial inclusion?
In providing some perspective to this question, workshop delegates were reminded that throughout history, whenever regulation is decreased or is not present, novel institutions and instruments emerge.
A speaker noted that following the 2008 financial crisis, Basel III imposed additional costs on banks and possibly led to lowered intermediation activities.
Fintech firms positioned themselves as a competing force to address underserved markets. As an example, ICOs have emerged as new financial instruments leveraging gaps in regulation, in the same way that credit default swaps emerged in the 1970s