Towards the end of last year, the news broke that Binance, the world’s largest international cryptocurrency exchange by volume, had withdrawn their application for a licence to operate a crypto exchange in Singapore due to regulatory issues.
While the news may have fallen on deaf ears in many other jurisdictions, it provides stakeholders in every crypto industry around the world with something to think about.
Various jurisdictions have taken different approaches on how to regulate their crypto industry. First, by imposing a total outright ban on cryptocurrencies and related trade, or by implementing extremely strict and cumbersome regulations from the get-go without a thorough understanding. Last, certain jurisdictions have avoided regulating the industry at all – with an aim to implement regulations slowly once they obtain an understanding of the technology and its impact on the fiscal, economic and regulatory environments.
To regulate or not to regulate?
Whether to regulate the crypto industry is an ongoing debate, but most informed stakeholders believe we need a regulated environment to grow the industry and provide protection and recourse to consumers.
From a growth perspective, a regulated crypto industry could increase overall adoption and give birth to a new sub-sector of publicly traded funds holding crypto as their underlying assets as we have seen internationally with the hype around exchange traded funds.
That said, it is paramount that these regulations do not stifle innovation.
Currently, we have no idea what local crypto industry regulations will look like. But there have been rumours of what the regulators are planning to impose and that they will do so in the second or third quarter of 2022.
The big question is whether virtual asset service providers (VASPs) are agile enough to organise themselves operationally to be able to adhere to these laws and regulations.
What is the possible impact on VASPs and their customers?
In the case of Binance, regulations had such a massive operational impact on their business that the knock-on effects resulted in their customers trading accounts closing by 13 February.
In South Africa, where the crypto industry currently remains unregulated, we are fortunate to have been able to observe other regulated jurisdictions and learn from their mistakes.
Currently, South African VASPs must adhere to general regulations, including the Companies Act, the Income Tax Act, statutory audits and exchange control regulations. But as soon as crypto-specific regulations are introduced, they may also need to adhere to the Financial Intelligence Centre Act and the Financial Advisory and Intermediary Services Act. With “normal” financial service providers already navigating this regulatory mine field for years, VASPs will need to catch up quickly.
In addition, VASPs will come under increasing compliance pressure from commercial banks, which are the lifeline for most of them, creating a bridge between fiat currencies and cryptocurrencies.
Over the past few years, we have seen certain commercial banks in South Africa implementing blanket bans for servicing VASPs. Others have followed an alternative strategy by ensuring that their risks are mitigated by demanding that their VASP clients are compliant from an overall regulatory standpoint and have the necessary Know Your Client and anti-money laundering policies and procedures in place.
Hopefully, we will also see amendments made to the Income Tax Act during February, possibly including crypto investment bundles as part of collective investment schemes, or further guidance from the South African Revenue Service as opposed to merely stating that “the ordinary rules apply”.
Who will be left standing?
Since the introduction of Bitcoin in 2009, the biggest reason for cryptocurrency exchange failure internationally has been security hacks. Not far behind, however, has been their inability to adhere to the applicable laws and regulations.
Once regulations kick in locally, and the industry is increasingly actively monitored from a compliance perspective by the FSCA and other watchdogs, some of these VASPs will likely drop out of the race due to compliance struggles – as we have seen internationally. This illustrates the importance for stakeholders to understand their preferred VASP’s stance on regulations and, in doing so, mitigate their risk of being affected.
To remain in the game, it is imperative that VASPs proactively manage ongoing regulatory risk as opposed trying to play catch up and eventually falling behind once regulations are imposed.
What remains to be seen is whether it will only be the larger VASPs left standing or whether there is scope for smaller players in a regulated crypto industry.
Wiehann Olivier is digital asset lead and partner at Mazars South Africa.
Disclaimer: The views expressed in this article are those of the writers and are not necessarily shared by Moonstone Information Refinery or its sister companies.
Moonstone Compliance’s Regulatory Update Webinar on 24 February has a session devoted to the regulation of crypto assets. Click here for more information and to book.