1. CRYPTO ASSETS AND REGULATORY INSTRUMENTS
2019/10/05
CRYPTO ASSETS AND REGULATORY INSTRUMENTS
19 August 2019

2. AREAS COVERED Background on the FIC
2019/10/05
AREAS COVERED
Background on the FIC
International Standard-Setting Instruments
Risks associated with crypto assets
Responses

3. Background
2019/10/05 
Established to administer the Financial Intelligence Centre Act, (Act 38 of 2001) 
South Africa’s national centre for gathering of transaction data and providing financial intelligence 
Authorised to receive and analyse suspicious transaction reports 
Does not conduct investigations into criminal activity 
Funded from the National Budget, reports to the Minister of Finance and is accountable to Parliament

4. Gather and analyse broad-spectrum financial information
FIC role and function
2019/10/05
Data Sources
Gather and analyse broad-spectrum financial information
Monitoring
Monitor, provide guidance and ensure compliance to regulations contained in the FIC Act
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.

5. International Standard-Setting Instruments
2019/10/05
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
Definition
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 1
General requirement
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 2
Specific requirements
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 3
Guidance
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. 4

6. Risks associated with crypto assets
2019/10/05
Money laundering/terrorist financing
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 1
Monetary policy
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 2
Market conduct
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 3

7. Responses
2019/10/05
Deciding whether crypto assets require completely new regulation, or be regulated in line with existing regulations, or refining of existing mechanisms
Level
Description of level
Level 0: Ignoring
The government does not pay attention to the existence of crypto assets.
Level 1: Monitoring
An official body has released a statement recognising the existence of crypto assets, but no approach to dealing with crypto assets has been defined.
Level 2: Recommendation
An official body has released a statement proposing an approach to deal with crypto assets.
Level 3: Guidance
An official body has issued guidance to govern the use of crypto assets.
Level 4: Regulation
Predefined conditions exist which, once complied with, could lead to formal authorisation to provide crypto assets-related products and services.
Level 5: Ban or integration (definitive legislation)
A complete or partial prohibition or adoption of crypto assets. A ban may be implemented via different forms, including banning banks from supporting activities related to crypto assets and a complete ban on all institutions and individuals.

8. Responses 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

9. Pieter Smit