In recent years, cryptocurrency has grown significantly in popularity amongst financial investors, to the point that crypto exchange trading platforms are a viable and even lucrative business model. At the moment, such exchanges and other crypto-centric financial instruments and associated services remain officially unregulated in South Africa. This is the lesson from the Financial Services Conduct Authority’s(“FSCA”) investigation of Ovex Pty Ltd (“Ovex”). Details behind the initial reasoning of the FSCA remain unknown, but summarily, the FSCA published a press release in 2021 warning the public against Ovex as an unlicensed financial service provider (“FSP”) in terms of the Financial Advisory and Intermediary Services Act 37 of 2002 (“FAIS”). Soon after this warning, the FSCA retracted its press release and published a new statement explaining that in fact, Ovex was not an FSP under the jurisdiction of the FSCA and apologising for the inconvenience.
A simplistic reading of the FAIS Act leads quite quickly to the conclusion that cryptocurrency exchanges are not FSPs. An FSP is characterised by the services it provides relating to FAIS-recognised financial products. Cryptocurrency itself does not currently make the list of recognised financial products in section 1 of FAIS, nor does any catch-all wealth-generating financial instrument into which crypto might fall. Thus, where cryptocurrency is the lone financial instrument upon which an entity’s services are based, such an entity cannot be considered to be an FSP requiring a FAIS licence. Again, this is a relatively easy conclusion to draw, perhaps too easy. Why did the FSCA suspect that Ovex may have required an FSP license? Is there a looming argument for the FAIS subjectivity of crypto exchanges? Certainly not from the perspective of cryptocurrency as a financial product itself as we have seen, but what about other recognised FAIS products that may underpin the crypto exchange, business model? Consider the deposit product. Deposits under FAIS have the same meaning as that in the Banks Act 94 of 1990. Deposits are defined in section 1 of the Banks Act as sums of money paid by person A to person B under an agreement that provides for the repayment to person A of that money subject to various conditions, including flexible repayment days and times, custodian fees and interest accrual to both parties; essentially, bank deposits as understood by the average person on the street with a bank account. Cryptocurrency exchanges certainly allow and even require that traders deposit money into the exchange’s bank account for trading purposes. Traders also withdraw such monies and any profits from trading activities back into their personal accounts. By virtue of this service provided to clients, crypto exchanges certainly provide intermediary services in relation to deposits as a financial product. Sceptics of this line of thinking have raised the argument that only entities licensed as banks in terms of the Banks Act are permitted to accept deposits in this manner. This may very well be the case. However, it is important to remember that the FSP license is a distribution and intermediation license. Where a cryptocurrency exchange accepts deposits into its own bank account, this does not mean that the exchange holds the deposit itself. This is because the bank remains the issuer and provider of the bank account product. It supplies the product to the exchange which ” distributes” or provides usage of that bank account to clients for crypto trading purposes. The exchange intermediates between the client and the bank by utilising the bank account supplied by the bank (the product provider) to effect trade payments between clients/users of the trading platform.
Depending on the business processes of Ovex, the FSCA may very well have been on to something in its thinking that crypto exchanges provide financial services that require the FAIS FSP license. Additionally, since the FSCA’s press releases, Ovex Pty Ltd has been licenced as a registered FSP with license number 50776. It is licenced for 9 product subcategories including long-term and short-term deposits. Whether this registration is an attempt to remedy the public scepticism caused by the earlier FSCA scrutiny, or whether it is in anticipation of the crypto exchange regulation that is expected in the near future is not at all certain. The seeming correlation between the licensing and the regulator scrutiny however cannot be ignored.