In the six-month period starting June 1, crypto companies that wish to operate in South Africa must submit a license to the Financial Sector Conduct Authority of the country.

South African crypto companies welcome the new licensing regime but are concerned that the fines for failure to register on time could sink smaller firms or force away firms who want to enter the market once the deadline has passed.

South Africa was ranked 30th on Chainalysis’ global adoption index in 2018. It is also behind other African nations like Nigeria, Kenya and South Africa when it comes to crypto use. The regulators of South Africa, as well as those in other countries, are trying to monitor the sector. It hit almost $3 trillion in global capitalization by 2021, before crash spectacularly.

The FSCA of South Africa proposed in November 2020 that crypto be treated as financial products and that companies offering crypto-related service must apply for a licence. After a consultation about the draft legislation, the FSCA released the Final Declaration regarding the licensing requirement on October 19,2022.

Nick Taylor, Luno’s head of public policy for Europe, Middle East, and Africa, said: “This is a very positive step both for the crypto industry as well as South Africa.” Luno is also owned by Digital Currency Group, as is CoinDesk.

Taylor said that the licensing requirements that result from the FSCA classification will raise standards, protect consumers and give businesses confidence to invest, innovate, and create jobs.

Mpumelelo Nuud Money’s CEO, Mpumelelo Nadamane told CoinDesk that the regime will protect consumers, which is very important.

South African regulators decided to wait until June 1 to begin the process of seeking approval, rather than enforcing it immediately after the declaration.

Firms who apply for registration within the specified six-month period will be allowed to operate while regulators decide on approval. For firms to continue operating, they will need to demonstrate that they meet the standards set by the country for financial service providers. This includes conditions such as integrity and being diligent.

The declaration stated that crypto derivatives service providers are not eligible for the exemption. This allows businesses to continue operating while applications were being processed.

Costs of not applying

The exact amount that crypto companies must pay to register at the FSCA is not yet known, but the fees they pay usually range between 2,544 South African Rand ($132) and 46,251 South African rands ($2,395) depending on which category the company falls under.

The category with the lowest fee is the one that will most likely apply to crypto companies. Meiran Schtibel said that if an applicant falls under more than one category, they will have to submit multiple applications.

Not applying can cost you a lot more.

The declaration stated that if crypto companies continue to operate after the deadline of November, but do not register, they may be fined up to 510,000 South African rands ($510,000), or face prison terms of up to ten years, or both.

Nuud Money has raised a seed round worth $350,000 and it would be impossible for them to pay a fine of $510,000, Ndamane explained.

Shadrack Kubyane, co-founder of South Africa’s blockchain company Coronet, told CoinDesk that a 10 million rand fine is a mere slap on other financial sectors with a lot of capital. But for an emerging industry such as crypto, it could “sink” the entire operation.

Shtibel explained that the fines were not unique to crypto and they are part of existing penalties under Financial Advisory and Intermediary Service Act (FAIS), a law which applies to all financial firms. He added that the fact the fines weren’t tailored specifically to the crypto industry may have contributed to the problem.

The FSCA declared that the benefits of the new regulations to the financial services sector outweigh the costs.

Some companies thought that the time allocated for preparing for the regime wasn’t enough. The FSCA had originally asked crypto companies to extend the time period for application to between eight months and up to two year. However, they settled on a six-month timeframe instead, because the FSCA felt that two years was not justified.

Shtibel stated that companies can still apply to register, but will not be allowed to operate until the regulator has approved them. This approach has led to the exodus of firms from countries such as the U.K. because they are required to register in order for them operate there.

Ndamane explained that those who set up their business closer to the deadline may find it difficult to complete the paperwork in time.

Kubyane explained that insufficient time could be a barrier when it comes to submitting an application. It may take some companies time to comply with the rules.

The declaration stated that crypto companies who wish to be licensed must fill out forms requesting information about their business activities, shareholders and financial stability.

The declaration stated that digital asset companies who have applied within the time limit will only be required to cease operations if they are rejected. FAIS is not clear on whether companies can reapply if they have been rejected. However, they can submit a request for reconsideration under current regulations.

The declaration stated that, once the Conduct Of Financial Institutions (COFI), bill becomes law, all crypto assets-related financial service will be covered by the COFI act, and not the FAIS Act which is a temporary measure. The COFI Bill provides protections for consumers.

The declaration stated that non-fungible tokens will not be required to register and will only be considered as part of a future framework. Mining Nodes, and Node Operators will also be excluded.

Kubyane wants the regulators to continue working with the industry in order to develop measures that are appropriate for all crypto players and not just large ones.

By the time of press, the FSCA had not responded to a CoinDesk comment request.

South Africa adds crypto businesses to list of accountable institutions

Sandali Handagama & Nikhilesh De edited the book.