This is the second part in a series of articles to provide readers with a more holistic understanding of crypto assets and the current South African regulatory framework. Part one is a brief overview of the most popular types of crypto assets.
New technological advances in the financial sector, referred to as fintech, leverage big data, machine learning and artificial intelligence, distributed computing, cryptography and the reach of the Internet. While fintech may create new opportunities and business models, greater efficiency, better and more targeted products and services, better client experience, higher levels of financial inclusion and cost reduction, it is not without its challenges for customers, services providers and regulators.
Most financial sector legislation predates these fintech advances, resulting in the possibility that some of the services rendered and products provided by fintech firms may fall outside of the existing regulatory framework, leaving customers vulnerable and without any regulatory protection or recourse against unscrupulous firms.
Many of these technologies also operate seamlessly across borders creating legal uncertainty (for example, where was a contract concluded) and the opportunity for regulatory arbitrage as regulatory approaches differ across jurisdictions (for example, different data privacy laws in different jurisdictions). Therefore, regulators must actively and continuously assess technological changes and the impact thereof on existing regulatory frameworks.
The objective of financial sector regulation is to identify vulnerabilities and imperfections that weaken financial stability, undermine market efficiency and competition and expose customers to risks. In pursuing these objectives concerning fintech regulation, the consensus is that regulation should be flexible to remain effective, it should be technology-neutral, activity-based instead of entity-based and greater harmonisation between national regulatory frameworks is required.
How are local regulators responding to fintech innovations?
In 2016, the Intergovernmental Fintech Working Group (IFWG) was established. The current IFWG members are the Financial Intelligence Centre (FIC), Financial Sector Conduct Authority (FSCA), National Credit Regulator (NCR), Competition Commission, National Treasury, South African Revenue Service (SARS), Prudential Authority and South African Reserve Bank (SARB). The IFWG is a forum for these South African regulators to gain deeper insights into fintech innovation as well as to regulate and foster responsible innovation, ensuring the continued efficient functioning of financial markets, financial stability and the safeguarding of customers’ interests.
The IFWG has published the following papers, worth a read to understand fintech developments, its challenges, and proposed regulatory treatment:
| Year | Title | Description |
|---|---|---|
| 2018 | IFWG Fintech Workshop | The inaugural IFWG workshops, held during April 2018, focused on private crypto assets; financial inclusion, innovation facilitation and appropriate policy and regulatory responses to these topics. |
| 2018 | IFWG Consultation Paper on PolicyProposals for Crypto Assets | This paper highlights the benefits and risks of crypto asset-related activities, reviews the approaches by other jurisdictions and presents initial draft recommendations for dealing with crypto assets from a South African perspective. |
| 2018 | Project Khoka – Exploring the use of distributed ledger technology for interbank payments settlement in South Africa | Project Khokha was a 2018 proof of concept designed to simulate a “real-world” trial of a distributed ledger technology-based wholesale payment system. |
| 2019 | IFWG Fintech Workshop | The September 2019 IFWG workshops covered the following topics: artificial intelligence; central bank issued digital currencies; cybersecurity; digital identity; innovation for economic growth as well as open banking. |
| 2019 | Fintech Scoping in South Africa | The aim of this research was to have a clearer understanding of the South African fintech market and is based on 2019 data covering active fintechs founded during the previous 11 years that have a physical presence serving South African consumers. |
| 2020 | IFWG CAR Working Group Position Paper on Crypto Assets | This paper provides specific recommendations for the development of a regulatory framework for crypto assets in South Africa, including suggestions on the required regulatory changes to be implemented. |
| 2020 | Vision for South Africa’s Fintech Sector | This document provides a forward looking, high-level vision for South Africa’s Fintech sector. The vision is for South Africa to be a leading Fintech hub for Africa, promoting financial inclusion while spurring competition, digital skills and economic growth through innovation. |
| 2020 | Non-traditional data research report | The aim of the report is to unpack the increasing use of alternative sources of data in shaping customer value propositions offered by fintechs as well as key benefits and risks this introduces. The report covers global trends, key applications of alternative data, local insights, key benefits and risks, and key actions to be considered by regulators and fintechs alike. |
| 2021 | IFWG CAR Working Group Position Paper on Crypto Assets | The paper confirms that crypto assets will be brought into the South African regulatory purview in a phased and structured manner. |
| 2021 | Fintech Digital Platforms – An investigation into Fintech Digital Platform activity in South Africa and their regulatory implications | A research document investigating fintech digital platform activities in South Africa and their regulatory implication. |
| 2021 | IFWG Paper on articulating the policy rationale and policy imperatives for Open Finance in South Africa | The purpose of this paper is to present an initial collective view of the IFWG on various open finance considerations, including but not limited to issues such as the appropriate regulatory regime for open finance and the potential benefits and risks of open finance. |
| 2022 | Project Khokha 2 – Exploring the implications of tokenisation in financial markets | The report explores the policy and regulatory implications of tokenisation in financial markets. As a practical proof-of-concept, the project trialled the trading, clearance, and settlement of debentures on distributed ledger technology. |
| 2022 | Feedback on the IFWG’s first Regulatory Sandbox initiative | The report documents the IFWG’s experience in following a cohort-based approach in its multi-regulator sandbox. The RSB also seeks to provide regulatory clarity to participants and industry more broadly, while providing insight into innovation for regulators and the policymaker to inform appropriate policy and regulatory responses. |
The IFWG also introduced the IFWG Innovation Hub to assist all financial sector innovators, including new start-ups, established fintech firms, incumbent financial service providers and adjacent industries entering the financial services market (for example, retail and telecommunications).
Innovation Hub users have access to three avenues for assistance:
- The Regulatory Guidance Unit assists market innovators in resolving specific questions regarding the policy landscape and regulatory requirements. It provides a central point of entry for market innovators to submit enquiries related to fintech and innovation-oriented policies and regulations.
- Responses from the Regulatory Guidance Unit integrate perspectives from relevant financial sector regulators, eliminating the need to contact multiple regulators. However, it must be noted that guidance provided is non-binding and innovators should seek formal legal advice on complex enquiries.
- The Regulatory Sandbox (RSB) provides opportunities for financial sector innovators to test new products and services that push the boundaries of existing regulation, all under the responsible supervision of relevant regulators. The RSB first opened for applications in April 2020. The RSB works with participating regulators to extend possible regulatory relief, where required, to regulated and unregulated innovators to test products and services that do not fit within or challenge the existing regulatory framework. The applicant and relevant regulator(s) agree on what will be involved in a particular sandbox test, including a test plan, testing parameters (restrictions placed on testing to manage risks, including to customers), and the duration of testing. Participants must remain compliant with all existing regulatory requirements and entrance into the sandbox does not change a firm’s licensing status nor does it signal tacit or implicit approval.
Participants are expected to report on testing progress at regular intervals. RSB testing offers the opportunity for regulators and innovators to consider the legislative and regulatory fit of emerging innovation. After testing, the insights gained should clarify how such innovation could be treated from a regulatory perspective in future thereby promoting regulatory certainty. Details of an applicant’s solution are not made public. However, where insights have broader market, policy or regulatory implications, they are shared with the industry. - The Innovation Accelerator provides a collaborative, exploratory environment for financial sector regulators to learn from and work with each other – and the broader financial sector ecosystem – on emerging innovations in the industry.
More information on the above points is available at the IFWG Innovation Hub.
In the next part of this series of articles, we will explore the provisions dealing with crypto assets that have been incorporated into the South African regulatory framework.
