In January 2023, I wrote an article for Blue Chip Digital titled The declaration of a crypto asset as a financial product: how does it affect financial planners? (The article is linked to QR1.) The article dealt with the declaration of crypto assets as a financial product under the Financial Advisory and Intermediary Services (FAIS) Act 37 of 2002.
As noted in that article, consumers have a poor understanding of crypto assets and the risks relating to investing in crypto assets.
In addition, crypto assets have created new opportunities for scammers as is evident from numerous news reports, and Netflix documentaries like Trust No One: The Hunt for the Crypto King and Bitconned.
The Financial Sector Conduct Authority (FSCA) continuously warns consumers against scams and urges consumers to act with care when investing their funds. Recently, the FSCA warned consumers against transacting with certain persons and entities, who are using Telegram to render unauthorised financial services, some who are purporting to be agents or representatives of the Johannesburg Stock Exchange, or that there is a FSCA guarantee in respect of the transactions.
To mitigate the risks relating to crypto assets, South African regulators have started creating a regulatory framework around crypto assets, which includes the declaration of crypto assets as a financial product for purposes of FAIS. However, the regulatory framework relating to crypto assets is much broader than that, and it will continue to evolve and adapt as crypto assets evolve.
This is the first part of a series of articles in which I will attempt to provide readers with a more holistic understanding of crypto assets and the current South African regulatory framework.
What are crypto assets?
Most crypto assets use blockchain technology. There are several types of crypto assets. The most common are:
- Cryptocurrencies and stablecoins
- Crypto tokens
- Central Bank Digital Currencies
Cryptocurrencies and stablecoins
A cryptocurrency is a digital or virtual currency. Most cryptocurrencies use blockchain technology. (To understand blockchain technology, watch the video linked to QR2.). It is secured by cryptography which makes it nearly impossible to counterfeit or double spend. Cryptocurrencies are generally not issued by any central authority, like a central bank. This theoretically allows them to be free of government interference or manipulation.
Cryptocurrencies have no inherent value. Their perceived value is based largely on supply and demand in the market. Cryptocurrency architecture decentralises existing systems and makes it possible to transact independently of intermediary institutions, like banks, making transactions faster and cheaper.
Bitcoin and Ether are examples of cryptocurrencies. (To understand more about how cryptocurrencies work, watch the video linked to QR3, and to understand more about cryptocurrency wallets, watch the video linked to QR4.)
The US Securities and Exchange Commission authorised the first crypto exchange-traded funds (ETFs) early in 2024. Cryptocurrency ETFs track the price performance of one or more cryptocurrencies.
These funds enable retail investors to gain direct exposure to cryptocurrency prices without having to own the assets directly.
Stablecoins are cryptocurrencies of which the value is pegged to that of another currency or commodity, for example, the USD or gold. Stablecoins provide an alternative to the high volatility of other cryptocurrencies. The most popular stablecoin is Tether. It is pegged 1:1 to the USD and backed by gold reserves.
Crypto tokens
Crypto tokens are a digital representation of an asset or interest in something and are built on a blockchain. They may be used to raise funds for projects and are usually created and distributed through an initial coin offering process.
The term “crypto token” is often used interchangeably with cryptocurrency. However, a cryptocurrency is used for making or receiving payments using a blockchain. Crypto tokens are used to facilitate transactions on a blockchain but can also represent an investor’s stake in a company or serve an economic purpose.
In 2024, BlackRock launched a tokenised investment fund, the BlackRock USD Institutional Digital Liquidity Fund on the Ethereum blockchain. The fund pays dividends as new tokens.
There are several types of crypto tokens, like non-fungible tokens, tokenised equity, security and utility tokens.
Non-fungible tokens (NFTs).
Non-fungible tokens are assets that were tokenised via a blockchain. The connection between the token and the asset makes them unique. Every NFT also contains a unique digital signature. Earlier NFTs were mostly digital art. However, NFTs these days can also include, for instance, photographs, music and in-game experiences.
The person who holds the private key to the token owns the rights assigned to the token. Two cryptocurrencies from the same blockchain are fungible, ie interchangeable, but even though two NFTs from the same blockchain can look identical, they are not interchangeable.
The most expensive NFT sold to date is The Merge by Murat Pak, which sold for US$91.8-million. (An image of The Merge is linked to QR5.)
Tokenised equity.
A business can issue shares in the form of a crypto token to raise capital. This is usually done through an initial coin offering. The tokens are issued, bought and sold on blockchain platforms and held in digital wallets.
Security tokens.
A security token represents rights of ownership, tokenised on a blockchain. It transfers value to whoever holds the private key to the token. For example, one can create a security token on the blockchain for the ownership and registration of a car by using the vehicle identification number with the owner’s name and address. The token could be sold and purchased, transferring ownership of the car.
Utility tokens.
Utility tokens give the holders access to a service or product. Even though these tokens can be bought on cryptocurrency exchanges, they are not designed to be a currency or a store of value, but rather to provide utility to users of the platform. For example, the Binance Coin, a utility token, grants traders discounts on trading fees when using the Binance exchange.
Central Bank Digital Currencies (CBDCs)
A CBDC is the digital form of a country’s fiat currency, issued by the country’s central bank. They are similar to cryptocurrencies, but their value is fixed by the central bank and equivalent to the country’s fiat currency. CBDCs increase transaction efficiency, promote financial inclusion, reduce costs and provide increased security and privacy for users.
By the end of 2023, the Bahamas, Jamaica and Nigeria had already introduced CBDCs, and more than 100 countries are in the exploration stage, with Brazil, China, the Euro area, India and the United Kingdom at the forefront.
The above is only a brief overview of the types and nature of crypto assets. In the next article, I will start unpacking the regulatory framework relating to crypto assets in South Africa.
