South Africa’s Crypto Regulatory Shift: Mandates Local Presence for Global Crypto Firms

Crypto exchanges around the world are grappling with increasing regulatory pressure, and now it’s South Africa’s turn to make its move. Recently, there was a series of crypto movements in South Africa’s Financial Sector Conduct Authority (FSCA) which examined 128 applications from crypto service providers, also planning to review 36 in their December meeting. The stringent actions are based on the FSCA’s evaluation method which includes aspects like customer onboarding, data protection, and risk management. 

Foreign Crypto Firms Face Enforcement

Their “Crypto Assets Markets Study” revealed that 60% of crypto traded are “unbacked assets,” excluding stablecoins and NFTs. Most providers have annual revenues between $53,000 and $2.7 million, with only 8% earning more than $5.4 million. In November 2022, the market reached a transaction value of $427 million. The FSCA warned unlicensed providers to comply or face potential penalties or closure after the deadline in 2023.

FCSA is on the verge of regulating foreign-based Crypto Asset Financial Service Providers (FSPs). Looking at the risk associated with the FSCA’s survey found that around 10% of these entities operate in South Africa but have headquarters abroad. To bolster oversight and accountability, the FCSA has issued a mandatory order to set up a local office presence for these offshore-based companies.

Dealing With Regulatory Gaps and Transaction Volumes

The FCSA’s Crypto Assets Market Study identified gaps in the regulatory framework after the classification of crypto assets as financial products in October 2022. The existing regulations lack specificity tailored to crypto services, necessitating a need for enhanced, innovation-friendly regulatory structures.

Cape Town leads in hosting Crypto Asset FSP headquarters, followed by Johannesburg and Pretoria, reflecting South Africa’s technology hub status. These firms registered over ZAR 8 billion in transactions in November 2022, focusing predominantly on retail customers through crypto exchanges. Of the 47 crypto financial service providers analyzed, over half cater to retail clients, primarily through trading fees. Most generate revenue between ZAR 1 million and ZAR 50 million. Interestingly, 10% derive income from both regulated and unregulated financial services.

Do They Need Change in Revenue Model?

Since these providers earned most of their money from trading fees, administrative, and consulting fees. Many firms made money from regulated and unlicensed financial services. Most Crypto Asset FSPs focused on unbacked crypto assets like Bitcoin and Ethereum, then stablecoins and other digital tokens. 

Increasing Crypto Regulations Worldwide

Around the globe, countries are intensifying crypto regulations in response to last year’s market turbulence. The European Union’s MiCA regulation aims to establish comprehensive frameworks, while Hong Kong, India, and Singapore have introduced new licensing rules for exchanges, marking a significant trend toward stricter oversight in the crypto market. South Africa’s stringent actions may inspire other nations facing similar challenges. 

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