[TOP STORY] The role of crypto assets in greylisting

SIMON BROWN: I’m chatting with Kara Meiring, a Cliffe Dekker Hofmeyr associate. Kara, I appreciate the early morning time. We scheduled this interview before crypto went all crazy with FTX and the like, but you’re making a point in a note you put out around crypto assets actually playing a significant role in [the FATF] greylisting status, and hence the announcement by the FSCA [Financial Sector Conduct Authority] last month around crypto actually could be helping us.

Read: D-day for crypto assets has arrived, as FSCA targets scams

KARA MEIRING: Absolutely. I think one of the main reasons that the announcement came when it did was because the FATF, the Financial Action Task Force, gave South Africa essentially until October of this year to align some of the issues that it had with the recommendations that the task force gave us in October last year, and the cut-off date was October of this year, and that’s exactly when the FSCA declaration came out.

So it hopefully will play a big role in making sure that we don’t get onto that grey list in February next year.

SIMON BROWN: I can see the concerns around crypto, and this doesn’t necessarily make some of the issues and it wouldn’t have solved FTX and the like, but what it does do is it brings it into sort of the formal structures of financial services, which [are] so hugely important.

KARA MEIRING: Absolutely. There are lot of similar companies to FTX in South Africa which are also not necessarily exchanges in themselves; but some of them are. So for example Luno and we definitely don’t want something like what happened to FTX to happen to Luno.  And I think this declaration definitely plays a big role in ensuring that there are these regulatory measures in place to ensure that there’s at least some form of compliance with the Financial Advisory [and Intermediary] Services Act.

SIMON BROWN: This would then suggest – and I’m not sure that anyone was suggesting otherwise – it does give us a clear indication that there might be an argument that perhaps government’s moving a little slowly, but government is moving; and broadly the Financial Sector Conduct Authority is an arm of government in many senses. We are moving forward. We are paving the way as best we can to avoid that potential greylisting.

KARA MEIRING: Absolutely. I think government realises the drastic impact it will have if we do end up on that grey list.

If you look at some research done by the IMF [International Monetary Fund], they say typically countries that ended up on the grey list, their GDP exports declined by 7%, their foreign direct investment declined by 3%.

Those are the kind of consequences that we definitely want to avoid, and I think the government is taking that very seriously and that’s one of the reasons that they took the steps that they did.

SIMON BROWN: Broadly, if you look at South Africa and how we deal with crypto, how far are we behind the developed market? My sense is it’s a bit [of a] hodgepodge, depending on the market. But are we sort of up there with the DMs [developed markets] in terms of dealing with crypto assets?

KARA MEIRING: I think we’re not quite there yet. I think the position that government has taken is more a reactionary one than a proactive one. So we’ve seen, for example, in England they’ve been making legislation for years now regulating different crypto assets, talking about how we should define a crypto asset as a property, as a currency.

So I think definitely South Africa is slightly behind. But if you compare us to a few other developed countries we are, again, perhaps a bit ahead. So I don’t think we’re too far behind. But I do think taking a proactive stance as opposed to this kind of reactionary measure that we’ve seen from government would probably be a better approach.

SIMON BROWN: One of the other big parts of crypto – particularly late last year, early this year – was NFTs, non-fungible tokens. That’s the space that, certainly in terms of looking at sales at places like OpenSea, is down 90% from the beginning of the year. But does this also have implications for NFTs which are by definition crypto assets?

KARA MEIRING: Yes. For various reasons the declaration has decided to exclude NFTs from the definition of financial products. The reason given by the FSCA in their policy document is essentially that they don’t think in the South African market NFTs are very big yet. There’s not a lot of activity going on there, and therefore they didn’t think that it was necessary to regulate [them]. I’m not necessarily sure that that’s the best approach to have taken. I think NFTs are an exploding market. So definitely the value of individual NFTs has gone down significantly since the beginning, because in the beginning it was this exciting and novel idea, and I think the market has done what it always does, which is regulate the price to a point where it is what the price should actually be for NFTs.

But I would definitely say there is movement in the South African economy, where we’ve seen companies moving towards NFTs.

For example, I think there’s a development in a parking block in Cape Town now that kind of came out and said, well, you can buy these properties through an NFT system, and they’re going to try cut out intermediaries like the Deeds Office. So I think we’ll have to see how that’s going to play out [in practice]. But there definitely is movement in the market towards using more NFTs.

So I would think that at some point either they would need to uplift that exemption and say, well now actually the declaration applies to NFTs, or they would need to make separate regulations that specifically apply to NFTs.

SIMON BROWN: I take your point. Sooner or later it is just going to have to happen. NFTs are here to stay. We can’t just ignore them.

We’ll leave that there. Cliffe Dekker Hofmeyr associate Kara Meiring, I appreciate the early morning.

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