Big News For Crypto In South Africa

South Africa’s banking regulator says it’s time to be sensible about crypto.

“To me this is the gentlest way a regulator could say to its banks “Don’t unbank the crypto industry!” tweeted VALR CEO Farzam Ehsani in a widely quoted thread on Wednesday August 17. That was the gist of the crypto industry’s response to the groundbreaking Guidance Note by the CEO of the Prudential Authority (PA), the main regulator of banks in South Africa.

This is big news because this latest Guidance Note is the first time that the South African Reserve Bank has sent such a clear signal on its stance on crypto: it’s part of the future of the financial services industry, and it’s time for the financial services industry as a whole to take a more sensible approach to the risk they associate with new technology. 

This latest Guidance Note is especially pertinent because, as recently as 2020, South Africa’s major crypto companies were unbanked by FNB and forced to find new banking service providers. In a moment of surprising candour, the Guidance Note states that the PA “is aware that certain banks in South Africa have previously opted to terminate the bank/customer relationship with CASPs or discontinued banking services to CASPs.” As Ehsani tweeted, “To my knowledge, this is the first time the SARB (where the PA is housed) has officially acknowledged this.”

There are a number of important points made in the note, but the key statement from the PA is this one: “Risk assessment does not necessarily imply that institutions should seek to avoid risk entirely (also referred to as de-risking), for example, through wholesale termination of client relationships which may include CASPs”.

There is lots of food for thought in the note with the otherwise rather unassuming title of “Supervisory guidelines for matters related to the prevention of unlawful activities”. The starting point is the Financial Action Task Force (FATF) guidance on risk-based approaches in banks and cites FATF Recommendation 15 which includes “identifying and assessing” AML/CFT risks in “new or developing technologies”. (South Africa is one of the 39 member countries of the FATF, and its policies are an important aspect of the way in which VALR proactively manages risk.)

These are some of the points that stand out:

• The crypto industry should not be unbanked, as has happened in the past. As the note comments: “Derisking may pose a threat to financial integrity … as it could potentially create opacity in … financial conduct, and it eliminates the possibility to treat ML/TF/PF risks.”

• Choosing whether or not to provide banking services to crypto service providers should be based on careful assessment of evidence, rather than a blanket ban. 

• De-risking should be a last resort, not the first option: “If the risk posed by a particular business or customer is too great to manage successfully, the decision to de-risk should only be made after careful due diligence and consideration.”

• A one-size-fits-all approach to crypto and risk does not make sense. “A “one-size-fits-all” approach in dealing with CASPs/CAs … may signify inadequate risk understanding and risk management, as business models may widely differ, and this goes against the spirit and practice of a risk-based approach.”

• Banks and other financial institutions should employ people who understand blockchain and crypto. “Banks should ensure that they have the relevant and requisite technical expertise to adequately assess the risks stemming from CASPs and CAs.” 

Risks and bad actors obviously still remain in crypto (as they do in many areas of financial services), and banks won’t immediately start banking all crypto companies. But this note takes SA in a direction that allows new technologies and innovation to flourish in a country that needs to take advantage of every opportunity to widen access to financial services and address inequality. It’s particularly helpful for companies in the crypto space that are responsibly trying to build products to serve people and small businesses which can most benefit from crypto and blockchain technology. 

“In my view this is a great step forward for crypto, for South Africa and for the banks themselves,” Ehsani notes. “Well done to the South African Reserve Bank – this is a much-needed and important statement for the country.”