Executive Summary

In recent years, the market for financial products and services associated to crypto assets has expanded quickly, becoming more and more integrated into the regulated financial system.

The cryptocurrency market has grown significantly overall and shows no sign of slowing down anytime soon. The potential for blockchain technology and crypto assets to transform numerous industries still exists, despite the industry's regulatory and other difficulties.

South African consumers are increasingly engaging in financial activities involving crypto assets, including investing in derivative instruments with crypto as the underlying asset, especially given the proliferation of online trading platforms. Heightened take-up and abuse in the retail market necessitates a suitable and proportionate regulatory and supervisory response. The volatility of crypto assets, coupled with the high gearing of derivative instruments poses significant risks to customers.

To better understand the crypto asset-related activities performed by Crypto Asset FSPs in South Africa, the Financial Sector Conduct Authority (FSCA), in accordance with paragraph 3(2) of FSCA FAIS Notice 90 of 2022, request Crypto Asset FSPs to furnish information the authority with information relating to their business and business practices.1 The information gathered is intended to support the work of the FSCA as it develops licensing, supervision, and regulatory frameworks for Crypto Asset FSPs, by highlighting consumer exposure to crypto assets, and in line with risk-based supervision, to identify risks that may negatively impact consumer well-being.

The information gathered suggests that the majority of Crypto Asset FSPs in South Africa provide financial services by making use of unbacked crypto assets, followed by stablecoins and security tokens. The observed crypto assets-related business models are diverse. However, in all instances, the activities mirror traditional financial activities, just using a different technology.

Other findings include:

• The majority of Crypto Assets FSPs disclose crypto asset risks to their clients and the public.
• Cape Town leads the way in head office location
• Key risks observed relate to volatility, market, operational, liquidity, adoption and cybersecurity. Lower-volume asset classes will be particularly vulnerable to market and liquidity risk.
• The majority of Crypto Assets FSP’s earn their revenue from trading fees.
• Majority of the Crypto Asset FSP’s use digital channels to distribute and market their products and services