Yesterday evening, Thursday 30 May 2019, the South African Reserve Bank (SARB) released its Financial Stability Review for 2019. In it, the SARB highlighted some of its outlook on cryptoassets, and potential risks and benefits, bearing in mind that – earlier in the year – the SARB published a consultation paper on proposals and policy for cryptoassets, in a bid to protect investors and consumers.
To provide a safe and sound financial system in South Africa, SARB and accompanying regulatory bodies institute strict boundaries for all participants in the system. Cryptoassets, however, perform the same financial activities often without such safety mechanisms in place, making the environment risky and currently leaving cryptoassets with no “legal tender” standing.
From the FSR, it is clear that the Intergovernmental Fintech Working Group (IFWG) are building on their regulation approach to the industry. Based on the review, the SARB still regard cryptoassets as a potential threat to the central bank’s right to issue and control the money supply.
The SARB also state in the review that cryptoassets pose more specific risks, including possible misuse in relation to terrorism financing and money laundering, no consumer protection, evasion of exchange controls, and an increase in hidden illegal financial flows.
Given the associated risks, SARB have come up with possible risk mitigation measures and enhance trust and stability.
Our two key take aways from the SARB’s section about cryptoassets in this review paper are…
- SARB recommends a limited regulations approach of cryptoassets in South Africa
An official body is set to offer guidance and place specific requirements on cryptoassets service providers. This way, the cryptoassets service providers will be held responsible under a legal obligation by the FIC (Financial Intelligence Centre) to comply with the AML/CFT (anti-money laundering/combating the financing of terrorism) requirements.
- SARB will allow innovation in the financial sector
Innovation is one of the main things that incentivises foreign direct investment, and curbing it will be detrimental to economic development. The regulatory authorities are therefore urged to keep up with the innovations, especially those that affect the market structure. They form an integral part of the financial stability system, that shouldn’t be compromised at any cost.
It is good to see the Reserve Bank recognising the opportunity that cryptoassets and blockchain technologies provide for innovation in South Africa, but we hope that their respect and recognition doesn’t get overshadowed by their fear of the threats they might seem to pose to central banks. It’s plausible that this is going to be the SARB’s most important task in this industry: balancing their fostering of FinTech innovation, with their fear of the unknown.
You can read the full review in a publication released by SARB on their website here.