eBusiness Weekly
Moneyweb
Most South African Reserve Bank (Sarb) guidance notes get read by the compliance officers and few others, but this one contains a few gems.
In a note issued this week, Sarb advises banks that risk assessment does not necessarily mean avoiding risk entirely by, for example, terminating client relationships with crypto asset service providers (Casps).
Crypto companies have complained long and hard about their treatment by banks, several of which terminated banking relationships because of the perceived risk.
Read: FNB to shut down cryptocurrency platforms’ bank accounts
The Sarb guidance note appears to be an attempt to get banks to review those decisions and work a little harder at understanding the risks. It also encourages banks to start hiring people who understand cryptos.
First-hand experience
Farzam Ehsani, CEO of crypto exchange VALR, responded on Twitter: “To my knowledge, this is the first time the Sarb [where the Prudential Authority is housed] has officially acknowledged this.
“This happened to VALR.com. FNB unbanked VALR and the other major crypto companies in SA in 2019/20 and we all moved to other banking partners in SA.”
“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 (Money Laundering/Terrorism Financing/ Proliferation of Weapons of Mass Destruction) risks.
“To me this is the gentlest way a regulator could say to its banks: ‘Don’t un-bank the crypto industry!”
This is a great step forward for crypto, for SA and for the banks themselves, adds Ehsani.
“It’s particularly helpful for companies in the crypto space that are responsibly trying to build products to serve people.
“Risks and bad actors obviously still remain in crypto (as they do elsewhere) and banks won’t immediately start banking all crypto companies. But this note takes SA in the right direction of allowing new technologies and innovation to flourish in the country,” says Ehsani.
‘Appropriate’ risk management
Sarb advises banks to conduct risk assessments on crypto assets and Casps to determine “the appropriate level of ML/TF/PF risk management measures necessary, as opposed to total avoidance, in line with the application of a risk-based approach.
”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,” says the note.
Ehsani says the SA crypto industry has a way to go to finalise a comprehensive crypto framework, but the guidance note from Sarb “gives me hope for SA.”
“Start-ups are hard. Crypto start-ups are even harder, particularly when a basic thing such as having a bank account isn’t a given. Well done @SAReserveBank – this is an important and needed statement for the country,” concludes Ehsani.
Sorting the wheat from the chaff
Co-founder crypto and fintech company Fivewest, Omer Iqbal, says the Sarb announcement is welcome, and that comprehensive, but “not overly excessive or punitive regulation”, is essential for the next phase of the crypto growth story.
“This sort of regulation will allow for legitimate Casps to no longer be tarred with the same brush as those using these technologies irresponsibly – or worse – for nefarious purposes.”
Regulation will make it easier for crypto investors and participants to differentiate between the legitimate and illegitimate players in the sector, while lowering barriers to entry for cryptocurrency platforms seeking banking and other commercial relationships (where currently such platforms are viewed with extreme prejudice, regardless of their legitimacy).
Says Iqbal: “In the current system, banks and other financial institutions only accept partnerships with the largest of these platforms that can afford substantial time and legal effort to argue their cases directly with these institutions.
“It is an emergent phenomenon that is fundamentally anti-competitive. With sufficient regulation in place, banks will be able to provide services to firms that are compliant, that do not have colossal bespoke legal and lobbying budgets.”
Given the benefit of cryptos in terms of financial efficiency improvements, this could have a massive impact on the much-touted goal of financial inclusion. “Creating an environment where Casps are monitored – and healthy competition in the space is encouraged by a level playing field – will go a long way in doing so,” adds Iqbal.
Banks’ inadequacies highlighted
Dean Joffe, co-founder of crypto investment company BitFund, says the Sarb guidance note highlights the fact that many banks lack the requisite technical expertise to adequately assess the risks stemming from crypto assets from a legal, technical, financial and operational perspective.
“In October 2018, the Financial Action Task Force adopted updates to Recommendation 15, which reinforced the need for financial institutions to identify and assess the money laundering or terrorist financing risks related to the use of new or developing technologies, and take appropriate measures to manage and mitigate the associated risks before using new or developing technologies,” says Joffe.
“However, since the update, South African banks have been hesitant to engage with Casps, who have been unbanked by many of the major banks without any valid legal, risk or other basis.”
Apart from encouraging banks to hire appropriate crypto skills, the guidance note requires banks to implement robust and flexible controls to adapt to changes encountered regarding technology developments.
Specifically, the guidance note highlights that a “one-size-fits-all” approach in dealing with crypto asset service providers from a risk perspective may be inadequate, and a risk-based approach is therefore needed.
“For years, Casps have spoken out against being unbanked without any rational basis, which has caused significant issues on crypto asset service providers and their clients,” adds Joffe. “While the guidance note is a step in the right direction, we are always concerned that certain banks may continue adopting a blanket approach by rejecting certain crypto asset service providers without any rational basis.”
