South African Central Bank Releases Crypto Risk-Assessment Note

The South African Reserve Bank has released guidelines for local banks to do business with cryptocurrencies and cryptocurrency companies.

The document, released by the Reserve Bank’s Prudential Authority, advises banks to employ anti-money laundering and counterterrorism financing for all crypto transactions.

Last year, South Africa’s financial watchdog, the Financial Sector Conduct Authority, announced plans to release a regulatory framework in 2022 in partnership with the Prudential Authority and the Financial Surveillance Board to govern how trading in Ethereum, XRP, and Litecoin should proceed.

At the time, FSCA commissioner Unathi Kamlana said the goal was to allow the FSCA discretionary power to intervene if consumers are offered a product carrying significant risk.

Risk assessment, not avoidance

The Prudential Authority’s guidelines draw from guidance issued by the Financial Action Task Force regarding the need for a bank to evaluate its vulnerabilities to money-laundering, terrorism financing, and proliferation financing.

Suppose the PA opines that a bank’s processes to handle risk are insufficient. In that case, it may intervene and request the bank to strengthen its policies, procedures, processes, or internal controls.

Some South African banks have already terminated banking relationships with what the PA calls Crypto Asset Service Providers (CASPs) due to the inability to quantify risks posed or the lack of a regulatory framework for the service provider. Banks perceive CASPs as having a higher risk profile.

However, the PA cautions banks against avoiding risk rather than conducting proper risk assessments. This approach opens the door for greater criminal anonymity and obstructs treating AML/TF shortcomings appropriately.

Proper risk assessment includes understanding what is driving the risk within a crypto asset or service provider, including the pedigree of a CASP’s clientele, their transactional activity, and cross-border fund flows. Internal controls must be flexible enough to adapt to new technologies, the PA said.

Banks must report suspicious activity to the Financial Intelligence Centre.

CBDC many years away, says deputy governor

In July 2022, the deputy governor of the SARB, Kuben Naidoo, said that the central bank would view cryptocurrencies as assets rather than a payment means.

He said the bank could already consider licensing some crypto exchanges, even though regulations could take between 12 and 18 months.

Additionally, Naidoo noted that the central bank could offer a digital version of the fiat currency, the South African Rand (ZAR). The bank has conducted two pilot projects, including a sandbox experiment with the new CBDC. However, its introduction could take years, Naidoo opined.

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