Potential Opacity in Financial Conduct Created by De-risking Crypto Firms, says South African Banking Regulator

By: Mark Jessy

Potential Opacity in Financial Conduct Created by De-risking Crypto Firms, says South African Banking Regulator

August 19, 2022 8:32 AM

The most recent guidance note released by the South African banking sector regulator, Prudential Authority, states that risk assessment does not mean financial institutions should completely end client relationships with organizations like crypto asset service providers in order to avoid or eliminate risks. The regulatory body prefers that financial institutions only think about "de-risking" when the risk is "too big to manage successfully."


Financial Integrity at Risk

The Prudential Authority, South Africa's primary banking industry regulator, has stated that some banks' actions to sever links with cryptocurrency companies "may constitute a threat to financial integrity in general." The regulator also indicated that fully avoiding cryptocurrency companies would potentially make banks' risk management procedures less effective.


The withdrawal of cryptocurrency entities like exchanges from the banking system "may potentially cause opacity in the impacted persons' or entities' financial conduct," according to Fundi Tshazibana, CEO of Prudential Authority, in a guidance note given to financial institutions. The eight-page guidance note continued, "The same also precludes the possibility of treating risks like money laundering, terrorist financing, and proliferation financing."


Tshazibana's comments came more than six months after allegations surfaced that certain South African financial institutions had informed customers of automated cryptocurrency arbitrage services that their accounts would be terminated.


The CEO, on the other hand, implores banks to carry out the pertinent risk assessment for each crypto asset (CA) or crypto asset service provider in the guidance note, which must also be given to the independent auditors of the respective institutions (CASP). Tshazibana clarifies:


"Therefore, it is wise for banks to be able to risk categorize CA/CASP-related clients through the process of conducting a risk assessment. This will help banks determine the appropriate level of [money laundering, terrorist financing, proliferation financing] risk management measures necessary, as opposed to total avoidance, in line with the application of a risk-based approach."


According to the CEO, a business or customer should only be de-risked or have service terminated if the risk posed by that business or consumer is "too big to manage properly."


A Significant Progress for Crypto

Farzam Ehsani, CEO of South African cryptocurrency exchange platform Valr, responded to the Prudential Authority's most recent advice note by tweeting that the regulator's justifications show that it now recognizes the advantages of keeping an eye on crypto transactions. Ehsani also shared his opinions on the guidance note's implications for the cryptocurrency sector. He stated:


This is a major development for cryptocurrency, South Africa, and the banks themselves, in my opinion. It's especially beneficial for businesses operating in the cryptocurrency sector who are striving to properly create goods that benefit customers. Banks won't immediately start banking all crypto enterprises because there are still risks and bad actors in crypto (as there are everywhere).


The head of Valr further asserted that South Africa will likely be led "in the correct direction" by the most recent guidance note, enabling the development of new technologies and innovation there.