Cryptocurrency is now regulated. What does this mean for investors?

Published on 15th December, 2022 at 02:44 pm

They’ve been around since 2009, but only recently started being regulated. We chatted with an expert about what cryptocurrency regulation entails, and how this impacts you as an investor.

Reading time: 3 minutes

In this article you’ll learn:

• About the new regulation of cryptocurrency assets in South Africa.
• What the new regulation means for your investment decision-making, from an expert.
• How meeting with a financial planner can help you make sound investment decisions.

In October 2022, the Financial Sector Conduct Authority (FSCA) declared that crypto assets are now a financial product that will be regulated under the FAIS Act. “This announcement is an important step towards making crypto assets more investable. Without regulation, it would be much too risky to consider as an investment. Section one of the FAIS Act gives a definition of what a financial product is. The act also states that those wanting to advise investors on investing in crypto assets should comply with the fit and proper requirements of the act,” says Jaco van Schalkwyk, a Certified Financial Planner^® at Plan-B BlueStar, authorised by Sanlam.

Cryptocurrency assets: a refresher

According to the South African Revenue Service (SARS), a crypto asset is a digital representation of value that is not issued by a central bank. It is traded, transferred and stored electronically by natural and legal persons for the purpose of payment, investment and other forms of utility, and applies cryptography techniques in the underlying technology.

While the application and use cases relating to blockchain are important, van Schalkwyk’s understanding is that this regulation is only the beginning. “We’re not at the same point as we are with asset classes that have been around for many decades, such as treasuries/bonds/equities,” he explains. “This is not an endorsement of cryptocurrencies. Investors still need to do their own research when making a final decision about where to invest. As crypto assets have been around for a lot less time than traditional asset classes, the research needs to be even more thorough than for traditional asset classes.”

Proceed with caution

Van Schalkwyk is cautious when it comes to investing in cryptocurrency. He retells the story of the failed cryptocurrency trading company FTX in which investors lost millions, and are unlikely to get their money back. “They thought that they were investing in a financial product, but they did not understand what was in that product. It’s important to realise that the complexity of the product is probably way more advanced than most novice investors realise,” he explains. The FTX founder, Sam Bankman-Fried, was recently arrested in the Bahamas, and is facing extradition to the US. The criminal charges against him included wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy and money laundering.

What would an expert do?

FTX is one of many cryptocurrency exchanges, and there’s still very little in terms of regulation. The initial promise of blockchain – and the possibility of making massive returns in a short period of time – has been met with civil fraud cases and, as a result, huge losses for investors along the way. “As a financial planner, I will personally not be advising my clients to take on any cryptocurrency exposure at the moment,” van Schalkwyk states. “Until we can accurately determine the value of an asset, we are not investing, but speculating or even gambling. I cannot risk the wealth of clients and expose [them] to that level of unnecessary risk.”

Room for progress

Even with the announcement, van Schalkwyk believes there is more work to be done – especially when it comes to investing. “Further regulation is required – and that’s the problem. The ideologies are in conflict: cryptocurrency and blockchain were promoted to offer an alternative to fiat currencies such as the USD without government intervention, but without regulation, there’s no protection,” he explains.

That said, the impact that cryptocurrency is already making on the global financial system cannot be underestimated. Major financial institutions may not be buying blockchain currencies, but they are investing in the technology behind it. “Blockchain can offer improvements in the overall functioning of the financial system. Declaring crypto assets as financial product is a very important step. The fact remains that it is but one of many steps on the path to get us to where we should be eventually,” concludes van Schalkwyk.

Sound investment decisions start with leaning on the experts. Speak to a Sanlam financial planner today about your current investment portfolio, and how you can add to it the smart way. Plus, earn 8 000 tier points when you request a meeting!