The Digital Asset Ecosystem in Mauritius and South Africa

*Disclaimer: The accuracy of this transcript is not guaranteed. This is not investment advice, and any opinions expressed here are the sole opinions of the individuals, not of the institutions they represent.

 

[00:00:11] Katrin: Welcome to this exciting episode of Metaco Talks. Exciting because today we talk about digital asset ecosystems in Mauritius, South Africa, and Kenya. I’m pleased to have two very distinguished experts in that field today with me. Angela Itzikowitz, as well as Ashveen Gopee, thanks very much.

Angela is an expert in banking and financial market regulation and reforms. You’ve been a distinguished academic as professor at Edward Nathan and an accomplished lawyer. You’re part of several boards and regulatory committees, and I’m very pleased to have you with us today. Thank you and welcome.

[00:00:54] Angela: Thank you for having me.

[00:00:56] Katrin: Ashveen, you’ve been very active as a voice in the virtual asset and fintech space, and you’ve also published on the topic in the Journal of International Banking Law and Regulation, for example. You’re supporting various clients in the financial services industry, navigating the landscape in your role as partner at PwC at the moment. Many thanks for taking the time to discussing digital assets today with us, and also welcome.

[00:01:21] Ashveen: It’s my pleasure to be with you.

[00:01:24] Katrin: Well, let’s dive straight into it. Adoption of cryptocurrencies in emerging markets across Africa as well as Asia, has largely been driven by rising inflation and depreciation of fiat currencies. However, the world of digital assets has so much more to do to it, and financial services companies around the world are bringing new products and services to market based on blockchain technology, while the regulatory landscape also across various jurisdictions is evolving and maturing.

We will therefore focus our episode today on the much broader virtual and digital asset ecosystem beyond cryptocurrencies. With that, as already mentioned, cryptocurrencies are just one side of the coin for applications of blockchain, even though they were the first ones, the first use case and applications on blockchain.

But let me ask you, what are other assets which people should know about and will become much more important topics in the future also? What do you probably also see specifically in South Africa and Mauritius?

[00:02:34] Angela: Would you like me to go first?

[00:02:37] Katrin: Yes, please, Angela.

[00:02:37] Angela: I think you are quite right in alluding to the fact that there are certainly digital assets beyond crypto, and that the terms are used interchangeably, that they actually aren’t synonymous. I always find the best way to draw a distinction between crypto assets and digital assets is to see digital assets as a seat or a file of which crypto assets is a subset or a folder. But certainly the subset digital assets encompasses a whole lot more. It for example encompasses non fungible tokens, stable coins, CBDCs, I suppose in a sense, although those are centrally issued – a myriad of different instruments beyond those simply of crypto.

Maybe just for the sake of the audience who isn’t well versed in the difference in terminology, I can have a stab at a definition. It’s not my definition but really a conglomeration of definitions of the term. A digital asset is nothing more than a non tangible asset that is created, stored, traded, and transferred in a digital form. If one accepts that definition, then in the context of blockchain a digital asset could certainly include non-fungible tokens, other tokens, as well as crypto assets. I’ll just stop there because I’m very conscious of not taking more than my share of time. Maybe I should say up front that notwithstanding, the bigger ecosystem of digital assets is distinct from cryptocurrencies or crypto assets.

Both South Africa and Kenya, and I’ll explain why later when we come to the regulation, have focused in their regulation on crypto assets rather than on regulating the broader subset of digital assets. I’ll explain as in a moment why that is. Thanks.

[00:05:07] Katrin: Yeah, that’s very interesting. Ashveen, from your perspective, would you have any thoughts around which of those different assets beyond cryptocurrencies are important or what you’re seeing in the market at the moment?

[00:05:21] Ashveen: Thank you for this question. I will certainly align myself with Angela here, when she says that cryptocurrencies would probably be a subset of the generic term, which is digital asset.

Now let me open a little bracket here and close it as soon as I possibly can. We do not necessarily have a global consensus on the legal taxonomy of all these tokens. The term digital asset to my memory, one of the organizations that first came up with the term digital asset would probably be the FATF in 2013, 2014, 2016, something like that, when they came up with the first report, where they defined cryptocurrencies as a digital asset at that time. But they’ve moved on a little bit away from that.

In 2019, 2020, Mauritius adopted certain guide notes on digital assets, and they used that terminology to define a cryptocurrency. However now we have a comprehensive legal framework here in Mauritius, which is called the Virtual Asset Initial Token Offering Services Act, where cryptocurrencies is defined as a virtual asset.

Again, we see that movement from one name to another, which can definitely throw a little bit of confusion. A virtual asset, a cryptocurrencies or virtual asset as it’s legally called in Mauritius, is a digital representation of a value that may be digital traded or transferred, and may be used for payment or investment purposes. Now, this is the characteristics and the early definition of what a cryptocurrency was doing or what it was intended to be done by the inventor, Satoshi Nakamoto of cryptocurrencies. That has been captured by the definition of the FATF and also what we have in Mauritius.

But then what follows is very important. It goes to say what it is not. It does not include fiat currencies, securities, and other financial assets that fall under the purview of the Securities Act, as far as the Mauritian definition is concerned. To close this bracket now, therefore, I agree with Angela. I think we have to have, and it’s a global consensus, the term digital asset is the more generic term which includes in our case virtual asset cryptocurrencies.

To answer your question now, yes, cryptocurrency is an application of the blockchain technology. Okay, just to give you a very non-conformal parallel, you’ve got a computer. The Excel program is one application that you can put there. Word is another one, PDF is another one. Just like that, the technology is a very, very poor comparison, don’t run that up with me, but just to make a point here. We have all the applications that can be made out of this technology, and we are only seeing the tip of the iceberg.

The other one being that we have already seen is NFT, not non-fungible tokens, that runs on different types of blockchains, especially those that have smart contracts applications. You don’t have NFTs on the Bitcoin blockchain, for example, but you can have it on the Ethereum blockchain. That Cardano Blockchain as well provide this feature to create a token that is unique in itself. The moment that you create a token that is unique, you can go as far as your creativity goes. Then you have other applications of the token, of the other types of digital asset, which you can link to another type of asset. The asset could be shares, for example.

If the underlying asset is a security, shares, debentures, et cetera, you call that digital asset now a security token. What we are seeing, and again I’m aligning myself with Angela here, we call digital asset the big family, and under that you have cryptocurrencies, which have the functionality that I’ve just defined as virtual asset inversions. You can have one, which is a NFT. We can have one, which has a tangible asset, a real asset. A security, you call it a security token. You can have one which is linked to another asset, like a property, et cetera, or a right to a property. This is the concept of tokenization of assets. The list goes on and on. You have stable coins, which are like a digital asset, but they’ve got like functionality to make them stable and not move up and down. But the list goes on and on.

[00:11:04] Katrin: Yeah, that’s very interesting. I certainly wouldn’t want to confine myself to Excel on the computer. I think we’re also doing well in not restricting ourselves to only cryptocurrencies in the digital asset space.

Ashveen, you already alluded to the regulatory landscape in Mauritius being in flux. Could you help us understand a little bit the current regulatory and also the licensing environment governing digital asset markets in Mauritius, or then also in the wider area of South Africa?

[00:11:41] Ashveen: We enacted The Virtual Asset and Initial Token Offering Services Act last year. That came into force on the 7th of February. I will call it VAITOS to make things simpler. The VAITOS is in alignment with recommendation 15 of the financial action taskforce. For those who do not know what the FETF is, the FETF is an organization that brings about recommendations for the purpose of EMS, CFD, money laundering and combating or financing of terrorism. They have 40 recommendations, and one of the recommendations is recommendation 15, which is about technologies. It provides that you have to have a regulatory framework or a fully entrenched legislative framework that’s going to regulate the space.

One of those spaces that was and still is a potential influx for money laundering is blockchain technologies with these cryptocurrencies.

In order to comply with recommendation 15, we enacted the VAITOS last year. Now, the VAITOS provides licenses. It provides 5 licenses, and it regulates those activities. The licenses are, for example, stockbroking, having a marketplace, having a wallet, a custodian, etc. Under the VAITOS we’ve got five regulated virtual asset service providers, VAST as we call them, activities that are regulated.

If you come within those and you’re doing business in or from Mauritius, you have to apply for a license with the Financial Services Commission and get a license.

But we didn’t stop there. This is a humongous space, as we would gather. The main legislation is that, but that is supplemented by a number of rules. For example, we got the travel rule. Travel rule is something which is extremely important when bearing in mind virtual assets is cross border. You have to have a rule that establishes how you become accounted for EMS, CFT checks, etc. You got eight rules that supplements the VAITOS, which is client disclosure, custody of clients, publication of advertisements, risk management, statutory returns, travel rules, and other financial requirements.

Beyond that, to finish off now, we also have guide notes. The legal framework of Mauritius for virtual assets is comprised with VAITOS the legislation, rules that supplements that, and those rules keep changing and keep adding up to that. Then guide notes, which speaks of stable coins. We have a guide note on stable coin, because that space is so dynamic. This is why we have got the supplementary legislation that moves to adapt. We got a guide note on the NFTs. We’ve got a guide note on DAO, decentralized autonomous organization. I think it’s still a draft guide note. That is another application of the blockchain, by the way. We’ve got guide notes on security tokens.

We’ve got to guide notes on stable coins and NFT, security tokens and DAOs.

[00:15:31] Katrin: That’s very interesting. It’s different levels of guidance or regulation or licensing regimes, depending on, are you talking about certain assets versus are you talking about providing certain activities with those assets then?

[00:15:45] Ashveen: Yes. Just very briefly to just spring off on that, and it aligns with your first question. What we have in Mauritius is that main act that governs the VASP activities, virtual asset service providers, but also we’ve got guidance that’s starting to recognizing things other than cryptocurrencies, like stable coins, NFTs, DAO, security tokens, etc.

[00:16:13] Katrin: Angela, can I ask you how this aligns with what is happening in South Africa in the licensing and regulatory landscape?

[00:16:23] Angela: If you don’t mind, Katrin, can I abuse my position and just ask Ashveen one question? Ashveen, you speak about this all-encompassing statute and the activities that it covers, then you speak of guidance notes and policy papers, my word, not yours. The perennial question for lawyers is whether these guidance notes are binding or non binding. If they are binding, they would assumingly take place in a subordinate regulation and would oblige issuers of stable coin to meet the guidelines, even though they’re not enshrined in principle legislation. Or they simply, as the name suggests, guidance notes?

[00:17:12] Ashveen: Exactly, Angela, and thank you for this very interesting question. No, they’re not binding, but at the end of the day if you don’t follow the guidance note you might get yourself in trouble with the Financial Services Commission.

Let me give you a very brief example to put things in perspective. We’ve got a guidance note on NFTs, for example. Now, NFTs under our guidance note has been categorized, they’ve got three scenarios. One, where the NFT is just like a virtual asset. The first scenario is where the NFT, the underlying asset is a digital picture, for example. If this is it, then the FSC says we don’t regulate that.

The second scenario is where the NFT displays characteristics of securities. For example, it provides features of fragments ownership that you can sell to the public at large, because you’ve got certain rights or you’re going to cash on profits because it’s going to be invested, etc. Of course, it is a guidance node, but if this is the case, the FSC is going to use that guidance note to check your token. If it’s got security features and you’re not licensed, you didn’t follow the security rules, this is where you run into trouble with them.

The other category is other NFTs, the catch-all basket. We are with Metaco, we know the link between Metaco and Ripple. We all know what’s happening with the SEC and Ripple, the big battle in the States. What has happened in the States again, here at least in Mauritius, we’ve got some guidance note where investors would know exactly, if I’m doing that, this would be securities and then I have to be careful. But what has happened, what we’ve seen in the States is that the SEC lashed out using a very old principle, which is called the howdy principle. It’s the howdy principle coming from an old case in 1976, if I’m not mistaken, 1970s, where they apply certain basic four pointers to determine whether something’s a security or not. They are now using that with the digital assets, and we are seeing the calamity that’s happening in the States. One of the cases that’s being run right now at the moment is the XLP, which is the cryptocurrencies of Ripple. The SEC is saying that XLP has characteristics of securities, and Ripple is saying no. Nobody knows. That’s going to be a big litigation.

But at least to sum up with regards to your question, we got those guidance notes. They are non-binding, but they give you a clear indication of how the FSC, the regulatory body is going to look at your token.

[00:20:28] Angela: Thank you. I see.

[00:20:31] Katrin: I think the positive outcome a few months ago was that the XRP token in and of itself is not a security, but there are certain outstanding questions still to be further discussed.

But let me go back to the regulatory landscape also in South Africa. Angela, if I would hand over to you, if you could give us a bit of a picture of what’s going on there?

[00:20:56] Angela: By way of comparison, Katrina and Ashveen, I would say that the South African regulatory landscape is not nearly as advanced or as developed as the Mauritian regulatory landscape.

Now, perhaps we can take a step back and explain to you why that is so. Let me start off by saying if you do any kind of search, you won’t find a definition of a digital asset. The reason for that is that in 2019 a workforce or a taskforce was constituted. It is known as the Intergovernmental FinTech Working Group, or its acronym is IFWG. Subsequent to that, a smaller group was established called the Crypto Assets Regulatory Working Group. The intention and the focus of the IFWG, which was comprised of our conduct regulator, our credential regulator, treasury, revenue people, the intention was that they would start off by focusing on crypto assets, specifically.

I was very fortunate; my law firm was very fortunate in that we were contracted to advise the IFWG on its policy considerations around crypto asset regulation and around the drafting of the crypto asset regulation. The IFWG is cognizant of the digital assets being a wider set, but decided to focus for now on crypto asset regulation as distinct from any other type of digital asset regulation.

Having said that, and I’ll speak to the regulatory framework in more detail in a minute, Katrin, I think probably the most important thing that I’m going to say today, and I don’t know who the audience is, but it’s this: anyone wanting to launch any form of digital asset, the first mistake anybody would make is to say this isn’t regulated. We know what crypto assets are, we know about the IWG, but there’s no regulation for what we want to do. We want to issue an NFT, that’s fine. We want to issue a token, a security token or utility token, it’s fine. We don’t have regulation dealing specifically with either of these tokens.

Because South Africa, like the majority of other cases, is a country with regulation, it looks at the function of the instrument that you want to issue. You have to test that instrument and the issue of that instrument against a whole body of law. Does it contravene the banks? If you’re going to lend a crypto asset, for example, would that be governed by the national credit? There that would involve a test as to whether lending speaks only of the loan of money rather than the loan of digital assets or crypto assets. You’d have to have regard to the national payment system to define whether or not it is something that is regulated by the national payment system. Or again, does the national payment system speak only of money in the fiat sense of the word?

That, as I said, is probably the best advice I can give today. I’ll come back to your question in a minute, Katrin. But always test your offering, what it is you want to do in the South African market, against a raft of legislation.

Going back to your question, South Africa or the IFWG decided that three initiatives would be embarked on. The first and the most pressing would be to include crypto assets again within the limit of the anti money laundering legislation. This has been done.

Then, it’s an interesting definition, because although it defines a crypto asset service provider, its reach probably covers more than simply crypto assets. Again, somebody wants to know whether the AML legislation applies to them. Can’t just say, “We know it applies to crypto assets, ours isn’t a crypto asset.” You have to look very carefully at that definition. I know we’re going to speak about AML in a little more detail in a while. But that brings with it, once the instrument is classified as a crypto asset and is brought within the AML regime, it brings with it a host of very stringent compliance obligations.

Again, my clients will say, “I’m not worried about that because we do customer due diligence. We do record keeping. We do bring ourselves for credit purposes as a prudent organization within the realm of the anti money laundering framework.” Not so. The anti money laundering framework sets out strict guidelines and stringent strictures that an entity regulated by it would have to comply. That’s the AML.

Turning now to the second piece of regulation, as it were, was in October 2022, the conduct authority, the Financial Advisory Intermediary Services Act, issued a declaration saying that all crypto assets would be financial products. They added to the list of existing financial products. However, you would only fall within the ambit of that statute if in addition to it being a crypto asset, you were providing financial services. Financial services are advice or intermediary services. If you are entering intermediary services or giving advice in respect of cryptos, you would then have to register as a crypto asset service provider.

At the same time as the declaration was issued, an exemption was passed. Same to the players already in this space, provided you meet certain requirements you can carry on trading, but you only have until the end of November in which to register. We see now clients hurrying to meet that registration requirement, because if they don’t register as a crypto asset service provider by the end of November, then they will be trading in an unauthorized manner. It will be a criminal offense, subject to penalties and the penultimate criminal sanction. But importantly, the Financial Sector Conduct, our market conduct regulator will make public everybody who has not applied for a license. There’s that regulatory censure which brings with it reputational risk.

It’s quite interesting and just to our original point and the thesis. One of the keys is that digital assets and crypto assets are used interchangeably. Crypto assets are defined almost to the letter as they are in the Mauritian legislation, mirrors the definition almost exactly. It then goes on to exclude NFTs, miners, and other entities. Now that again to my mind when I was looking at it in preparing for today, just shows that even the regulators themselves don’t understand the distinction between crypto assets and digital assets in as much as they thought to exclude what are not really crypto assets.

Sorry, just one point if I may, Katrina, I’m very conscious of time.

[00:29:51] Katrin: Please, please. No, I think it’s quite interesting what you’re saying that maybe the regulator doesn’t understand fully everything that is going on in the digital asset world. To your point earlier, companies which are working with digital assets in the financial services space probably don’t know all the regulations which apply to them when they’re working in the financial services space.

It’s probably a steep learning curve on both sides. But please, go on with your thoughts.

[00:30:19] Angela: Thanks, Katrin. Still staying with the phase registration, where you have to register as a crypto asset service provider by end of November as the cut-off point, the registration in and of itself has been a huge mission because of the novelty of adopting crypto assets as a bespoke financial product.

There’s some crazy questions in that application. For example, please state out your experience in the crypto asset space. Please tell us what qualifications you have. Now, as I say, given the novelty of it as a distinct class, yes, there are courses now. But is that enough to say I’ve done a six-week course at UCT with Angela, or a year’s course at Harvard? Would that meet the experience requirement? We’ve seen a lot of applications coming back to say, please elaborate on your experience requirements. It’s not plain sailing.

But interestingly, as long as you put in your application before the end of November, you can continue trading even though you may not be registered before the cut-off date,

[00:31:45] Katrin: That would actually have been a question now from my side. when do we expect the licenses or the registrations to happen when you have applied and you know you have a deadline by November?

[00:31:56] Angela: The short answer is as long as you’ve submitted your application, it’s as good as gone. You don’t have to wait until you actually are registered. Our consumer protection and financial market regulation does not follow that pattern all the time. Sometimes only registration allows you to trade, whereas in others simple submission allows you to carry on trade.

The very last point I want to make, Katrin, if I may, on the regulatory framework, one was AML. Two was conduct standard financial services in respect of cryptos requiring license. The third is exchange control. That for me has probably been the biggest source of frustration for my clients, not only in the crypto space, but also in the remittance space. The reason for that, and I say this with respect and all I know there may be people from the authority in the audience, but it really is time that the credential authority, that the Financial Surveillance Department, that the central bank, comes out and takes a stand as to whether crypto assets do or don’t constitute capital for purposes of our exchange control.

Katrina, you may not be in up to these restrictions on the capital account coming from where you do, but pretty much you can’t freely remit capital unless you have the proper permissions. If those rules are going to apply to crypto, then the central bank has to start pre-barricading. Either it does, or it doesn’t.

Those are the three areas of regulation.

[00:33:47] Ashveen: May I just follow in the footstep of Angela and ask her a question in return now? Before that, I’m thrilled that you put UCT and Harvard in the same phrase, because I’m also an alumni of UCT.

[00:34:05] Angela: Wonderful! It wasn’t intentional, but glad I did.

[00:34:11] Ashveen: But you see, it’s true. You said something about, if you give advice with regards to cryptocurrency, you can potentially be considered as a crypto asset service providers. Now, is advice defined? Is it like financial advice? What type of advice are we looking at here?

[00:34:39] Angela: That’s a very good question, thank you for asking. There is a definition and it’s very, very broadly defined. It’s basically any advice in the form of recommendation or a judgment, not in respect of the service but in respect of the financial product. It then does exclude things such as factored information or information of an objective kind, which doesn’t involve judgment of any kind.

It’s quite interesting, just maybe as an add-on to your question. it’s both advice and intermediary services. Now, we’ve had a number of clients who curiously really want to register, a number but one or two want to register as crypto services providers to give the market the comfort that they are regulated. But because they don’t get advice and because they are not trading as intermediaries or offering an intermediary platform, by trading as principal or offering services as principal, lending for example is principal, they cannot register as a crypto asset service provider. More regulation will come, but this regulation doesn’t cater for that category of activity.

[00:36:06] Ashveen: As I said initially this is a huge space which is expanding constantly as we are speaking. We had somebody who was interested to see if Mauritius has a regulatory framework with regards to collaterals. They’re trading in collaterals of virtual assets.

We don’t, but what’s good about the Financial Services Commission is they’re hyperdynamic. Within a week or two, they say they would be still considering it as something that’s doable, but it would be considered as a security here in Mauritius.

[00:36:55] Angela: That’s a marked difference on a block and say between your FCS and our Financial Sector Conduct Authority.

[00:37:12] Ashveen: We have been blessed to have officers at the Financial Services Commission who are very, very proactive. I’ll just give you a very brief example. I had a client who wanted to have a DAO, a decentralized autonomous organization. Of course, we don’t have a framework as yet, and at that time we didn’t even have the guidance note.

We were just tossing ideas and they were sitting on one side, we were sitting on the other side of the table. You could see the synergy and the dynamism. At the end of the session, they just said why don’t I give them a few ideas, how we can amend this particular act? Or how about we come up with a DAO Act? A month later, we started hearing through the grapevine that they are considering having a DAO Act to be implemented here in Mauritius.

We have been blessed with this very forward-looking attitude so far, which we need if you want to make this market grow and keep in line. With this evolution of the market, this is the mindset you have from a regulatory perspective.

[00:38:24] Katrin: I think it’s great to see.

[00:38:27] Angela: I’m so sorry, I feel like I’m usurping your position, Katrin. But it’s such an interesting discussion and so dynamic in that the one is leading on to another.

You were interested in, and I’m glad to be able to say something of Kenya. We do have an office in Kenya and I do a lot of work in Kenya, but I’m no expert on Kenya cryptos. But what you would find interesting is that the parliament, The Kenyan authority as well as the central bank of Kenya, has now said to the Bitcoin Association of Kenya, “You’re full of criticisms. We tried to impose a tax on crypto assets, everything we do you challenge. Here you go, Blockchain Association of Kenya, you help us drop the legislation.” Kenya is completely novel in that regard. They’ve given a two-month period in which to come up with the bill, driven primarily by competition that they are facing from other African jurisdictions.

I thought you’d and the audience might be interested to hear.

[00:39:40] Ashveen: I like that attitude. Thank you.

[00:39:43] Katrin: We have a question from the audience. I will just pose it to you both. Just to confirm, the CASP licenses are relevant for operational and asset services and providers also. The question is, like custodians, do they have to store and custodize the crypto keys, the private keys as well, for digital assets?

[00:40:10] Ashveen: If I may?

We are talking about a custodian license probably, I think this is what he has in mind. The question is, is it the role of the custodian to have access to a key? Well, the answer seems to be yes. It’s not that elaborate in our law, but you have to look at the report of the FATF, the initial report and subsequently as it was subsequently updated. It defines as, we have a private key, which gives you control over the virtual asset. Now, the private key can be fragmented so that I have control, but my data is not sufficient to move the virtual asset within the blockchain, I need somebody else to put these or her private key together. This is how custodian works in the majority of cases. There could be certain custodian that would have full control of the asset because you need them to trade very rapidly. But otherwise, if you’re doing safekeeping, this is usually how it would work.

To come back to the question, what the FATF provides is that the moment that anybody has control, even if it is not full control, even if you require the participation of someone else, that would make you a custodian. I’ve answered the question in reverse. Therefore, yes, the custodian usually is somebody who has control over the virtual asset.

There’s another license in Mauritius, which is called the Wallet Service Providers. The distinction between the custodian license and the Wallet Service Providers seems to be that the Wallet, Service provider does not have control. It’s just providing that service. The full control rests with the owner of the virtual asset. I hope I’ve answered the question.

[00:42:19] Katrin: Very interesting distinguishing, thanks very much for that. We’ve talked a lot about how the regulator sees it or how the regulation is evolving. What is your view on the market’s perception on that in the different areas? Also, how are they tackling to think about, we need to apply for a license? What are the steps they need to think about?

[00:42:50] Ashveen: Angela, would you like to go first?

[00:42:55] Angela: Yes. Maybe not so curiously, but the market has received the regulation very well. When the amendment was made to the, let me call it the market conduct regulation phase, we gave an opinion saying that the regulators couldn’t simply add another financial product to an existing list of financial products. We gave an opinion that that was beyond their powers, and they would have to go through a much more lengthy legislative process, and they couldn’t just wake up one morning and add it to the list. That came out in the comments because the people were given an opportunity to comment on the proposed registration as crypto asset service providers.

But nobody was prepared to challenge the regulator on their view. Within a very short time, the players accepted this and were very welcoming of it. So much so, as I said earlier, Katrina, we have clients who really want to register, but can’t yet, because they don’t render intermediary services or provide advice. But certainly a willingness, happy to be regulated. Initially there was a lot of talk around self regulatory organizations and self regulatory body, but I think that’s gone. People really do want to bring themselves within the ambit of the law. It gives confidence.

[00:44:35] Ashveen: If I may, this is what we’ve seen as well. If we look at the evolution of this space, we started being in a far West, which was not regulated. Now it is a very lucrative business, highly lucrative business. Now there are ropes and you’ve got serious players, serious business people. These people want to be regulated because if they are regulated, it’s like a seal of our quality of acknowledgement. It gives them a better way to market themselves. Because it’s about providing trust to the client. A client would rather go to an exchange which is regulated as opposed to an exchange which is not regulated. We have seen that.

I had a case, a guy who insisted that we find a license that he comes with one of those five licenses. We looked at his business model and said, “No, I don’t think you do.” “Then you find one. We need to be regulated. We need to come on to one of those five categories.”

This is what we’ve seen.

[00:46:05] Angela: exactly.

[00:46:08] Katrin: Yeah, that’s very interesting. Let me jump ahead a little bit. Angela, you already mentioned it, AML is quite an important topic. Could I ask what are your thoughts on the AML regulation, what we are seeing being implemented, and also what the effect is on the industry or on different players in the industry in your respective markets?

[00:46:34] Angela: Two strands to this. I do think that in compliance with the FATF standards, given that exchanges and that cryptos can be used for money laundering purposes, I think it’s correct and in keeping with what most other jurisdictions are doing, to bring crypto assets within the anti money laundering regime. But as I alluded to earlier on, this imposes significant compliance obligations on an entity. I understand that a lot of the exchanges don’t deal with companies and there isn’t the issue of an ultimate beneficial owner, but that ultimate beneficial owner is causing huge headaches. Having to screen against sanctions lists to the extent that we are obliged to screen, ascertaining who politically exposed persons are, all of which have a good cause and are salutary at their heart, but it’s just making it very difficult to comply with the anti money laundering legislation to the letter.

In addition, everyone who plays in that space has to have a compliance regulatory, what’s it called? CRMP, compliance regulatory monetary policy. I probably twisted the acronym around a bit, but that’s a very detailed document, enormously detailed, setting out what your obligations are or rather how you will comply with it. The regulators in imposing penalties looks at much of compliance with the regulation as it does with the compliance risk management program.

The second strand shift is that we’ve seen, and this is a very worrying trend, that banks for a while completely closed the bank accounts of persons who were playing in the crypto space. They didn’t want those who had bank accounts, all of the bank terminated that. That’s a very interesting body of law, whether you can simply terminate somebody’s account. What notification you have to give them, as I said, it’s a subject of much litigation in South Africa and will be stringently regulated when our Conduct Of Financial Institutions Act is amended. But leaving aside any RD principle, leaving aside any legislation, the banks were simply saying, “We don’t want you. The risk is too much, we just can’t run the risk. It could be assets or proceeds of money laundering, we don’t know what the genesis of this money is. We know it’s borderless, we know it’s anonymous to a certain extent, and we don’t want to deal with it.”

So much so that our former deputy governor of our central bank, came out and said to the banks, “You must stop this. You must bank and continue to bank clients who are playing in the crypto asset space.”

I’m trying to register a client of mine now who’s applied for a crypto asset services provider license, but because it’s onshore and offshore it’s very difficult to find a bank who will happily bank that client.

Well, those are the two strands I wanted to touch on.

[00:50:38] Ashveen: This is a global phenomenon, except for the very few countries like Switzerland. Now you’re so right, Angela, on debanking. I think in November last year, the South Africa Reserve Bank issued a communique warning banks about debanking. But this is the very right way. Debanking is the right and perfect way to make money laundering proliferate. I’ll tell you why.

Today we are having regulations and a regulatory framework regulating exchanges where these exchanges will have certain responsibilities with regards to AML CFTs, for example. Now, these exchanges, they are fully licensed with the Financial Services Commission here in Mauritius, but they need a bank account to operate. If you cut access to the other bit of the the vitality to make the whole business function, what you’re doing is you’re pushing them away. You’re killing them, you’re pushing them away. But when you do that, instead of having a regulated space where people can come and trade, and these VASPs, the virtual assets service providers, they’ve got the obligation to comply with the AML CFT frameworks, you’re pushing them away to push people to go into a peer to peer.

This is where it happens. Money laundering is not happening that much on exchanges. I’m not saying that it’s not happening. I’m not going to name exchanges, but I know some of the other exchanges, they have a wallet, you want to trade with them,, you set a wallet with them. You put in cryptocurrencies. Well, strictly speaking, the cryptocurrencies don’t stay in the wallet, but for the purpose of simplicity here. you put in cryptocurrencies in the wallet, and the moment that they find out that those cryptocurrencies have been into the darknet, for example, they cancel. They have a contractual relationship with you where you agree that they’re just going to shut down access to the whole wallet. Because bear in mind they are custodian and they have part of the control access to the virtual asset. These are the things that we should see.

If you don’t have a debunking policy, you will push people to carry on trading because people will do it. We have a tendency of thinking that money laundering became into existence after 2009. Money laundering has always been around. I would ask you a simple question. That dollar that you have in your pocket, can you guarantee me that it has not been rolled and sniffed cocaine with? Guarantee me that. You can’t. but still we’re accustomed to it. We are formatted now to accept fiat currency as they are, but we’re not ready to do that. Yet cryptocurrencies, the virtual asset offer better tests with the new tools that we have now to determine where they’ve been. But it’s a change of a mindset.

To finish off on that point, and this is one thing that I’m advocating. You can train a tech person to understand a finance world, but it’s very hard to train a graduate into the finance world to make him understand the tech nitty-gritties. What banks and financial institutions should start thinking now in terms of their recruitment, is to start taking people with tech backgrounds more and more and more. You can train them to understand the finance product. It’s a change of culture.

[00:54:31] Angela: But you know, sorry Katrina, I know it’s almost time, but if I can just respond or add to that point. I fully understand the reluctance and the resistance of the banks historically to take on crypto exchanges, where there’s a suspicion, rightly or wrongly, it’s a subject of suspicion, that the monies may be proceeds of unlawful activities. But surely now on a positive side, the fact that the crypto asset exchanges or the players in the crypto asset space themselves have to do stringent anti money laundering compliance, they have to meet the same requirements as a bank does because of the functional approach to regulation.

What the crypto asset service provider must be implementing its anti money laundering policy is just what the banks have to do. Of course, I understand the risk for banks must be very different, but shouldn’t the bank? There are also mechanisms in our anti money laundering legislation which might allow the banks to not quite piggyback, but to draw some of the anti money laundering or the customer due diligence screening tests that the crypto service provider itself has done.

Hopefully that will give them the confidence. Otherwise, as you said, those are the consequences or the results to which one will be driven. Peer to peer lending and effectively a a Hawala banking system.

[00:56:08] Katrin: Hopefully we see the regulation as well as the market respectively going in a different direction, that we actually have well governed markets in the future. You already mentioned it, as we are approaching the top of the hour, Angela, Ashveen, thank you both very much for being at Mataco Talks today. It’s been a huge pleasure, and I’m sure I’m not the only one, to say that it was an extremely interesting episode. To get your insights today has been very interesting. I’m sure our guests enjoyed it as well.

Thanks everyone for turning in and we’ll announce you when the recording of the conversation will be available on www.metaco.com. Stay tuned for the next episodes towards end of November. In the meantime, please follow us on LinkedIn and Twitter, and feel free to let us know your feedback.

[00:56:59] Ashveen: Well, thank you very much for having us, Katrin, and the Metaco team.

[00:57:04] Angela: Yes. Many thanks, Katrin, Bradley, Metaco. It was so interesting. We could have carried on speaking for hours and hours. I really appreciate it.

[00:57:18] Ashveen: Thank you for integrating our insight as well, Angela. Thank you very much.

[00:57:26] Angela: Pleasure. Thank you both, and indeed the audience.