Crypto Market Study

2 CRYPTO ASSETS MARKET STUDY
Table of Contents
Executive Summary 4
1. Introduction 6
1.1 Recent regulatory developments 7
1.1.1 International context 7
1.1.2 Local context 8
2. Problem Statement 9
3. Purpose 10
4. Research Approach 10
5. Scope of the Information Request 11
6. Overview of the Crypto Assets Operating Environment 11
6.1 Crypto Asset Ecosystem 11
6.2 Crypto Assets Taxonomy 14
6.3 Crypto Assets Functions and Activities 15
7. Key Findings from the Information Request 16
7.1 Supply-side 16
7.1.1 Type of Crypto Assets 16
7.1.2 Head Office Location 17
7.1.3 Summary of Annual Total Revenue 18
7.2 Outsourcing Arrangements 19
7.2.1 Outsourced Services 19
7.3 Business Model 20
7.3.1 Business Model 20
7.3.2 Remuneration Model 20
7.3.3 Cross Border Business Monitoring 22
7.4 Market Dynamics 23
7.4.1 Value of Crypto Assets Traded per Month in 2022 23
7.4.2 Distribution channels 23
7.4.3 Risk Disclosure 24
7.5 Demand Side 25
7.5.1 Proportion of Retail Customers 25
7.5.2 Proportion of Financial Institutions 26
7.5.3 Defining a Dormant Account 27
7.6 Complaints 28
7.6.1 Sources of Complaints 28
7.6.2 Categorisation of Complaints 28
7.6.3 Complaints Handling Policy 29
8. Conclusion 30
CRYPTO ASSETS MARKET STUDY 3
Abbreviations
AML - Anti Money Laundering
BA - Blockchain Association
CFT - Combating the Financial of Terrorism
CAR WG - Crypto Assets Regulatory Working Group
CBDC - Central Bank Digital Currency
COFI - Conduct of Financial Institutions
CRC - Crypto Rating Council
CASPs - Crypto Asset Services Providers
DLT - Distribution Ledger Technology
FSCA - Financial Sector Conduct Authority
FSR Act - Financial Sector Regulation Act
FSP - Financial Services Provider
FAIS Act - Financial Advisory and Intermediary Services Act
FMA - Financial Markets Act
FMIs - Financial Market Infrastructures
ICO - Initial Coin Offering
IFWG - Intergovernmental Fintech Working Group
IPO - Initial Public Offering
KYC - Know your Customer
NFT - Non-Fungible Token
TCF - Treating Customers Fairly
List of Figures
Figure 1: Crypto Asset Regulatory Developments 8
Figure 2 : A Taxonomy of Crypto Assets 15
Figure 3 : Types of Crypto Assets 16
Figure 4 : Head Office Location 18
Figure 5 : Annual Total Revenue 19
Figure 6 : Summary of Business Models 20
Figure 7 : Summary of Common Remuneration Model (%) 21
Figure 8 : Cross Border Business Monitoring Activities 22
Figure 9 : Monthly Crypto Assets Traded from January 2022 to December 2022 23
Figure 10: Distribution Platforms and Strategies 24
Figure 11: Risk Disclosure 24
Figure 12: Proportion of Retail Customers 26
Figure 13: Proportion of Financial Institutions 26
Figure 14: Definition of Dormant Account 27
Figure 15 : Source of Complaints 28
Figure 16 : Categorisation of Complaints 29
List of Tables
Table 1: Essential Functions and Activities in the Crypto Asset Ecosystem 15
Table 2: Complaints Handling Interventions 29
Executive Summary
In recent years, the market for financial products and services associated to crypto assets has expanded
quickly, becoming more and more integrated into the regulated financial system. The crypto asset market
has grown significantly overall and shows no sign of slowing down anytime soon. The potential for
blockchain technology and crypto assets to transform numerous industries still exists, despite the industry's
regulatory and other difficulties.
The term ‘crypto assets’ has been adopted as it encapsulates and is seen as a broader, or ‘umbrella’,
term for different crypto asset tokens used for a variety of uses. South African consumers are increasingly
engaging in financial activities involving crypto assets, including investing in derivative instruments with
crypto as the underlying asset, especially given the proliferation of online trading platforms. Heightened
take-up and abuse in the retail market necessitates a suitable and proportionate regulatory and supervisory
response. The volatility of crypto assets, coupled with the high gearing of derivative instruments poses
significant risks to customers.
In October 2022, the Financial Sector Conduct Authority (FSCA) officially declared crypto assets as a
financial product in terms of the Financial Advisory and Intermediary Services Act (FAIS). This means that
any individual or business that provides financial advice or intermediary services in respect of crypto
assets – what is typically understood to be a “broker” or “advisor” - will have to register as an FSP. The
Declaration in effect puts in place a regulatory and licensing regime for persons providing financial
services in respect of crypto assets. With the declaration on place, it is not necessarily tailored around
crypto assets services providers, and the specific risks posed in the crypto asset environment. Therefore,
there is need to develop bespoke and/or refine further the existing framework to ensure that it is fit for
purpose and addresses crypto asset specific risk, without stifling innovation in a significant manner.
To better understand the crypto asset-related activities performed by Crypto Asset Financial Service
Providers (FSPs) in South Africa, the FSCA, in accordance with paragraph 3(2) of FSCA FAIS Notice 90
of 2022, requested Crypto Asset FSPs to furnish the authority with information relating to their business and
business practices. The information gathered is intended to support the work of the FSCA, particularly in
relation to the development of licensing, supervision, and regulatory frameworks for Crypto Asset FSPs, by
highlighting consumer exposure to crypto assets; and in line with risk-based supervision, identify risks that
may negatively impact consumer well-being.
The information gathered suggests that the majority of Crypto Asset FSPs in South Africa provide financial
services by making use of unbacked crypto assets, followed by stablecoins and security tokens. Most
unbacked crypto assets are used for speculative purposes rather than as a medium of exchange. Further,
the observed crypto assets-related business models are diverse. However, in some instances, the business
models mirror traditional financial activities such as operating an exchange or providing advice. These
activities require consumers to trust centralised entities which is against the disintermediation function that
crypto assets were designed for.
Other findings include:

• Almost all Crypto Asset FSPs claim to disclose risks relating to crypto asset activities to their customers
and the public.
• Cape Town leads the way in head office location. The results bear testimony to the fact that Cape
Town is considered the largest technology hub in Africa.
• The majority of Crypto Asset FSPs earn their revenue from trading fees and most of the remuneration
models identified mirror traditional financial revenue models.
• The majority of crypto assets Crypto Asset FSPs have interventions in place to handle complaints.
However, these interventions would need to be coordinated with the management and processing
of complaints related to the Treating Customers Fairly (TCF) outcomes.
• More than half of the Crypto Asset FSPs have built their businesses around retail customers.
Understanding the extent of retail participation over time will be critical in assessing the consumer
protection risk and impact of this market.
The information gathered will assist the FSCA in enhancing its approach to licensing and supervision
of crypto asset activities, with a view to appropriately mitigate risk in this environment, thereby ensuring
better financial customer outcomes in the crypto asset environment. This is anticipated to enable the
authority to make more informed decisions concerning the potential future regulation for crypto asset-
related activities.
1. Introduction
Crypto assets and its associated products and services have grown rapidly in recent years, becoming
increasingly interlinked with the regulated financial system. While the industry faces regulatory and other
challenges, the potential for blockchain technology and crypto assets to transform the financial sector
remains significant.
The crypto economy in Sub-Saharan Africa is the smallest among all regions, accounting for 2.3% of
the global transaction volume from July 2022 to June 2023. In the same time frame, the region attracted
an approximate total of $117.1 billion in on-chain value1. While Sub-Saharan Africa consistently stands
as one of the smaller cryptocurrency markets, a closer analysis reveals that cryptocurrency has made
significant inroads among key populations. Nigeria exemplifies this better, ranking second on the 2023
Chainalysis Global Crypto Adoption Index2. Other countries in the region that score high on the index
include Kenya (21), Ghana (29), and South Africa (31). Further, a 2022 study by Triple A (Singapore
Blockchain company) indicates that over 5.8 million people, 9.44% of South Africa’s total population -
currently own crypto assets, with 43% of the population expected to be using them by 20303.
Retail customers use crypto assets for transacting and speculation/investment but were - until now –
largely unprotected, often investing in products without understanding the risks and complexities of the
instruments. Moreover, crypto assets are increasingly being used as the underlying assets in derivative
instruments and becoming more popular with retail customers with the proliferation of online trading
platforms.
In general, governments and regulators are grappling with how to regulate the crypto asset ecosystem
given its decentralised nature and global reach. Regulatory challenges often relate to jurisdiction and
understanding how Crypto Asset Service Providers (CASPs) fit into the existing financial sector laws and
supervisory landscape. More severe challenges include preventing money laundering and other illegal
activities, protecting investors from scams and fraud, and monitoring the potential financial stability of the
financial system.
The regulation of crypto assets varies depending on the country and region.
1 The 2023 Geography of Cryptocurrency Report. Available at:

https://go.chainalysis.com/rs/503-FAP-074/images/The%202023%20Geography%20of%20
Cryptocurrency%20Report.pdf?version=0
2 The 2023 Geography of Cryptocurrency Report. Available at:
https://go.chainalysis.com/rs/503-FAP-074/images/The%202023%20Geography%20of%20
Cryptocurrency%20Report.pdf?version=0
3 Cryptocurrency information about South Africa: Available at:
https://triple-a.io/crypto-ownership-south-africa-2022/
When considering crypto asset regulation, there are essentially three approaches available4:
1. Ban: Some countries have completely banned the use of crypto assets, such as China, Algeria, Bolivia,
and Egypt.
2. Regulate: Some countries have given legal recognition to crypto assets, often with licensing restrictions,
such as Japan, the United States of America (US), Canada, the European Union (EU), and Australia.
In these countries, crypto assets are regulated under existing laws and financial regulations, such
as Anti-Money Laundering (AML), Know Your Customer (KYC), and tax laws. These may include
registration and licensing. In some cases, crypto assets may be classified as securities and subject to
securities regulation. Some countries have consumer protection laws that apply to crypto assets, which
may include restrictions on advertising, disclosure requirements, and measures to prevent fraud and
scams. Central banks in some countries regulate crypto assets to control the money supply, monitor the
potential impact on financial stability, and prevent money laundering and other illicit activities.
3. Wait and learn: Some countries have opted to observe and monitor crypto asset innovation before
intervening. Over time, as the regulators gain capacity around crypto assets innovation and the
technology becomes more commonly adopted, policymakers may incrementally amend or change
existing regulations. For instance, The Central Bank of Ireland does not have specific crypto assets
regulation, and there is no prohibition of crypto assets activities within Ireland. Instead, the Central
Bank of Ireland has taken a “do nothing” approach to the regulation of crypto assets.
In addition to government regulation, there are also self-regulatory organizations within the crypto industry,
such as the Crypto Rating Council (CRC) and the Blockchain Association (BA), which are working to
establish standards and best practices for the industry.
1.1 Recent regulatory developments

1.1.1 International context
Throughout the world, several jurisdictions have implemented various regulations for crypto assets, creating
a fragmented regulatory environment. The degree and range of these regulations are determined by
several factors, including the stage at which the cryptocurrency ecosystem is developing, perceived
threats to the stability of the financial system, the capacity of the regulatory bodies in charge of regulating
cryptocurrency assets, the intention to promote innovation, and other regionally specific factors5. These
factors combine differently for every country, creating a complex regulatory environment where some
countries (like China) banned the use of cryptocurrency, while other countries (like El Salvador6 and the
Central African Republic) have made certain cryptocurrency assets (like Bitcoin) officially recognised as
legal money7.
4 IFWG, Position Paper on Crypto Assets, 2021. Available at:

https://www.ifwg.co.za/Reports/Position%20Paper%20on%20Crypto%20Assets.pdf
5 Pathways to the Regulation of Crypto-Assets: A Global Approach. Available at:
https://www3.weforum.org/docs/WEF_Pathways_to_the_Regulation_of_Crypto_Assets_2023.pdf
6 EL Salvador and Cryptocurrency. Available at: https://freemanlaw.com/cryptocurrency/el-salvador/
Figure 1: Crypto Asset Regulatory Developments
Source: Pathways to the Regulation of Crypto-Assets: A Global Approach 8
1.1.2 Local context
In South Africa, the Crypto Assets Regulatory Working Group (CAR WG) of the Intergovernmental Fintech
Working Group (IFWG)9 published the final Position Paper (CAR Paper) on crypto assets for South Africa
in June 202110. The CAR Paper signalled a regulatory and policy response to crypto assets activities in
South Africa.
The CAR WG Paper made 25 recommendations for crypto assets and related activities and essentially
provides a roadmap for a regulatory framework for CASPs. The CAR Paper proposed the FSCA to be the
regulatory authority to license, supervise and investigate Crypto Asset FSPs.

9 The IFWG is a collaborative effort and resultant body of several South African financial sector regulators, including
National Treasury, the Financial Intelligence Centre (FIC), the FSCA, the National Credit Regulator (NCR), the South
African Reserve Bank (SARB) South African Revenue Service (SARS) and the Competition Commission
10 IFWG: CAR WG Position Paper on Crypto Asset in June 2021. Available at:
In line with the crypto assets developments that were happening within the IFWG CAR WG, in November
2020 the FSCA published for public consultation a draft Declaration of crypto assets as a financial
product under the FAIS Act. This proposed Declaration signalled the FSCA’s acute interest in CASPs and
was put forward as an interim step to mitigate conduct and consumer protection risks in the crypto asset
environment, pending the anticipated Conduct of Financial Institutions (COFI) Bill framework and the
broader policy discussions taking place at the time through the CAR WG.
In October 2022, the FSCA officially declared crypto assets as a financial product in terms of the FAIS
Act11. This means that any individual or business that provides financial advice or intermediary services in
respect of crypto assets – what is typically understood to be a “broker” or “advisor” - will have to register
as an FSP. The Declaration in effect puts in place a regulatory and licensing regime for persons providing
financial services in respect of crypto assets. Crypto Asset FSPs12 must be licensed and will be subject to
the FSCA’s oversight and supervision.13
Following the declaration, in December 2022 the FSCA published an Information Request in accordance
with paragraph 3(2) of FSCA FAIS Notice 90 of 2022, requesting Crypto Asset FSPs to furnish the
authority with information relating to their business and business practices.
Broader developments surrounding crypto assets will likely be given effect through the COFI Bill, which
constitutes the future consolidated legal framework governing the conduct of all financial institutions.
Financial services related to crypto assets will likely be included in the licensing activities under the COFI
Bill, potentially expanding the scope of crypto asset activities that are currently regulated under the FAIS
Act.
2. Problem Statement
After declaring crypto assets as a financial product, the FSCA remains of the view that crypto asset
related activities pose significant risks to financial customers. While there is a legal framework is in place,
it is not necessarily tailored around crypto assets services providers, and the specific risks posed in the
crypto asset environment. Therefore, there is need to develop bespoke and/or refine further the existing
framework to ensure that it is fit for purpose and addresses crypto asset specific risk, without stifling
innovation in a significant manner.
Further, the regulation of crypto asset related activities is a new development and the FSCA is still unpacking
the specific risks inherent in this environment. To regulate effectively, the FSCA needs to develop a deeper
understanding of these risks and market dynamics to enable it to refine its approach to licensing and
supervising of crypto asset activities with a view to appropriately mitigate risk in this environment, thereby
ensuring better financial customer outcomes in the crypto asset environment.
11 Reference the Declaration ie what was the official title.

12 Means a person that is required to be licensed under section 8 of the Act to render a financial service in relation to
crypto assets and currently renders financial services under the exemption provided in terms of FSCA FAIS Notice
90 of 2022.
13 Financial Advisory and Intermediary Services Act, 2002 (Act No. 37 Of 2002)
3. Purpose
The purpose of this research is to assist the FSCA to better understand crypto asset related activities
performed by Crypto Asset FSPs14 in South Africa, in order to:
i. Support the work of the FSCA, particularly in relation to the development of licensing, supervision,
and regulatory frameworks for Crypto Asset FSPs, by highlighting consumer exposure to crypto
assets; and
ii. In line with risk-based supervision, identify risks that may negatively impact consumer well-being, in
support of the FSCA’s regulatory and supervisory approaches.
4. Research Approach
The study employed a “mixed methods” approach. The FSCA obtained information related to crypto
assets-related activities in South Africa directly from Crypto Asset FSPs, by issuing an Information Request
in December 202215. In terms of the Financial Sector Regulatory Authority (FSRA) 9 of 2017, the FSCA is
empowered to request information from regulated persons in the fulfilment of its objectives and functions16.
The purpose of the Information Request is to assist the authority in obtaining a better understanding
of crypto asset-related activities that Crypto Asset FSPs are currently performing in the crypto asset
environment, in turn, to better understand related conduct risks.
Information submitting by the Crypto Asset FSPs was augmented by desk-based research. The desk-
based research drew information from different sources, including policy and academic texts, and
national and international datasets from both public and private stakeholders.
14 Means a person that is required to be licensed under Section 8 of the Act to render a financial service in relation to
crypto assets and currently renders financial services under the exemption provided in terms of FSCA FAIS Notice
90 of 2022.
15 FSCA Information Request 7 of 2022 (2022) FAIS.
16 Financial Sector Regulation Act 9 of 2017. Available at:
https://www.gov.za/documents/financial-sector-regulation-act-9-2017-english-sepedi-22-aug-2017-0000
5. Scope of the Information Request

The scope of the Information Request included crypto assets-related activities performed and business
practices of Crypto Asset FSPs in South Africa as at December 2022.
The Information Request covered:

i. Crypto Asset FSP supply-side driving factors;
ii. Crypto Asset FSP outsourcing arrangements;
iii. Crypto Asset FSP business models;
iv. Crypto Asset Market dynamics;
v. Crypto Asset FSP demand-side driving factors; and
vi. Complaints.
6. Overview of the Crypto Assets

Operating Environment
This section provides an overview of the crypto asset ecosystem, taxonomy, market essential functions, and
activities. The section sets the stage for the evaluation in section 7, which looks in more detail at the Crypto
Asset FSP activities in South Africa.
6.1 Crypto Asset Ecosystem
For the purposes of this paper, the definition of crypto asset is adopted from the IFWG CAR WG
Position Paper on Crypto Assets. The paper defines crypto asset as17:
i. a digital representation of value that is not issued by a central bank, but is capable of being traded,
transferred or stored electronically by natural and legal persons for the purpose of payment, investment
and other forms of utility;
ii. applies cryptographic techniques; and
iii. uses distributed ledger technology (DLT).
17 IFWG, Position Paper on Crypto Assets, 2021. Available at:

Various naming conventions have been used over the years by ecosystem participants, from ‘digital
tokens’ and ‘digital assets’ to ‘cryptocurrency’ and ‘crypto assets’. Considering naming conventions, the
central banks, in particular, have been reluctant to refer to these digital representations on blockchain
ledgers as ‘currency’ as it is not deemed to be a form of legal tender or fiat currency.
The regulatory authorities have taken a functional approach, focusing on the economic activities being
performed, compared to a more generic, ‘all-encompassing’ classification. It is acknowledged that
crypto assets may perform certain functions similar to those of ‘traditional’ currencies, securities, or
financial products and commodities.
The term ‘crypto assets’ is thus preferred and has been adopted by the Intergovernmental Fintech Working
Group, as it encapsulates and extends to these functions. ‘Crypto assets’ are seen as a broader, or
‘umbrella’, term for different crypto asset tokens used for a variety of uses.
Regarding the functioning and organisation of the crypto assets market, Box 1 below gives a detailed
description of the various participants in and components of the crypto asset market:
Box 1: Key Crypto Asset Ecosystem Components and Actors
1. Blockchain is the foundation of the crypto assets’ ecosystem, a type of distributed ledger
where transactions are recorded, and participants transact with other participants and
decentralised applications.
2. Customers in the crypto-assets market take part and are involved in transactions. They could
be individuals, institutions, and businesses.
3. Financial intermediaries such as brokers provide advice or facilitate the purchase of crypto
assets by investors.
4. System administrators such as crypto assets issuers (this includes those who issue tokens
through an Initial Coin Offering - ICO18) and auditors (allowed to view the ledger but not
allowed to make changes). They issue crypto assets, decide who can access the network,
and maintain and administer dispute resolution rules.
5. Miners/validators and transaction processors, who are incentivised by remuneration to
verify transactions and add them to the ledger.
6. Trading platforms and exchanges facilitate transactions between participants and ensure
a liquid market.
7. Payment providers enable customers to pay for services or goods received using a crypto
asset.
8. Wallet providers enable customers to make coin transactions and secure the storage of
crypto assets.
For traditional financial institutions, avoiding crypto assets entirely may not be possible. Although banks
may prohibit certain types of crypto asset transactions (e.g. blacklisting certain counterparties), it may
not be feasible for them to fully unplug from the crypto assets’ ecosystem if their customers or third parties
remain involved in it. For instance, if customers can engage in crypto asset transactions, even outside
of the perimeter of traditional financial institutions, then the flow of funds through their accounts may
represent a risk related to money laundering or fraud.
18 An initial coin offering (ICO) is a type of capital-raising activity in the crypto assets and blockchain environment.
The ICO can be viewed as an initial public offering (IPO) that uses crypto assets.
6.2 Crypto Assets Taxonomy
No internationally agreed taxonomy exists for crypto assets and as a result, crypto asset types have been
categorised into various forms, such as1920:
1. Non-Fungible Tokens (NFT) – A unique digital asset that represents ownership of a specific item or
asset e.g. art, music, in-game items, videos, and more. They are bought and sold online, frequently
with crypto assets, and they are generally encoded with the same underlying software as many crypto
assets21.
2. Security tokens - Although the definition of a security token varies across jurisdictions, these are tokens
that provide the holder with rights like that of traditional security, for example, the right to a share in the
profits of the issuer. Securities tokens are often subject to securities laws and regulations.
3. Utility tokens - These tokens provide the token holder with access to an existing or prospective product
or service. These are usually limited to a single network (that is, the issuer) or a closed network linked
to the issuer. For example, a tokenized store card or certain gaming tokens might be considered types
of utility tokens.
4. Unbacked crypto assets - These crypto assets are transferable, primarily designed to be used as a
medium of exchange, and are often decentralised. Unbacked crypto assets are the oldest and most
prominent type of crypto asset. They do not rely on any backing asset for value but instead on supply
and demand. Most unbacked crypto assets are currently used for speculation and not for payment
purposes. Prominent examples include Bitcoin and Ether (although in some jurisdictions with broad
definitions of securities, these might be considered security tokens).
5. Stablecoins - This type of crypto asset aims to have a stable price value. This objective is normally
pursued by the crypto asset being linked to a single asset or a basket of assets, for example, fiat funds,
commodities such as gold, or other crypto assets. Prominent examples include Tether, Binance USD,
and USD Coin.
6. Central Bank Digital Currency (CBDC) - A CBDC can be defined as a form of money that is
denominated in fiat currency (central bank money), in an electronic form, and which is a liability on
the central bank’s balance sheet similar to cash and central bank deposits22.
19 Regulating the Crypto Ecosystem, the Case of Unbacked Crypto Assets, IMF note 2022/007. Available at:
www.imf.org/en/Publications/fintech-notes/Issues/2022/09/26/Regulating-the-Crypto-Ecosystem-The-Case-of-
Unbacked-Crypto-Assets-523715
20 IFWG: CAR WG Position Paper on Crypto Asset in June 2021. Available at:
21 What is NFT, Forbes article. Available at:
https://www.forbes.com/advisor/investing/cryptocurrency/nft-non-fungible-token/
22 Frequently asked questions on central bank digital currencies. Available at:
www.resbank.co.za/content/dam/sarb/what-we-do/banknotes-and-coin/CBDC%20FAQ%27s.pdf
Figure 2 : A Taxonomy of Crypto Asset
Source: Regulating the Crypto Ecosystem the Case of Unbacked Crypto Assets, IMF note 2022/00723
6.3 Crypto Assets Functions and Activities
The crypto asset market features a wide range of functions and activities, many of which resemble those
in the traditional financial system. Table 1 identifies essential functions around crypto assets, as well
as prevalent activities associated with these functions. Annexure 1 provides a detailed list of activities,
their service providers, associated vulnerabilities and risks, as well as potentially relevant international
standards.
Table 1 : Essential Functions and Activities in the Crypto Asset Ecosystem
Source: FSB Regulation, Supervision and Oversight of Crypto-Asset Activities and Markets Consultive document 2022.
www.imf.org/en/Publications/fintech-notes/Issues/2022/09/26/Regulating-the-Crypto-Ecosystem-The-Case-
of-Unbacked-Crypto-Assets-523715
7. Key Findings from the

Information Request
7.1 Supply-side
47 Crypto Asset FSPs responded substantively to the FSCA's Information Request24.
7.1.1 Type of Crypto Assets
Figure 3: Types of Crypto Assets
The majority of Crypto Asset FSPs in South Africa provide financial services by making use of unbacked
crypto assets (60%), followed by stablecoins (26%) such as USD Coin and Binance Coin. This is then
followed by security tokens (7%) and NFT tokens (4%).
Unbacked crypto assets are the oldest and most widely recognized digital assets. They derive their value
solely from supply and demand dynamics, without any physical or underlying asset to support them.
The assets offer limited or no rights to token holders and are often issued through decentralized means.
Unbacked crypto assets are primarily utilised for speculative purposes rather than serving as a means of
exchange25. Notable examples of unbacked crypto assets include Bitcoin and Ether. Stablecoins on the
other hand, aim to have stable price value by being linked to a single asset or basket of assets such as fiat
currency, commodities, or other crypto assets.
24 While 56 submissions were made, some of the responses were received from licensed FSPs as a way of confirming
that they do not perform any activities that constitute financial services in respect of crypto assets.
https://www.imf.org/en/Publications/fintech-notes/Issues/2022/09/26/Regulating-the-Crypto-Ecosystem-The-
Case-of-Unbacked-Crypto-Assets-523715
7.1.2 Head Office Location
Cape Town leads the way in head office location with the largest percentage of Crypto Asset FSPs having
established their head offices in the city. It is followed by Johannesburg (33%) and Pretoria (7%). The
results bear testimony to the fact that Cape Town is considered the largest technology hub in Africa and
has been dubbed the Silicon Valley of Africa, home to more than 450 tech start-ups26. A small proportion
of Crypto Asset FSPs operating in South Africa have their head offices in foreign countries.
26 BusinessTech. South Africa’s ‘silicon valley’ has over 450 tech firms and employs more than 40,000 people.
Available at: https://businesstech.co.za/news/technology/489253/south-africas-silicon-valley-has-over-450-
tech-firms-and-employs-more-than-40000-people/
Figure 4: Head Office Location
The strong local presence bodes well for regulatory and supervisory protection. For the 10% of entities that
have an off-shore head-office, consideration will need to be given to the requirements relating to having
a local branch27. This is important because it, amongst other things, creates a physical presence that would
allow the FSCA to have appropriate oversight over and ensure accountability of the institution conducting
activities in South Africa.
7.1.3 Summary of Annual Total Revenue (may comprise a combination of traditional and
crypto asset activities)
The data received showed that 38% of the Crypto Asset FSPs received revenue less than ZAR one million,
while 46% received revenue between ZAR 1 and 50 million. About 10% of Crypto Asset FSPs derive their
income from both regulated28 and unregulated financial services.
27 Even in the absence of a requirement of a local branch, they must register as an external company in terms of Section
23 of the Companies Act, as they will be engaging in a course of conduct or have engaged on a course or pattern
of activities (in this case providing financial services as defined in FAIS) within the Republic over a period of at least
six months, such as will lead a person to reasonably conclude that this offshore company intended to continually
engage in business within the Republic.
28 "Regulated” means regulated in terms of the FAIS Act and includes all activities that constitute financial services.
Figure 5: Annual Total Revenue
7.2 Outsourcing Arrangements
7.2.1 Outsourced Services
KYC/AML, exchange platform, custody, cyber security, information technology services, and blockchain
monitoring services are some of the activities that are outsourced by Crypto Asset FSPs. This means that
some of the financial services in respect of crypto assets and technical activities inherent to the provision
of crypto assets financial services are outsourced.
The outsourcing of the activities does not relieve Crypto Asset FSPs from their responsibilities to ensure fair
treatment of customers. They, therefore, will have to comply with specific outsourcing requirements relating
to the responsibilities of a Crypto Asset FSP, including requirements relating to:
• the ability, capacity, and authorisation (as required by law) of the person to whom the functions
have been outsourced
• the contract that governs the outsourced arrangement
• oversight of the outsourced activities
• risk management controls and processes (including disaster recovery contingency plans)
• effective access to data related to the outsourced activities.
It should also be understood by market participants that outsourcing financial services activities can only
be done to entities that are themselves licensed and regulated under the FAIS framework. This mitigates
the risk of regulatory arbitrage.
7.3 Business Model

7.3.1 Business Model
The observed business models29 are diverse. However, in some instances, the business models mirror
traditional financial activities such as operating an exchange or providing advice. The only difference is that
they use a different type of technology. These activities require consumers to trust centralised entities which
is against the disintermediation function that crypto assets were designed for. The increasing significance of
these alternative activities could result in them being categorised as systemic financial market infrastructures
(FMIs). Going forward, it will be important to consider an equivalent regulatory and supervisory treatment
for these crypto activities to their traditional counterparts, based on the “same activity, same risks, same
rules” principle being embraced by certain international standard setting bodies30 and regulators31.
Figure 6: Summary of Business Models
7.3.2 Remuneration Model32

The majority of Crypto Asset FSPs charge trading fees (38%) followed by 25% who earn their revenue from
administration fees while 20% earn revenue from advice fees.
29 A business model describes how businesses create, deliver, and capture value.
30 Financial Stability Board proposes framework for the international regulation of crypto-asset activities. Available at:
https://www.fsb.org/2022/10/fsb-proposes-framework-for-the-international-regulation-of-crypto-asset-activities/
31 Future financial services regulatory regime for cryptoassets. Available at:
https://assets.publishing.service.gov.uk/media/63d94ea68fa8f51881c99eb4/TR_Privacy_edits_Future_
financial_services_regulatory_regime_for_cryptoassets_vP.pdf
32 The remuneration model refers to the structure and formats used by Crypto Asset FSPs to compensate for the services
rendered.
Figure 7 : Summary of Common Remuneration Model (%)

7.3.3 Cross Border Business Monitoring
56% of Respondents indicate that cross border monitoring is not applicable in their current operations,
while 42% consider cross border monitoring as part of their business to promote good governance, fair
treatment of customers, and regulatory compliance.
Figure 8 : Cross Border Business Monitoring Activities
Box 2: Summary of Cross-border Monitoring Activities
i. Implementation of KYC process to ensure adherence to AML and Combating the Financial of Terrorism
(CFT) requirements
ii. Implementation of background checks, risk assessment (related to customers, geographic area,
products and services and delivery channels) and transaction monitoring
iii. Personal and business allowance monitoring and confirmation that clients are aware of exchange
control limits
iv. Implementation of key governance policies and procedures ordinarily incumbent on licensed financial
services provide
v. Sign up with regulated providers
vi. Performs due diligence on all providers and exchanges
vii. Assessment of geographical risk and localised standards are measured against South African
standards
viii. Obtain trust scores from various centralised sources to ascertain the legitimacy of a correspondent
Crypto Asset FSPs
Effective cross border monitoring mitigates and reduces the risk of money laundering and the financing of
terrorism activities. This is essential in protecting the integrity of markets and the global financial framework.
7.4 Market Dynamics
7.4.1 Value of Crypto Assets Traded per Month in 2022
South African Crypto Asset FSPs recorded the highest monthly transaction value which was over ZAR8
billion in November 2022. The average crypto assets traded were approximately ZAR520 million per
month during the year. South Africa is one of the African countries with the highest number of crypto assets
users in the region33. Monitoring changes in trading patterns may be an important conduct risk indicator;
for example, substantial increases in trading volumes may bring additional operational risk, and unusual
trading could signal market abuse.
Figure 9 : Monthly Crypto Assets Traded from January 2022 to December 2022
7.4.2 Distribution channels
Distribution channels are the avenues through which customers encounter a business and become part
of the sales cycle. They allow the business to communicate directly, obtaining feedback from customers
that in turn assists with improving its product offerings and customer experience. Crypto Asset FSPs should
satisfy themselves that the channels used to distribute their financial products are appropriate to the nature
and complexity of that financial product and the targeted financial customer.
Over 94% of the Crypto Asset FSPs use digital channels34 to distribute and market their products and
services while 6% utilise non-digital channels35.
33 Africa’s Growing Crypto Market Needs Better Regulations. Available at:

https://www.imf.org/en/Blogs/Articles/2022/11/22/africas-growing-crypto-market-needs-better-regulations
34 Digital channels include emails, social media platforms, website, podcasts.
35 Non-digital channels include in person meetings, billboards, and direct phone calls
Figure 10: Distribution Platforms and Strategies
Some of the marketing strategies employed include building the client base through trading on peer-to-
peer exchanges and in-person meetings with clients to discuss product and services offering.
7.4.3 Risk Disclosure
Almost all Crypto Asset FSPs claim to disclose the risks relating to crypto asset activities to their customers
and the public. The accuracy of this claim and the quality of disclosure will need to be monitored over time.
Figure 11: Risk Disclosure

The risk disclosures are made to the clients is several ways which include:
Box 3: Summary of Risk Disclosure
i. Risks are disclosed when clients are signing up.

ii. Risk disclosures are made on the website, exchange platform and in all communication with the clients.
iii. Risk disclosures are made on social media platforms, webinars, events and media interviews.
iv. Clients sign a crypto assets declaration describing the risks and that they understand the implications
of trading with crypto assets.
7.5 Demand Side
7.5.1 Proportion of Retail Customers
The information gathered suggests that more than half of the Crypto Asset FSPs have 100% of their
businesses built around retail customers.
The activities identified span both financial markets and financial services. This will be instructive for the
development of both the COFI Bill and Financial Markets Act (FMA) revisions.
Figure 12: Proportion of Retail Customers
Understanding the extent of retail participation over time will be critical in assessing the consumer protection
risk and impact of this market. Under the COFI Bill, provision is expected to be made for a targeted regulatory
framework for retail customers. Understanding marketing and distribution strategies, as highlighted above,
will be a particular focal point. Consistent with international developments, consideration may be given
to prohibiting more risky products and services from being marketed to higher risk and more vulnerable
customer groups36.
7.5.2 Proportion of Financial Institutions
The information gathered suggests that approximately 12% of Crypto Asset FSPs have 100% of their
businesses centered around financial institutions. The statistics also reflect that Crypto Asset FSPs have no
customers which are retirement funds.
Figure 13: Proportion of Financial Institutions
36 FCA bans the sale of crypto-derivatives to retail consumers. Availalble at:

https://www.fca.org.uk/news/press-releases/fca-bans-sale-crypto-derivatives-retail-consumers
7.5.3 Definition of Dormant Account
The results suggest three main approaches to classification of dormancy, with most specifying some level
of account inactivity:
- account is closed (10%)
- account has a zero balance (24%)
- level of account inactivity (65%)
Understanding the extent of dormant crypto asset accounts and unclaimed crypto assets is important to
inform further development of the proposed framework for unclaimed financial assets, including dormant
accounts37, that are currently under consideration. It will also provide insights into how Crypto Asset FSPs
are embedding the Treating Customers Fairly (TCF) principles into their processes and business practices
and will provide supervisory insights into the suitability of the product for those customers.
Figure 14: Definition of Dormant Account
Some Crypto Asset FSPs reported that they have interventions in place to respond to dormant accounts.
For instance, their consultants reach out to customers to understand why they (the clients) have stopped
using their accounts; the account is suspended until the client signs a new annual mandate; or the dormant
account automatically triggers an alert on AML/CFT tools.
37 See the Discussion Paper on ‘A Framework for Unclaimed Financial Assets in South Africa’ .
7.6 Complaints
Crypto Asset FSPs are required to establish and maintain an internal complaints management framework,
as the effective management of complaints is a vital component of TCF and contributes to the protection
of financial customers. Such framework, inter alia, must provide for adequate systems for record keeping,
monitoring, and analysis of complaints to enable Crypto Asset FSPs to identify trends and incidence of
complaints, manage conduct risks, and effect improved outcomes and processes for customers.
7.6.1 Sources of Complaints
The average number of customer complaints received between January 2022 to December 2022 was
over 1 500 and were communicated via digital platforms.
Figure 15 : Source of Complaints
7.6.2 Categorisation of Complaints
A large proportion of complaints were categorised as service and general support (42%), product design
(24%) and investment performance (13%). The nature of complaints reflected suggests that the percentage
of complaints relating to ‘service’ could be higher than reported suggesting that achieving good customer
outcomes may not yet be embedded within the processes and practices of the Crypto Asset FSPs. The
product and investment complaints may suggest that the crypto asset products are not suitable for the
target market or may not be performing as customers were led to expect. The FSCA will need to explore
whether customers are provided with key information on their products on a regular and ongoing basis
and that information provided is appropriate and being understood by the target market. Complaints data
is a valuable supervisory source of information that enables the FSCA to identify and more quickly and
effectively respond to risks.
Figure 16 : Categorisation of Complaints
As an important pillar of TCF38, the FSCA will also in future monitor complaints received through the ombud
system to identify potential systemic conduct issues.
7.6.3 Complaints Handling Policy
The majority of crypto assets Crypto Asset FSPs have interventions in place to handle complaints. However,
Crypto Asset FSPs will need to align the management and processing of complaints with the TCF outcomes.
Some of these interventions are summarised in table 2 on the next page.
Table 2: Summary of Complaints Handling Interventions
38 Treating Customers Fairly (TCF) is an outcomes based regulatory and supervisory approach designed to ensure that
regulated financial institutions deliver specific, clearly set out fairness outcomes for financial customers.
8. Conclusion
The FSCA aims to promote the development of an innovative, inclusive, and sustainable financial system in
South Africa. Research undertaken in support of this objective allows the FSCA to better understand fintech
and other related innovations currently taking place. The findings of this research contribute to the growing
body of knowledge on financial sector innovations, both domestically and internationally. This allows us
as the regulator, but also other affected stakeholders, the ability to better understand and explore how we
can more proactively assess and respond to emerging risks and opportunities.
The information drawn will support the work of the FSCA, particularly in relation to the development of
licensing, supervision, and regulatory frameworks for Crypto Asset FSPs, by highlighting consumer exposure
to crypto assets. In line with risk-based supervision, the identified risks will support the FSCA’s regulatory
and supervisory approaches going forward. It is envisaged that this will assist the authority in making more
informed decisions regarding the potential future regulation of crypto assets-related activities.
Annexure 1: Essential Functions,

Risks and Relevant International
Standards
Function 1: Creation, issuance, redemption, distribution, and underlying infrastructure of crypto assets
Activities Service providers and Key Regulatory and financial Potentially relevant
activity/entity pair stability risks and vulnerabilities international standards and
policies
1. Creating, issuing 1. Issuers, including those: 1) Credit risks: the issuer may fail to 1. IOSCO Objectives and Principles of
and redeeming meet redemptions in stressful situations Securities Regulation for underwriting
crypto assets i) -not incorporated as a legal if they have promised redemption to
(Developing entity. users. 2. CPMI-IOSCO Principles for
protocols, designing financial market infrastructures (PFMI)
a smart contract ii) -incorporated as a legal entity (2) Liquidity risk: Selling crypto assets (only if an activity is performed by a
and choice of the but not licensed or registered by quickly, especially during periods of systemically important FMI)
consensus regulatory authorities. high volatility or market stress can be
mechanism), difficult. This lack of liquidity can create 3. CPMI-IOSCO Guidance on the
placement, iii) -incorporated as a legal significant losses for investors who Application of the Principles for
marketing and entity licensed or registered by need to sell their assets quickly. Financial Market Infrastructures to
sales regulatory authorities. stablecoin arrangements
(3) Misconduct risk (insider
2. Project development team information, price manipulation,
false disclosure); Weak governance
3. An underwriter or facilitator of related to protocols, and consensus
issuance or capital formation. mechanism.
4. An entity undertaking
marketing and sales (4) Conflicts of interest in designing
the arrangement, selecting participant
entities (especially in permissioned
DLTs) Some issuance lack clear
definition of roles and responsibilities
of the governing body and lack
of effective contractual and
accountability mechanisms among
participating entities. Absence of a
clearly identifiable entity that can be
held accountable for meeting rights of
holders, addressing operational risk
and ensuring compliance with AML/
CFT standards.
Others: ML/TF risks

Function 1: Creation, issuance, redemption, distribution, and underlying infrastructure of crypto assets
2. Operating the 1. Permissioned DLT: Entities (1) Operational risks (including cyber 1. BCBS Principles for Operational
infrastructure and that perform validation and risks): risk from the technology and Resilience
validating settlement of transactions. They are operations the issuer controls. This
transactions normally selected and authorised includes smart contracts design risks, 2. BCBS Principles for the Sound
beforehand. deficient cyber security resulting in Management of Operational Risk
unavailability or hacking of wallets
2. Permissionless DLT: that hold/mint/burn tokens, other 3. CPMI-IOSCO Principles for
Validator nodes (Miners) can operational risk events such as loss of financial market infrastructures (PFMI)
be set up by anyone fulfilling the keys, fraud, mismanagement of token (only if the activity is performed by a
technical requirements and the supply or trustworthy settlement of systemically important FMI)
protocols. transactions, validation and settlement
patterns of cross-chain transfer. 4. CPMI-IOSCO Guidance on the
3. Centralised platforms (often Operational risk at the issuer level Application of the Principles for
a trading platform that performs could lead to, e.g., a disruption of Financial Market Infrastructures to
many other functions) that keep users’ ability to transfer their tokens or stablecoin arrangements
records off-chain, hold assets in a loss of value of the tokens.
custody, and settle transactions. Misconduct such as miners front- 5. CPMI-IOSCO, Guidance on Cyber
running attack in which a miner Resilience for Financial Market
includes its own transaction in the Infrastructures (only if the activity is
block instead of someone else's performed by a systemically important
and does not include the original FMI)
transaction.
6. IOSCO Objectives and Principles
(2) Settlement risk Crypto assets may of Securities Regulation
have settlement risks when used for
payments. 7. IOSCO Principles on Outsourcing
(3) Climate transition risk affecting 8. FSB Regulation, Supervision, and

validation and scalability: changes of Oversight of “Global Stablecoin”
the consensus protocol and validation Arrangements
mechanisms, both voluntary or
imposed by legal restrictions for a 9. FSB Effective Practices for Cyber
certain type of activities (ban from Incident Response and Recovery
certain territories and/or climate
restrictions.
(4) Concentration risk: concentration of

validators and technology service
providers.
(5) Third-party risks (e.g., a failure that

arise in sub-contractors and other
centralised entities that keep records or
network services).
(6) Others: AML/CFT, financial crime

(e.g., direct exchange of illegal
proceeds
for mined coins with no transaction
history).
Function 2: Wallets and custody
Activities Service providers and Key Regulatory and financial Potentially relevant international
activity/entity pair stability standards
risks and vulnerabilities and policies
3. Provision of Custody service providers (1) Operational risks: cyber security 1. BCBS Principles for Operational
custodial could be risks leading to unavailability or un- Resilience
(hosted) wallet i) regulated financial authorised outflow of customers' 2. BCBS Principles for the Sound
and institutions; crypto-assets; This includes technical Management of Operational Risk
custody services They manage crypto assets vulnerabilities including wallet 3. BCBS Principles for Sound Liquidity
(i.e., software Risk
private keys) for retail and design and cyber security measures, Management and Supervision
institutional customers, usually and 4. CPMI-IOSCO Principles for financial
provided in conjunction with operational vulnerabilities such as loss market infrastructures (PFMI) (only if the
other or activity
services such as offline key mismanagement of private keys. is performed by a systemically
management services and Misconduct risk from, e.g., loss of funds important FMI)
insurance services as a hedge due to negligence, fraud/theft, poor 5. CPMI-IOSCO, Guidance on Cyber
against loss, in addition to the administration, inadequate record Resilience for Financial Market
transfer and exchange of keeping, or co-mingling of assets. Infrastructures
crypto assets. They may (2) Concentration risks: When a small (only if the activity is performed by a
manage crypto-assets number of service providers, wallet systemically
administratively or jointly (e.g., software or software libraries account important FMI)
using multi-signature) with their for 6. IOSCO Objectives and Principles of
customers. the majority of market share, Securities Regulation
ii) other entities; failures/vulnerabilities in them affect 7. IOSCO Recommendations
They manage crypto assets many Regarding the
(i.e., customers' crypto assets (e.g., loss of Protection of Client Assets
private keys) on behalf of their crypto assets) and spill over to crypto 8. IOSCO Recommendations for
customers, but may be exempt assets Liquidity
from regulation for reasons ecosystem. Risk Management for Collective
such (3) Third-party risks (e.g., a failure that Investment
as the sole activity of arises in sub-custodians and other Schemes
management of crypto-assets subcontractors) 9. IOSCO Principles on Outsourcing
is not within the regulatory (4) Others: AML/CFT 10. FSB high-level recommendations
perimeter in some jurisdictions N.B. (Specific to global stablecoin
or they manage crypto-assets The type of custody service varies arrangements)
jointly with their customers and significantly with different risk features, 11. FSB Effective Practices for Cyber
have no controlling authority. covering operational, conduct, and Incident
In other cases, the actual market Response and Recovery
situation is unclear and it is knock-on effects, depending on the 12. FATF Standards and Updated
challenging for authorities to contractual agreement between the Guidance
determine whether they are provider and the user. for a Risk-Based Approach to Virtual
within the perimeter. Assets
In addition to this, there are and Virtual Asset Service Providers
some
entities that do not comply with
regulations, such as
unregistered
service providers.
iii) DeFi protocols
They manage users' crypto
assets
or information about their
interests in crypto assets using
smart contracts that pool users'
crypto assets, typically as part
of
Function 2: Wallets and custody
4. Provision of i) regulated financial (1) Operational risks: including cyber 1. BCBS Principles for Operational
noncustodial institutions; security risks leading to unavailability Resilience
(unhosted) To offer solutions for retail and or 2. BCBS Principles for the Sound
wallets institutional customers or for unauthorised outflow of users' crypto Management of Operational Risk
general public to manage their assets; 3. CPMI-IOSCO Principles for financial
crypto assets (i.e., private This includes technical market infrastructures (PFMI) (only if the
keys) vulnerabilities including wallet activity
themselves. software is performed by a systemically
Users use unhosted wallets for design. Operational vulnerabilities are important FMI)
considerations on often due to users (e.g., carelessness, 4. CPMI-IOSCO, Guidance on Cyber
cybersecurity, lack of knowledge). Resilience for Financial Market
transaction costs, etc. and, they (2) Concentration risks: When a small Infrastructures
typically use their self-hosted number of wallet providers, wallet (only if the activity is performed by a
wallets in combination with software or software libraries account systemically
regulated entities' services for important FMI)
such the majority of market share, 5. IOSCO Objectives and Principles of
as an exchange of crypto failures/vulnerabilities in them affect Securities Regulation
assets. many users' crypto assets (e.g., loss of 6. IOSCO Principles on Outsourcing
ii) others; crypto assets) 7. FSB high-level recommendations
They may only develop and and spill over to crypto assets 8. FSB Effective Practices for Cyber
sell ecosystem. Incident
the hardware/software and (3) Third-party risks (e.g., a failure of Response and Recovery
are hardware/software wallet that arise in
typically not subject to sub-contractors)
regulations. (4) Others: AML/CFT (Users can use
There may be some entities the
who wallet without going through KYC,
do not comply with CDD,
regulations. STR etc.)
iii) DeFi protocols
They may offer solutions for
users or for general public to
manage their crypto assets
(i.e.,
private keys) themselves to
promote the use of DeFi
protocol.
Other entities might provide
support services for wallets.
Function 3: Transfer and transaction
activity/entity pair stability international standards
5. Payment Payment and settlement (1) Market risks: excessive volatility, 1. FATF Standards and Updated
for/of goods, providers, including: rapid price swings can hamper the use Guidance for a Risk-Based Approach
services, gifts and of crypto-assets in transactions, to Virtual Assets and Virtual Asset
remittances i) Traditional FMIs (both payment particularly in settlement operations. Service Providers
and securities systems, e.g., Sharp depreciation may generate
Credit Card provider); outflows and jeopardize the use of 2. CPMI-IOSCO, Guidance on Cyber
certain crypto assets. Resilience for Financial Market
ii) Financial institutions Infrastructures
(including banks); (2) Counterparty credit risks:
Depending on the mismatch of 3. CPMI-IOSCO Principles for
iii) Other entities37, typically exposures of the two payment legs. financial market infrastructures (PFMI)
centralised trading platforms; (only if the activity is performed by a
(3) Operational risks, in particular for systemically important FMI)
iv) DeFi protocols. unregulated entities whose records
may be less reliable including cyber 4. CPMI-IOSCO Guidance on the
security risks, and legal risks where Application of the Principles for
uncertainties of the legal status of Financial Market Infrastructures to
crypto-assets and their broader stablecoin arrangements
ecosystem could expose entities
different forms of legal risks. 5. BCBS, Principles for Operational
Misconduct by any service provider of Resilience
the crypto-asset ecosystem, in
particular, in unregulated centralised 6. BCBS, Revisions to the Principles
trading platforms; for the Sound Management of
Operational Risk
(4) Reputational risks, in particular for
traditional FMIs that promote or enable 7. BCBS, Prudential Treatment of
the use of crypto-assets in payment Crypto asset Exposures (second
transactions, which could face consultation)
reputational risks in the event of
payment failure.
(5) Exchange rate risk. Using for

payments or clearing, crypto assets
could substitute local currency,
especially in EMDEs and non-reserve
currency nations. This can generate
volatility and changes in the level of
exchange rate.
(6) Settlement risks. Crypto assets may

have settlement risks when used for
payments.
(7) Others:
Investor protection: lack of protection
discourages users from using in
transactions for payment, in cases of
unregulated entities. A specific case
relates to the lack of legal clarity in
single
instruments (e.g., whether it is a
financial
Function 3: Transfer and transaction
6. Facilitate the i) Traditional FMIs (1) Market risks: excessive volatility, 1. FATF Standards and Updated
exchange of rapid price swings can hamper the use Guidance for a Risk-Based Approach
crypto assets: ii) Traditional financial of crypto assets in transactions, to Virtual Assets and Virtual Asset
either between institutions, broker-dealers, particularly in settlement operations. Service Providers
crypto-assets or custodians Sharp depreciation may generate
between crypto- outflows and jeopardise the use of 2. CPMI-IOSCO, Guidance on Cyber
assets and fiat- iii) Unregulated entities, such as certain crypto assets. Resilience for Financial Market
currency, or fiat an unregulated centralised Infrastructures
currency-backed trading platform (2) Counterparty credit risks:
financial contracts Depending on the mismatch of 3. CPMI-IOSCO Principles for
iv) DeFi protocols exposures of the two payment legs. financial market infrastructures (PFMI)
(only if the activity is performed by a
(3) Operational risks, in particular for systemically important FMI)
unregulated entities whose records
may be less reliable including cyber 4. CPMI-IOSCO Guidance on the
security risks, and legal risks where Application of the Principles for
uncertainties of the legal status of Financial Market Infrastructures to
crypto-assets and their broader stablecoin arrangements
ecosystem could expose entities
different forms of legal risks. 5. BCBS, Principles for Operational
Misconduct by any service provider of Resilience
the crypto-asset ecosystem, in
particular, in unregulated centralised 6. BCBS, Revisions to the Principles
trading platforms; for the Sound Management of
Operational Risk
(4) Reputational risks, in particular for
traditional FMIs that promote or enable 7. BCBS, Prudential Treatment of
the use of crypto-assets in payment Crypto asset Exposures (second
transactions, which could face consultation)
reputational risks in the event of
payment failure.
(5) Exchange rate risk. Using for

payments or clearing, crypto assets
could substitute local currency,
especially in Emerging markets and
developing economies (EMDEs) and
non-reserve currency nations. This can
generate volatility and changes in the
level of the exchange rate.
Others:
Conflicts of interest associated with
exchanges. The use of crypto assets
may compete with fiat currency in
EMDES and amplify volatility to non-
reserve currencies and currencies of
EMDEs. The above-mentioned risks
could be amplified in the case of FIs
with direct or indirect exposures due
Function 4: Investment, lending, insurance, leverage and risk management
activity/entity pair stability international standards
7. Use as collateral to Institutional investors, they can be (1) Credit risk: leverage magnifies 1. BCBS standards on capital and
borrow other crypto potential losses and financial liquidity
assets, including i) Centralised investor entity stability consequences of losses
stablecoins (e.g., hedge funds, family offices, (e.g., liquidity impact of unwinding 2. CPMI-IOSCO Principles for
pension funds, can be either collateralized positions in response financial market infrastructures (PFMI)
traditional FIs or unregulated to price moves). (only if the activity is performed by a
entities) systemically important FMI)
(2) Counterparty credit risk:
ii) Centralised crypto asset trading Collateralisation exposes the 3. IOSCO Objectives and Principles
platforms lender to the value of crypto assets. of Securities Regulation
Collateral value and borrower
iii) DeFi protocols solvency are likely to be 4. IOSCO Recommendations for
correlated. Liquidity Risk Management for
Other entities providing support Collective Investment Schemes
services, such as custodian, (3) Others: Risk contagion as losses
advisor, and asset manager. They and liquidity stresses spill over to the
can also, be any of the three core part of the financial system.
above categories. Consumer protection when
engaging retail investors
Crypto assets allow for repeated
rehypothecation and leverage,
creating the possibility of very sharp
declines and automated unwinding
and liquidation.
This hidden leverage may be
difficult for regulators to monitor and
address.
8. Lending in crypto Lenders of crypto-assets or (1) Liquidity risks, 1. IOSCO, Report on Issues, Risks and
assets (Including lenders that accept crypto assets Regulatory Considerations Relating to
direct lending in in business, they might be: (2) Credit and counterparty credit Crypto- Asset Trading Platforms
crypto-assets risk: the risk that the counterparty
or facilitator for i) Centralised crypto asset will fail to meet its obligations in 2. BCBS, Prudential Treatment of
traditional financial platforms accordance with agreed terms. This Crypto asset Exposures (second
instruments i.e., loans, risk is particularly relevant in lending consultation)
derivatives, ii) DeFi protocols operations between users involving
investment crypto-assets: as such, high level 3. CPMI-IOSCO Principles for
vehicles, etc.) iii) Traditional financial of volatility of crypto-assets may Financial Market Infrastructures (PFMI)
institutions including banks amplify this source of risk (only if the activity is performed by a
systemically important FMI)
Other entities providing support (3) Market risk related to investing
services, such as custodian, assets with proceeds from
advisor, asset manager. They can depositors/investors
also be any of the three above
categories. (4) Operational risks fraud, failed
process or infrastructure failure.
(5) Others: Market integrity

related to inadequate disclosure,
misconduct in sales and promotions.
Consumer protection when
engaging retail investors. Risks may
mutually reinforce and give rise to
the rapid transmission of stress due
to tight interconnections.
Use of crypto-assets in traditional
financial activities may create new
risks, such as elevated volatility,
technical risks, and sudden price
dislocations ("flash crashes") and
increases the potential for stress in
crypto-asset system to spill over to
the traditional financial system.
9. Insurance Insurance of digital assets (e.g., (1) Credit risk, market risk, liquidity IAIS: No specific standards and no
crypto-asset wallets), holding of risks in relation to accepted/ specific guidance on insurance based
digital assets and underwriting of invested etc. crypto assets on crypto assets exist. However,
crypto-related risks. Also includes general standards apply, e.g., on risk
replacement of fiat currency as a (2) Operational risks for insurers in management and internal controls
form of payment (premiums and relation to (i) holding of own assets (ICP 8), valuation of assets and
claims). Important to note that (custody of keys etc.), (ii) transfers of liabilities (ICP 14), and investments
there is little to no activity in / crypto assets, (iii) conversions in fiat (ICP 15) whereby the supervisor
exposure to digital assets in the money, and (iv) compliance with requires the insurer to invest only in
insurance industry AML/KYC regulations assets where it can properly assess
and manage the risks.
i) Traditional insurers
ii) Centralised platforms
iii) DeFi protocols (very rare in

practice due to difficulty in pricing
the risk)
10. Direct/outright 1. Institutional investors, retail (1) Market risks, including basis risks 1. IOSCO, Report on Issues, Risks and
exposures to crypto investors, banks, and insurers in hedging Regulatory Considerations Relating
assets (including, to Crypto-Asset Trading Platforms
writing of products, 2. Centralised crypto asset (2) Liquidity risks (2020)
margining, market trading platforms
making, etc.) (3) Credit and counterparty credit 2. IOSCO, Consultative Report on
3. Brokerage firms/ investment risks Principles for the Regulation and
advisers Supervision of Commodity Derivatives
(4) Operational risks. Markets (2021)
4. Settlement provider
(5) Concentration risk 3. IOSCO Recommendations
5. Custodian Regarding the Protection of Client
(6) Others: Market integrity/investor Assets
They can be: Protection.
4. IOSCO Recommendations for
i) Traditional FMIs Holding crypto assets outright gives Liquidity Risk Management for
rise to the risks outlined above but Collective Investment Schemes
ii) Traditional financial is also a necessary condition for
institutions (Bank, insurance, generating the risks posed by crypto 5. IOSCO, Risk Mitigation Standards
funds) assets when used as a means of for Noncentrally Cleared OTC
payment or as collateral. Derivatives (2015)
iii) Unregulated centralised
platforms 6. BCBS, Prudential Treatment of
Crypto asset Exposures (second
iv) DeFi protocols consultation)
7. CPMI-IOSCO Principles for

Financial Market Infrastructures (PFMI)
11. Synthetic/ 1. Institutional investors, retail (1) Market risks, including basis risks 1. IOSCO, Report on Issues, Risks and
derivative exposure investors, banks, and insurers in hedging. Regulatory Considerations Relating
to crypto assets, to Crypto-Asset Trading Platforms
including exposure to 2. Centralised crypto asset (2) Liquidity risks. (2020)
derivatives referenced trading platforms
by crypto assets (3) Credit and counterparty credit 2. IOSCO Objectives and Principles
3. Brokerage firms/ investment risks. of Securities Regulation
advisers
(4) Operational risks. In particular 3. IOSCO, Consultative Report on
4. Settlement provider misconduct in engaging retail Principles for the Regulation and
investors and may spillover and Supervision of Commodity Derivatives
5. Custodian have knock-on effects. Markets (2021)
They can be: (5) Concentration risks. 4. IOSCO Recommendations

Regarding the Protection of Client
i) Traditional FMIs Derivatives can give rise to virtually Assets
unlimited exposure, thereby
ii) Traditional financial amplifying losses and liquidity 5. IOSCO Recommendations for
institutions (Bank, insurance, demands to sustain exposures Liquidity Risk Management for
funds) In addition, given the indirect Collective Investment Schemes
exposure to crypto assets it
iii) Unregulated centralised provides, traditional financial 6. IOSCO, Risk Mitigation Standards
platforms system participants who may have for Noncentrally Cleared OTC
concerns with operational resilience Derivatives (2015)
iv) DeFi protocols of direct holding of crypto assets
are incentivised to hold synthetic 7. The Basel Framework (capital and
exposure to crypto assets, which liquidity standards)
would increase interconnectedness 8. BCBS, Prudential Treatment of
between crypto-asset markets and Crypto asset Exposures (second
the traditional financial sector consultation)
9. CPMI-IOSCO Principles for

Financial Market Infrastructures (PFMI)
The nature of complaints reflected suggests that the percentage of complaints relating to ‘service’ could be higher than
reported suggesting that achieving good customer outcomes may not yet be embedded within the processes and practices
of the Crypto Asset FSPs. The product and investment complaints may suggest that the crypto asset products are not suitable
for the target market or may not be performing as customers were led to expect. The FSCA will need to explore whether
customers are provided with key information on their products on a regular and ongoing basis and that information provided
is appropriate and being understood by the target market. Complaints data is a valuable supervisory source of information
that enables the FSCA to identify and more quickly and effectively respond to risks.
Annexure 2
Some of the risks reported by the Crypto Asset FSPs are shown in Annexure 2.
Summary of common risks identified:
i. Regulatory risk: Governments around the world are still figuring out how to regulate the crypto asset industry. This
uncertainty creates regulatory risk for investors, as new laws and regulations could significantly impact the value of their
investments.
ii. Volatility risk: Crypto assets are highly volatile, which means their value can change rapidly and unpredictably. This
volatility can lead to significant gains or losses for investors, making it a risky investment. Market risk: The crypto asset
market is relatively new and has been unregulated, which makes it vulnerable to manipulation, fraud, and other market
risks.
iii. Operational risk: Crypto assets are stored in digital wallets, which are vulnerable to hacking and theft. If a wallet is
compromised, investors could lose their entire investment.
iv. Liquidity risk: Crypto assets can be difficult to sell quickly, especially during periods of high volatility or market stress. This
lack of liquidity can create significant losses for investors who need to sell their assets quickly.
v. Cybersecurity risk: Crypto assets and the underlying blockchain technology are vulnerable to cyber-attacks and hacking
attempts, which can lead to the loss of funds or personal information.
vi. Adoption risk: The widespread adoption of crypto assets by businesses and consumers is not yet assured, and failure to
achieve widespread adoption could negatively impact the value of crypto assets.
vii. AML and KYC risk: Crypto assets can be used to facilitate illegal activities, such as money laundering and terrorist
financing. To combat these risks, AML and KYC regulations require crypto exchanges and other virtual asset service
providers (VASPs) to verify the identity of their customers and monitor their transactions for suspicious activity.
viii. Terrorist Financing risk: Crypto assets can be used by terrorist groups to finance their activities anonymously. This risk is
mitigated by AML and KYC regulations, which help identify suspicious transactions and prevent the use of crypto assets
for illicit purposes.
ix. Fraud risk: Crypto assets are vulnerable to fraud, such as Ponzi schemes, phishing scams, and fake ICOs. Investors can
fall victim to these scams, losing their investments in the process.

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2 CRYPTO ASSETS MARKET STUDY

Other findings include:

1 The 2023 Geography of Cryptocurrency Report. Available at:

1.1 Recent regulatory developments

4 IFWG, Position Paper on Crypto Assets, 2021. Available at:

Figure 1: Crypto Asset Regulatory Developments

Source: Pathways to the Regulation of Crypto-Assets: A Global Approach 8

1.1.2 Local context

8 Pathways to the Regulation of Crypto-Assets: A Global Approach. Available at:

11 Reference the Declaration ie what was the official title.

5. Scope of the Information Request

The Information Request covered:

6. Overview of the Crypto Assets

6.1 Crypto Asset Ecosystem

17 IFWG, Position Paper on Crypto Assets, 2021. Available at:

Box 1: Key Crypto Asset Ecosystem Components and Actors

6.2 Crypto Assets Taxonomy

Figure 2 : A Taxonomy of Crypto Asset

6.3 Crypto Assets Functions and Activities

Table 1 : Essential Functions and Activities in the Crypto Asset Ecosystem

7. Key Findings from the

47 Crypto Asset FSPs responded substantively to the FSCA's Information Request24.

7.1.1 Type of Crypto Assets

Figure 3: Types of Crypto Assets

7.1.2 Head Office Location

Figure 4: Head Office Location

Figure 5: Annual Total Revenue

7.2 Outsourcing Arrangements

7.2.1 Outsourced Services

7.3 Business Model

Figure 6: Summary of Business Models

7.3.2 Remuneration Model32

Figure 7 : Summary of Common Remuneration Model (%)

7.3.3 Cross Border Business Monitoring

Figure 8 : Cross Border Business Monitoring Activities

Box 2: Summary of Cross-border Monitoring Activities

7.4 Market Dynamics

7.4.1 Value of Crypto Assets Traded per Month in 2022

7.4.2 Distribution channels

33 Africa’s Growing Crypto Market Needs Better Regulations. Available at:

Figure 10: Distribution Platforms and Strategies

7.4.3 Risk Disclosure

Figure 11: Risk Disclosure

Box 3: Summary of Risk Disclosure

i. Risks are disclosed when clients are signing up.

7.5 Demand Side

7.5.1 Proportion of Retail Customers

Figure 12: Proportion of Retail Customers

7.5.2 Proportion of Financial Institutions

Figure 13: Proportion of Financial Institutions

36 FCA bans the sale of crypto-derivatives to retail consumers. Availalble at:

7.5.3 Definition of Dormant Account

Figure 14: Definition of Dormant Account

7.6.1 Sources of Complaints

Figure 15 : Source of Complaints

7.6.2 Categorisation of Complaints

Figure 16 : Categorisation of Complaints

7.6.3 Complaints Handling Policy

Table 2: Summary of Complaints Handling Interventions

Annexure 1: Essential Functions,