The FSCA prohibits retirement funds from investing in volatile crypto — for good reason
Popular crypto currencies have lost value at a staggering rate. The Financial Sector Conduct Authority is right to regulate these so-called assets to protect less-informed South Africans
The crypto market is under siege. The losses being sustained are causing bankruptcies in some of the main exchanges. The most recent exchange to file for bankruptcy is FTX after a major liquidity crisis. This follows two crypto platforms, Celsius and Voyager, declaring bankruptcy in July this year.
This is a major talking point for market watchers, a risk for central banks that have financial stability mandates and painful for those not well informed who have taken their savings and leapt onto the bandwagon of crypto-market investing.
On October 19, the Financial Sector Conduct Authority (FSCA) officially declared that crypto assets are now classified as a financial product in terms of the Financial Advisory and Intermediary Services Act (Fais). It has defined crypto assets as 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; applies cryptographic techniques and uses distributed ledger technology.
OK, but so what? There are hundreds of cryptocurrencies or assets. The rapid growth in these coins, with no underlying economic activity or intrinsic use, must say something about their fundamental value. Calling them currencies or assets is due to a lack of a better description, because they don’t meet the usual characteristics of currencies or assets, economically speaking. They are poor and volatile stores of value.
Let’s take a few of the more popular ones: bitcoin, ethereum and dogecoin. Their dollar value has declined 64%, 67% and 50%, respectively since the beginning of the year. In the first half of this month alone, bitcoin was down 19% and ethereum and dogecoin by 24% and 26%, respectively. It’s clear that if one ever invests in these assets, the level of stress will generally rise when markets get volatile. More importantly, the losses are astronomical for some investors.
FSCA makes the right call
Fortunately, the FSCA, through Regulation 28, prohibits retirement and pension funds from investing in crypto assets. One would then ask why the FSCA classifies cryptocurrencies as financial assets, yet prohibits them for pension funds.
Because they are now financial products; they fall under the Fais Act, which means institutions that offer advice or sell them must be registered financial institutions, and individuals who offer advice must be appropriately qualified to understand and declare the risks involved in investing in cryptocurrencies. Failure to do that implies they can be reported to the Fais ombud and might even be charged for fraud or mis-selling.
“Calling crypto assets currencies or assets is due to a lack of a better description, because they don’t meet the usual characteristics of currencies or assets, economically speaking. They are poor and volatile stores of value.”
So, declare them financial products, so you can regulate them and protect less-informed South Africans who have been influenced by overnight bitcoin experts, including some DJs and celebrities. But exclude them from retirement and pension funds’ investments to safeguard people’s hard-earned savings. That’s responsive regulation that sees the risks and moves in quickly to protect citizens.
Who is to blame for the meltdown in crypto markets? Fellow columnist and friend Mamokete Lijane said on these pages that it’s the US Federal Reserve’s aggressive tightening of monetary policy in response to decades-high inflation (“Fed chair Powell partly to blame for Twitter saga”, November 15).
Let’s take a step back and celebrate the Fed for knocking inflation back to sub-2% and for high asset prices in the decade to 2019. Let’s celebrate the Fed and other central banks, including the SA Reserve Bank (Sarb), for responding with speed and scale by cutting rates and increasing liquidity in the market to help save livelihoods hit by the Covid-19 pandemic.
Immediately after that, lets blame the Fed and other central banks for misdiagnosing the persistency of inflation, which they caused. When they eventually respond by hiking rates, lets blame the Fed for hiking too much, too fast.
To paraphrase Warren Buffett: Don’t blame the tide for exposing those who have been swimming naked. Because crypto exchanges are not well regulated, they took advantage and became overleveraged, ignoring the fundamentals. Lijane is wrong to blame the Fed for a crypto market that overleveraged itself because of greed.