South African Fintech: How Regulators Approached Crypto and Innovation

Two reports, two moments

This article compares two sources. The first is a legal overview from March 2018 describing the fintech climate and regulatory position at that time. The second is a landscape study from October 2019, prepared by Genesis Analytics for the Intergovernmental Fintech Working Group (IFWG), whose members are the Reserve Bank, the Financial Intelligence Centre, the Financial Sector Conduct Authority, National Treasury, the National Credit Regulator and the South African Revenue Service. The study states that its views are the independent provider’s, not those of the regulators.

Reading them together shows how quickly the conversation moved from ‘what is this?’ to ‘how do we support and supervise it?’

The 2018 picture

The overview was upbeat. It credited market demand, capable innovators and an inquisitive regulator for a promising outlook, with activity focused on payment systems, exchange control and apps that avoid the need for a bank account. There was no bespoke fintech regulation, but the Reserve Bank ran a programme that supported innovation.

In February 2018 the Reserve Bank announced a FinTech Programme with three objectives: review its position on private cryptocurrencies to inform an appropriate policy framework, decide whether to set up innovation facilitators, and launch Project Khokha to experiment with distributed ledger technology (see our Project Khokha article).

On digital currencies, the overview said virtual currencies were unregulated, were not legal tender and were used at the user’s own risk. Crypto lending was growing but also unregulated. Where legal tender was involved, however, existing laws were broad enough to apply regardless of the platform. Payments were comprehensively regulated: fintechs facilitating digital payments in legal tender were treated as system operators or third-party service providers and needed authorisation from the Reserve Bank or the Payments Association. On cross-border use, the Reserve Bank worried that anonymous digital currency transfers could circumvent exchange controls, and it did not entertain requests for cross-border trade in them.

Take-up of alternative remittance technologies was low because of limited cost savings, reliance on traditional infrastructure like bank accounts and ATMs, and low financial and digital literacy.

The 2019 landscape

The Genesis study set out to map every active fintech in South Africa, segment them by function, estimate each segment’s size, interview entrepreneurs and review regulation. It limited itself to firms founded from 2008 onwards with a physical presence in the country. It counted more than 200 fintechs.

Segments included payments, lending, savings and deposits, insurtech, investments and financial planning, plus a large enabling-technology group. Examples of counts reported: 28 lending fintechs; 14 in savings and deposits, including four digital banks; 22 in investments, ten of them cryptocurrency trading platforms; and an enablers segment of 48 fintechs, of which 17 offered white-label platforms and ten focused on security and identity.

The overall verdict: a sophisticated financial system and world-class fintechs, three of which had appeared on a 2016 global fintech list, yet incumbents dominate, making it hard to scale. Challenges included a risk-averse funding environment, a shortage of entrepreneurial skills and a complex regulatory environment. The report recommends ways regulators can support the sector without stifling innovation.

What changed between the two

In 2018 crypto sat in a grey zone and the regulators were learning. By 2019 the question was how to map and enable an industry whose largest cluster was payments and lending, with crypto trading platforms a visible minority of investment fintechs. The IFWG itself, which the Project Khokha report cites as a collaboration between regulators, is an example of the coordination that the landscape study recommends continuing.

Rules have changed since 2019, so treat both documents as snapshots and check current regulatory guidance before acting. For the wider continental view, see Blockchain and African economies.