South Africa Advances on Crypto Regulation to Combat Money Laundering and Terror Financing

South Africa is poised to implement a tighter framework for cryptocurrency transactions as part of its commitment to adhere to international standards on anti-money laundering (AML) and combating financing of terrorism (CFT). The Financial Intelligence Centre (FIC) of South Africa has received commentary from 17 entities on its draft directive concerning the 'Travel Rule', a key regulation that mandates crypto asset service providers (CASPs) to identify and verify the parties involved in a cryptocurrency transaction.

The proposed regulations, underlined by FIC acting director Pieter Smit, are a step towards dissociating South Africa from the Financial Action Task Force (FATF) greylist. Businesses in the crypto sector, insurance companies, and even The Banking Association South Africa have weighed in, and the FIC is considering their feedback to refine the final version of the directive.

The directive mandates the collection of comprehensive personal data from the sender, including full name, ID or passport number, date and place of birth, residential address, and wallet address. For cross-border transfers, even more stringent measures are prescribed, wherein the CASPs must ensure full verification of sender and beneficiary details for transactions exceeding R5,000, unless the transaction raises suspicion of money laundering or terrorist activities.

The responsibility also extends to intermediary CASPs who are required to track the originator and beneficiary details for both domestic and cross-border transactions. They must carry out due diligence on counterpart providers and regularly update their checks. Furthermore, incoming cross-border transfers must be monitored for compliance, demanding CASPs to implement either post-event or real-time monitoring systems to catch noncompliant transactions.

Additionally, these new rules bring into focus 'unhosted wallets', often referred to as self-custody in cryptocurrency parlance. CASPs will need to establish a risk-based policy to delve deeper into these transactions if they are deemed high-risk.

The greylisting of South Africa by the FATF on February 24, 2023, has accelerated the country's reform process in addressing the 11 measures concerning AML and CFT. The global watchdog's Travel Rule seeks to thwart the misuse of virtual assets for criminal and terror activities by linking transactions to identifiable persons.

South Africa's proactive approach is evidenced by the rapid development of regulatory frameworks that align with the 35 jurisdictions compliant with the Travel Rule, as of 2023. Though the expectation is that South Africa could remain on the greylist until 2025, the FATF has recognized South Africa's political determination to combat AML and CFT threats.

These regulatory efforts reflect South Africa's intent to create a safer and more transparent digital asset environment. By implementing the proposed directive, South Africa could both secure its financial borders and foster development within its burgeoning cryptocurrency sector.