According to the latest guidance note issued by the South African banking sector regulator, Prudential Authority, risk assessment does not mean that financial institutions should avoid or eliminate risks by wholesale termination of customer relationships with entities such as crypto-asset service providers. Instead, the regulator wants financial institutions to only consider “de-risking” when the “risk posed is too great to be successfully managed”.
A threat to financial integrity
South Africa’s main banking industry regulator, the Prudential Authority, has said that decisions by some banks to end relationships with crypto entities “may pose a threat to financial integrity in general”. In addition, the regulator suggested that completely avoiding cryptocurrency entities could weaken banks’ risk management processes.
According to guidance note sent to financial institutions by Fundi Tshazibana, director general of the Prudential Authority, the removal of crypto entities such as exchanges from the banking system “can potentially create opacity in the financial conduct of affected individuals or entities.” The same also eliminates the possibility of dealing with risks such as money laundering, terrorist financing and proliferation financing, the eight-page guidance note adds.
Tshazibana’s remarks come more than six months after it was reported that certain South African financial institutions had sent account termination notices to customers who offered automated cryptocurrency arbitrage services. As previously reported by Bitcoin.com News in late 2021, one of the banks, Standard Bank, insisted at the time that the end of services to crypto entities was aimed at ensuring the financial institution’s compliance with regulations .
However, in the guidance note, which must also be sent to the independent auditors of the respective institutions, the CEO urges banks to conduct the relevant risk assessment for each crypto asset (CA) or service provider of cryptoassets (CASP). Tshazibana explains:
Therefore, it is prudent for banks to be able to classify the risk of customers related to CA/CASP by conducting a risk assessment which will help banks to determine the appropriate level of [money laundering, terrorist financing, proliferation financing] necessary risk management measures, as opposed to total avoidance, in accordance with the application of a risk-based approach.
The CEO argued that the decision to de-risk or terminate service should only be made after “the risk posed by a particular company or customer is too great to manage successfully.”
“A big step forward for Crypto”
Reacting to the Prudential Authority’s latest guidance note, Farzam Ehsani, CEO of a South African crypto exchange called Valr, said in a tweet that the arguments presented by the regulator indicate that it now understands the benefits of monitoring cryptographic transactions. Ehsani also weighed in on what the guidance note means for the crypto industry. he said:
“From my point of view, this is a big step forward for crypto, for South Africa and for the banks themselves. It’s especially helpful for companies in the crypto space who are trying to responsibly build products for serve people. Risks and bad actors obviously remain in crypto (as they do elsewhere) and banks won’t immediately start banking every crypto company.”
The Valr boss also argued that the latest guidance note will likely steer South Africa “in the right direction to enable new technology and innovation to thrive in the country”.
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Terence Zimwara is an award-winning journalist, author and writer from Zimbabwe. He has written extensively about the economic problems of some African countries, as well as how digital currencies can offer Africans an escape route.
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