Strong retail interest in crypto has prompted South African regulators to rethink their approach to cryptocurrencies and their classification.

South African financial regulators are laying the groundwork for “phased and structured” regulation of cryptocurrencies. The move represents a move away from an approach that has largely been used over the past seven years and was driven by the country's ever-higher level of retail interest in cryptocurrency.

In a position paper released on June 11, the country's Intergovernmental Financial Technology Working Group, or IFWG, under the auspices of the Cryptoassets Regulatory Working Group, laid out a roadmap for a regulatory framework that would focus on cryptoasset service providers, or CASPs.

South Africa's original national cryptocurrency policy so far has been caution but non-interference. Back in 2014, the National Treasury issued a public statement addressing the issue, along with the South African Reserve Bank and the country's financial regulator, as well as financial and tax agencies. His tone was cautious but unobtrusive, warning the public that they could trade cryptocurrency at their own risk and would not be offered legal protection or recourse in case of difficulty.

Commentators noted that several factors, including the rise of the South African cryptocurrency market to more than R 2 billion (USD 147 million) in daily trading earlier this year, made this old policy untenable and irrelevant.

The new IFWG document emphasizes that even though the structured regulatory framework must be phased in, cryptoassets remain “inherently risky and volatile,” and the perceived financial losses incurred in trading cryptocurrencies remain high.

Six overarching principles will guide the country's changing approach. This entails a “performance-based perspective” that will ensure that regulators are focused on the principle of “do the same, do the same risk”; implementation of measures proportional to the risk; a joint approach to the regulation of cryptoassets; keep abreast of international best practices and promote digital financial literacy among consumers.

The document also contains 25 recommendations on how to regulate cryptocurrency in relation to three main areas of concern: combating money laundering and combating the financing of terrorism, international financial laws and the application of financial sector laws. The latter means that the South African Financial Sector Conduct Authority will be tasked with preventing market abuses, such as fraud and misconduct in the market, and taking action against relevant industry violators.

Along with the published document, IFGW issued a press release outlining its strategy, which raised concerns about the nature of the asset class and the surrounding ecosystem. IFGW pointed to decentralization as a downside rather than a plus, which leaves consumers and traders without recourse to authorities or a centralized organization that could resolve user errors, such as using the wrong crypto wallet address.

IFGW also remains concerned about the manipulative nature of many cryptocurrency marketing materials, asset price volatility and fraudulent activities such as Ponzi schemes. Indeed, this year, the country's largest Ponzi scheme involved a company targeting Bitcoin (BTC) traders, which raised 23,000 BTC in investment holdings from 26,000 members worldwide.