South Africa
A collection of resources curated by our team to help advisors understand our products and how they can benefit investors.
On 19 October 2022, the Financial Sector Conduct Authority (FSCA) declared Crypto Assets as a Financial Product (FP) under the Financial Advisory and Intermediary Services Act (FAIS Act).
What does this mean for you as a Financial Advisor?
In simple terms, the effect of this announcement is that existing providers or advisers of Crypto Assets within the scope of providing advice and/or rendering intermediary services may continue to render financial services regarding Crypto Assets without being licensed, provided they apply for a license from 1 June 2023 until 30 November 2023. From this date, engaging in Crypto Asset activities without a license will be a criminal offence that may lead to prosecution.
By bringing Crypto Assets under the scope of the FAIS Act, financial advisors and their clients are safeguarded within the crypto market. Now, Crypto Asset providers and advisers in the crypto market are held under the same standards as providers and advisers within the traditional market. Not only must they be conscientious of relevant regulatory obligations but, they should be competent and experienced in Crypto Assets. To provide honest, fair, and impartial advice and services with due skill, care, and diligence. Where financial advisors and their clients are unsatisfied with the advice or services received, they may follow the usual avenue when lodging a complaint with the Ombud for Financial Services Providers (FAIS Ombud).
In analysing an acceptable level of exposure for Crypto Assets in an investment portfolio, we draw from the principles of Modern Portfolio Theory (“MPT”). This is an investment theory that allows investors to assemble an asset portfolio that maximizes expected return for a given level of risk. investors are risk-averse; for a given level of expected return, they will always prefer the less risky portfolio.
In our assessment of what would constitute an acceptable level of exposure to Crypto Assets, we have found recent studies to be supportive of our view of a 1% to 5% allocation. We base our view, simplistically, on what is traditionally deemed to be a sufficient level of exposure to alternative assets in a conservative, well-diversified investment portfolio.
We believe that one should assess the Crypto Asset class on a risk-to-return basis, not simply volatility. This measurement is more relevant based on the MPT.
At Pet Rock Investments, we recommend a three step process when considering an allocation to Crypto exposure and proceeding with a Crypto investment: (1) Understand investment needs, (2) Selecting the right partner and onboarding, and (3) Monitoring performance on an ongoing basis.
For more insights, download our complete report: “Digital Asset allocation in a diversified portfolio”
The South African Revenue Service has made it clear that Crypto Assets will be taxed, no matter how they are invested in, such as a partnership, personally or through a company.
Pet Rock Investments has simplified the tax calculation by providing the breakdown of any capital gains/income as well as expenses in client fund statements so as to allow clients to easily populate tax returns.
So, how will Client investments in the Pet Rock Funds be taxed? The South African Pet Rock Investment funds make use of private equity partnerships. A partnership does not possess a legal personality – that is to say, it is not a separate legal person distinct from the individuals who constitute it. Accordingly, a partnership cannot be liable for tax. Instead, the partners are treated as separate taxpayers in their own right and are subject to be taxed. We believe that there are significant taxation benefits in this approach and discuss this in the complete report.
For more insights, download our complete report: “Taxation considerations”
There are two primary pieces of legislation to be considered when assessing whether a service provider dealing in the investment of crypto-assets requires a license in South Africa: the Financial Advisory and Intermediary Services Act (“FAIS”) and the Collective Investment Schemes Control Act (“CISCA”).
If the activities of a service provider falls within the scope of regulation by either Act, then a license is usually required. FAIS regulates the financial services industry and the provision of services relating to financial products.
Locally, funds are structured as private equity partnerships. Each fund is segregated and treated as a separate legal entity with separate fund management and mandates. These partnerships are designed to be for the benefit of a small circle of high-quality investors, and not the general public. Pet Rock Investments provide access to crypto markets using these fund structures and best practices that are well known and trusted by the industry.
For more insights, download our complete report: “Legal structures: know your rights”
