The Financial Sector Conduct Authority (FSCA) in South Africa has adopted a flexible approach to regulating non-fungible tokens (NFTs) in a quickly changing cryptocurrency landscape.

While many forms of crypto assets are now classified as financial products requiring a licence, NFT-related financial services remain exempt, at least for now. But with the FSCA keeping a close eye on the market, could this exemption be short-lived?

Why NFTs Are Currently Exempt

According to the FSCA, this exemption is based on a risk assessment that determined NFTs do not currently warrant financial oversight.

Unlike traditional cryptocurrencies, NFTs are unique, non-interchangeable digital assets that exist on blockchains. They are often associated with digital art, music, and collectibles, serving as proof of ownership and authenticity.

Because NFTs do not function like other crypto assets, such as Bitcoin or Ethereum, which are used as currency or investment vehicles, the FSCA has decided they do not require the same level of regulatory scrutiny.

However, the regulator has also emphasised that this position is subject to change depending on how the market evolves.

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The Rise and Fall of NFTs: A Case Study

The NFT boom of 2021 saw digital collectibles like Cryptopunks and the Bored Ape Yacht Club skyrocket in value, with some selling for millions of rands.

Celebrities including Jimmy Fallon, Paris Hilton, Seth Green, Madonna, and Justin Bieber publicly invested in the craze. However, when the market crashed, many high-profile buyers found themselves at the centre of controversy.

A proposed class-action lawsuit later accused Bored Ape Yacht Club’s parent company, Yuga Labs, of working with Sotheby’s in a deceptive auction.

The legal battles and significant price declines have led to scepticism about NFTs as a viable investment, further complicating the discussion on whether they should be regulated like other financial products.

Where South Africa Stands on Crypto Regulation

In 2022, the FSCA officially declared crypto assets to be financial products under the Financial Advisory and Intermediary Services (FAIS) Act.

This means that any entity or individual providing financial services related to crypto, such as advising on investments or facilitating transactions, must be licensed.

However, the FSCA clarified that its position is not permanent and could be updated based on market trends. “Entities and individuals engaging in financial services related to crypto assets are encouraged to seek independent legal and compliance advice regarding their specific obligations under applicable laws,” the regulator stated.

This cautious yet adaptive approach highlights the regulator’s commitment to consumer protection while allowing room for innovation in the crypto space.

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Memecoins vs. NFTs: Different Treatment Under FSCA Rules

Interestingly, the FSCA does not treat all crypto assets equally. Memecoins—cryptocurrencies based on internet memes and cultural trends,are subject to financial regulation if they are used in financial services.

Dogecoin, an early example of a memecoin, started as a joke but has since gained real-world utility and investment value. Unlike NFTs, which are unique digital assets, memecoins function like regular cryptocurrencies and can be traded or used as currency.

The key distinction is that NFTs are non-interchangeable, whereas memecoins, like traditional cryptocurrencies, can be exchanged on a 1:1 basis.

This fundamental difference explains why NFTs currently enjoy an exemption from licensing requirements while other crypto assets do not.

Final Thoughts

For now, South Africa’s approach to NFTs is one of cautious observation rather than immediate regulation. The FSCA’s decision to grant an exemption reflects an understanding of NFTs’ unique nature compared to traditional cryptocurrencies.

However, as the crypto industry continues to evolve, regulatory oversight may expand to include NFT-related financial services.