FSCA approval of 59 crypto licences a ‘tremendous’ step

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JIMMY MOYAHA: Crypto asset service providers have been in the news of late. We’ve heard that the FSCA [Financial Sector Conduct Authority] has recently approved around 59 Casps [crypto asset service providers], as they are being referred to. This is essentially the latest in licensing efforts from the FSCA to better regulate our financial services space, and in particular, regulate the crypto space.

I’m joined on the line by one of the approved Casp licence holders, Unum Capital. I’m speaking to the head of trading at Unum Capital, Michael Porter, around this licensing development and what it means for investments. Good evening, Michael. Thanks so much for taking the time. Let’s start with a bit of background.

In October 2022, we sort of knew that we were going down this road. There were announcements made from the FSCA that they were looking at crypto asset service providers. It’s been quite a long journey, but how significant is it as a milestone to be at this point where we have approved Casp licences and a better-regulated environment?

Read: D-day for crypto assets has arrived, as FSCA targets scams [Oct 2022]

MICHAEL PORTER: Yes, good evening. Jimmy. Thank you for having us. We are very excited. We were informed today that our licensing has been approved. So yes, we are one of the first to be approved on this, and I think it’s a significant step.

It’s come a long way since October 2022, where the FSCA officially declared that crypto assets are financial products.

Since then, we’ve seen quite a lot of demand for these specific products.

Read: FSCA gets 93 crypto asset service provider licence applications [Dec 2023]

From our side, we obviously wanted this to be in a more regulated space. That’s why we were also one of the first to apply. I think we did our application already in June 2023, last year. It has been a process and we’re happy that it got approved, and I think it’s a tremendous step overall for retail and institutional investors in this landmark.

JIMMY MOYAHA: Mike, we’ve been seeing a growing number of retail investors and even institutional investors dabbling in the crypto space. We expect that in South Africa, in particular, cryptos are going to be such a big part of the investment or the speculative side of things going forward.

Currently there are a number of analysts that are saying we’re entering a crypto bull market. How is the timing of this approval lining up quite nicely with what we’re seeing in the market – and the interest around cryptos and the various types of crypto products that are there at the moment?

MICHAEL PORTER: A hundred percent. You see, the problem we had is that as soon as one had had a chat around crypto there was always the regulation part of it. But the guys were obviously scared and worried about that. Obviously what we’ve seen in prior years has been big institutions with regulation issues and that sort of thing.

So in terms of this we’ve seen a bull market since the end of last year.

This comes actually at a very good time, especially since we are seeing a lot more demand for these crypto assets from clients who previously weren’t actually interested in this asset class.

JIMMY MOYAHA: Mike, let’s look at the benefits of now being Casp-regulated or being regarded as a Casp in the market space. We’ve seen that in the past products like crypto CFDs [contracts for difference] have been offered by brokers. Recently we saw the SEC [US Securities and Exchange Commission] approve crypto ETFs [exchange-traded funds], but until now have [not had] a specific regulation for Casp licensing in South Africa. What does that mean for a trading desk and its ability to create products, but also for an investor and the types of products they can now invest in?

MICHAEL PORTER: The thing is that obviously we did offer these types of products either via CFDs or derivatives. And now, most recently we’ve seen a big demand in the exchange-traded funds.

But what this means actually from a Casp licence point of view is that we can now offer these products in the cash market. So that would be that any retail or institutional client can hold the coins in their own wallet.

It doesn’t need to be a derivative. You can add that from a discretionary portfolio, a non-discretionary portfolio. You can hold that now in the cash market in your account. So that is a massive step, especially from South Africa’s point of view on cryptos.

JIMMY MOYAHA: And Mike, what about investment portfolios? Surely this now opens that up as well to say portions of your long-term investment portfolios can be looked at, if you are looking at alternative kind of allocations and the like.

MICHAEL PORTER: Yes. If you look at that, most portfolios usually have a small allocation for alternatives, and that is just to generate perhaps a little more alpha. What is nice now is we can add these to the portfolios.

Obviously, we are not saying that your whole portfolio should be in cryptos per se, but it can have a nice couple of percent allocation just to generate that alpha – especially if there is a bull market.

We’ve seen a lot of queries and demand for these products to be added. So this is a significant step, correct.

JIMMY MOYAHA: Now cryptos still contain a lot of volatility and there’s a lot of risk associated with them, regardless of whether they’re regulated or not at this stage as products. It’s still very much a demand/supply kind of market, and there is still a very outlawed and almost Wild West kind of approach to crypto trading. We’ve seen that products like meme coins are all the rage at the moment.

But from a portfolio point of view, Mike, from an investment point of view and a strategic point of view, how do you navigate the research? How do you navigate the portion of it that you must allocate into your portfolio in terms of percentages and all of that? How do you approach this crypto environment in a responsible manner – again, through the use of now-regulated providers?

MICHAEL PORTER: You see, the thing is that obviously you get a whole different sphere of coins that are not necessarily just bitcoin or Ethereum or your main coins, and that’s where the alternative coins or what they would [call] the meme coins actually come in.

From an intermediary and a non-discretionary side, we can offer whatever the client needs. But from a discretionary and a portfolio-management point of view, we’ve got analysts that are covered from a technical and a bit of research [capability] on that, and we probably stick to the main ones. But if there is demand for the other ones we can create a bespoke portfolio.

Read: Bitcoin smashes previous all-time high in rands as it nears R1.2m [Feb 2024]

Other than that, we mostly stick to the main ones – bitcoin, Ethereum, Solana, and all of them have probably the highest allocation within that percentage. But still, from an overall perspective, from your overall portfolio, it is just a couple of percent from an alternative point of view.

JIMMY MOYAHA: Michael, what’s the benefit of sticking to the larger ones, these so-called ‘stable’ or ‘secure’ coins in terms of investments? How does that better position of a portfolio survive unknown variables that come with crypto?

MICHAEL PORTER: I think it comes down to liquidity. Obviously you might get one of these smaller coins that has massive movement in terms of volatility.

Volatility plays a massive role. But second is liquidity. If you need to sell, you want to get out of that position, whether that’s now a larger position per se.

So we tend to stick – obviously we’ve got our criteria, but they need to fulfil the liquidity and obviously the amount traded on that, so we tend to stick to the more stable coins just in terms of a liquidity point of view as well.

JIMMY MOYAHA: Responsible trading from a responsible service provider. Thank you so much, Mike. That’s Michael Porter, the head of trading at Unum Capital, chatting to us about their crypto asset service providers licence, their Casp licence. They were one of the first providers to apply for one, and they now have been one of the first providers to be awarded a Casp licence.