Crypto complaints on the rise, says Fais Ombud

Investments in cryptocurrencies such as bitcoin are leading to an increasing number of complaints being received by the office of the Financial Advisory and Intermediary Services (Fais) Ombud.

However, assistant ombud Thobile Masina says the office of the ombud is facing a dilemma in finalising and issuing determinations on cryptocurrency complaints because of challenges related to the definition of cryptocurrency and whether it is a financial product or merely an alternative currency.

The latest Fais Ombud annual report lists cryptocurrency complaints among the new trends in the industry. 

It says the complaints relate to cases where these currencies are being marketed as mainstream investment solutions; in some cases, the performance is even guaranteed.

But no disclosure is made that these products are unregulated, or what the risks associated with these investments are and the implications this has on the complainant’s investment.

First determination

The report states: “Investigations into a few matters are at an advanced stage and this office is looking to issue its first determination on this type of investment early in its 2019/2020 financial year.”

The report was released earlier this month and covers the Fais Ombud’s financial year to end-March 2019, but the office has not yet issued any determinations on cryptocurrencies.

Masina says the reason it has not made a decision related to any of these complaints is because the office of the ombud is still battling with the definition of cryptocurrencies and whether or not they count as financial products.

She adds that whether cryptocurrencies do or do not fall within the definition of a financial product will determine whether the Fais Ombud has jurisdiction to consider complaints about them.

Masina says that when the ombud initially dealt with cryptocurrency complaints, its view was that they were not a financial product.

It was however then engaged by the Financial Sector Conduct Authority (FSCA) about whether cryptocurrency could be a financial product and, if so, where it fits in among the list of financial products currently identified in the Fais Act.

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Masina was unable to quantify how many cryptocurrency complaints have been lodged with the ombud, but believes the number will increase in the future.

“People are looking for alternative means of investing and the issue with cryptocurrencies is that they are very popular, not only among seasoned investors or people who know the market very well, but [others] – people pitch them as very normal and very easy to get into.

“Even your neighbour can say I can sell you some bitcoins,” she says, adding that people are generally picking up on the opportunities through word of mouth.

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Masina says people are not necessarily getting into cryptocurrencies through financial services providers (FSPs) who are selling them to their clients but from clients among themselves.

“They don’t identify them as cryptocurrencies because people are pitching them as just an investment. That is the difficulty we are having right now.

“If it is from a FSP,” she continues, “what type of information are they giving you regarding this particular type of product?

“The argument, especially from FSPs, is that it isn’t a financial product, it’s just an alternative currency.”

First National Bank last month gave notice of its termination of its banking services to virtual currency exchanges and intermediaries trading in virtual currency in South Africa.

The bank did not specifically name these exchanges or intermediaries but reports indicate that valr.com and Luno are affected.

FNB said it considered its action to be prudent “following a comprehensive review of the potential risks currently associated with these entities, particularly given that appropriate regulatory frameworks are not yet in place”.

Luno said it did not anticipate any impact to its existing or future customers because it has other banking relationships in place to support deposits and withdrawals on the platform.

The South African Reserve Bank reported this month that it is planning to introduce new rules regarding the use of digital currencies, or cryptocurrencies, in an attempt to stop them from being used to evade currency controls.

These rules will be implemented in the first quarter of 2020.

Masina says there is also a problem with people who opened cryptocurrency accounts and are now trying to sell them off to other people so they do not have to deal with any loss.

She says some of the complaints the ombud has received are from people who had bought a bitcoin from someone who had previously bought it.

“It’s not necessarily that new accounts have been opened but similar to when Sharemax was falling apart and people were selling their shares in property syndications to other people who were none the wiser [of the problems].”