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South Africa’s Crypto Risk: High Threat of Money-Laundering and Terrorist Financing

south africa crypto terrorist financing money laundering

Crypto assets have rapidly gained traction in South Africa, with more than 5.8 million South Africans owning digital currencies. However, as the crypto space becomes more popular, it also faces growing concerns over its use for illicit activities such as money laundering (ML) and terrorist financing (TF). These concerns are particularly critical given that the country’s crypto asset service provider (CASP) sector is now categorized as carrying a “high” inherent risk for both ML and TF. According to a recent report by the Financial Intelligence Centre (FIC), the crypto industry in South Africa poses significant challenges when it comes to regulatory oversight, and the risk of misuse remains considerable.

The Financial Intelligence Centre has released a sector risk assessment report, which sheds light on the vulnerability of South Africa’s crypto sector to criminal activities. The FIC classifies the overall risk posed by the country’s crypto asset service providers as high due to multiple factors, including the types of services offered, transaction methods, and client profiles. The report emphasizes that the speed, decentralization, and global access of digital currencies make them highly attractive to criminal syndicates and terrorist organizations.

The report further elaborates that while crypto assets are not inherently linked to criminal activity, the decentralized nature and the ease with which they can be exchanged across borders make them an appealing tool for illicit actors. Criminals can exploit crypto assets to launder money by masking the origin and destination of funds, bypassing traditional financial institutions’ anti-money laundering (AML) and counter-terrorist financing (CTF) measures.

In its analysis, the FIC also highlights that there are still challenges when it comes to regulatory clarity, making it more difficult to ensure the industry remains safe from illicit activities. With the crypto market still relatively new, South African authorities are working to strengthen the legal framework to address these risks more effectively.

The Role of Crypto in Money-Laundering and Terrorist Financing

As digital currencies have gained popularity globally, they have also become a tool for illicit financial activities. The anonymous nature of many crypto transactions, along with their ability to move large sums of money quickly across borders, makes them particularly appealing to those involved in money laundering and financing terrorism. The FIC’s report points out that many crypto transactions are not easily traceable, providing criminals with a method of transferring funds without leaving behind a paper trail.

However, the report also underscores that while crypto assets can offer some level of anonymity, they are not completely beyond the reach of law enforcement. Blockchain technology, which underpins most crypto assets, records all transactions publicly and can be accessed and traced by authorities, albeit with some challenges. This aspect of crypto transactions provides opportunities for investigation, but it also presents a double-edged sword. On the one hand, law enforcement agencies can use this public record to trace suspicious transactions, but on the other hand, the sheer volume and complexity of crypto transactions make it difficult to identify illicit activities without advanced tools and expertise.

Furthermore, the report emphasizes that while the transparency of blockchain might aid in investigations, it can also lead to challenges in distinguishing between legitimate and illicit activities. A transaction could appear suspicious on the surface but may actually be part of a lawful transfer. This creates the need for more sophisticated investigative techniques and collaboration between authorities and financial institutions to effectively monitor the sector.

The FIC also highlights the use of crypto assets in terrorism financing. As global terrorist groups and networks adapt to evolving financial systems, they increasingly turn to crypto assets to finance their activities. The report notes that while some crypto assets offer privacy features, which make them attractive to terrorist groups seeking to avoid detection, the underlying blockchain technology still enables governments to trace and investigate transactions. Nonetheless, there is still much room for improvement in how regulators can monitor and manage these risks effectively.

Regulatory Measures and Their Impact on Crypto Service Providers

As of February 2025, the FIC registered 256 crypto asset service providers (CASPs) under updated legislation introduced in December 2022. This development marks a significant step towards regulating the industry and addressing the risks associated with crypto assets. However, despite these advancements, the FIC warns that the actual number of active CASPs may be much higher, with some operating without proper registration.

The FIC has expressed concerns over unregistered operators that could potentially exploit regulatory gaps. Some businesses, which are involved in crypto asset services, have also failed to comply with registration requirements, thus operating outside of the regulatory framework. This increases the risk of these service providers being used as channels for money laundering or financing terrorism. The FIC further highlights the importance of CASPs adhering to the same AML and CTF standards applied to traditional financial institutions. Ensuring compliance within the crypto space is essential to reducing the risks of criminal exploitation.

One of the key challenges highlighted in the report is the lack of exchange control measures for crypto assets. While legislative changes have been made to address money laundering and terrorist financing risks, certain aspects of regulation, such as exchange controls, are still in the planning phase. The absence of proper exchange control measures could potentially exacerbate the risk of misuse of crypto assets in criminal activities.

Despite these regulatory challenges, there are efforts to improve the situation. The FIC’s oversight of the CASP sector includes ensuring that these service providers are licensed by the Financial Sector Conduct Authority (FSCA) and comply with the standards set by the Financial Action Task Force (FATF). Additionally, crypto service providers are required to adhere to anti-money laundering (AML) regulations, ensuring that they remain accountable in their operations. However, the report suggests that there is still a need for clearer guidelines regarding the exchange control of crypto assets to close any existing regulatory gaps.

International Cooperation and Risks of Cross-Border Crypto Transactions

Another critical risk factor highlighted in the FIC report is the potential for cross-border crypto transactions. Several South African business entities involved in crypto asset services have their headquarters in other jurisdictions, including Singapore, Switzerland, and the UK. While these jurisdictions may have their own regulatory frameworks, the differences in supervision can create risks for money laundering and terrorist financing activities.

Crypto transactions that cross international borders pose challenges for regulators, as differing legal and regulatory standards can create loopholes for illicit financial activities. For example, while one jurisdiction may have strong AML and TF measures in place, another may have more relaxed regulations, making it easier for criminals to exploit these differences. Moreover, cryptocurrency exchanges often operate across jurisdictions, allowing users to move funds between countries with little oversight from regulators. This transnational nature of crypto assets adds complexity to efforts to mitigate criminal exploitation.

The FIC report stresses the importance of international cooperation in addressing these risks. Regulatory bodies in different countries must work together to create a unified approach to crypto asset regulation, ensuring that service providers adhere to consistent standards and that the global crypto market is not used to facilitate illicit activities. The FIC highlights the importance of sharing information and best practices to improve monitoring and enforcement. Without international collaboration, the risk of money laundering and terrorist financing activities could escalate.

In response to these challenges, South African regulators have called for stronger international cooperation to harmonize crypto asset regulations. This would help ensure that crypto assets are not used to exploit regulatory loopholes and would allow for more effective enforcement of AML and CTF laws. Furthermore, the report suggests that South African regulators continue to enhance their partnerships with international counterparts to address the global nature of crypto-related crime.

Conclusion: Moving Forward with Crypto Regulation in South Africa

The crypto asset sector in South Africa has grown rapidly, and its potential for both legitimate and illicit use cannot be ignored. While regulatory measures have been introduced to mitigate risks related to money laundering and terrorist financing, there is still much work to be done. The lack of clarity on certain regulatory aspects, combined with the international nature of crypto transactions, creates challenges that require ongoing attention and cooperation between local and global authorities.

Despite these challenges, there is hope that the continued efforts to regulate the sector will lead to a safer environment for crypto users and businesses. The FIC’s report serves as an important reminder of the risks associated with crypto assets and the need for vigilance in combating financial crime. As the crypto industry matures, both in South Africa and globally, regulators and service providers must work together to ensure that crypto remains a tool for innovation rather than a vehicle for criminal activity.