Story audio is generated using AI
DA finance wizard Mark Burke, just 36, is an accomplished man by all accounts. Armed with a PhD from Cambridge University, he is driven and ambitious; eight years ago he co-founded Kastelo — a fintech start-up that is now in the crosshairs of the South African Reserve Bank over alleged exchange control violations. Burke was chair of Kastelo until February, when he stepped down just weeks after the firm failed in a high court bid to lift a Bank order freezing its funds in Access Bank. His brother Nicholas is CEO of the fintech. The central bank froze the Kastelo money in November on suspicion the company had moved about R4bn out of the country unlawfully. The authorities accused it of misrepresenting its business to regulators and designing its business model to circumvent exchange control laws. Kastelo’s business model included crypto arbitrage — the process of buying and selling cryptocurrencies on different exchanges to take advantage of price differences. Crypto arbitrage itself is not unlawful. It has become a recognised investment strategy to exploit price differences between domestic and foreign crypto markets. Kastelo has denied wrongdoing, and the Bank’s investigation continues. What is the Bank alleging?Its accusations include:That Kastelo used its clients’ personal single discretionary allowances (SDAs) and foreign investment allowances (FIAs) to move funds offshore for the company’s own commercial crypto-arbitrage business. These allowances are meant for individual, personal offshore investment, not pooled commercial investment structures;That Kastelo did not properly inform its clients of how it was using their allowances; and That Kastelo misrepresented its activities in compliance declarations submitted to the Bank.“The very business model is suspected of contravening the exchange control regulations,” Andre Malherbe, an investigator in the Bank’s financial surveillance department, says in an affidavit. “The dominant purpose of the business model is to circumvent the exchange control regulations by facilitating acquisition of foreign currency for Kastelo’s own benefit through the use of third parties without permission from the department.” The very business model is suspected of contravening the exchange control regulations— Andre MalherbeKastelo’s positionKastelo defended itself in a statement, saying: “We have a track record of licensing and consistent engagement with several regulators regarding our products and services, serving as evidence that we’ve always built offerings which comply with regulations. Our business model focuses on client delight within the laws of South Africa.”The start-up said most of its clients made no use of their foreign investment allowances and generated no returns from offshore opportunities prior to using Kastelo’s services. “Kastelo enabled them to use their own discretionary allowance to earn returns for themselves on their own investments.”Commercial lawyers weigh inOne of South Africa’s leading commercial law firms, ENS Africa, said in a note on the case that it was an important reminder of the regulatory expectations that apply when new financial products meet South Africa’s exchange control framework.“South Africa’s exchange control regime allows individuals to move capital offshore through SDA and FIA mechanisms, subject to set limits and regulatory requirements. These allowances are meant to help with legitimate personal foreign investment and expenditure,” the note says.“They are not designed to create pooled investment structures or to let third parties use an individual’s allowance for commercial purposes. Where a business model depends on combining or relying on multiple individuals’ allowances, regulators are likely to scrutinise whether the transactions remain consistent with the framework’s purpose.“The reported allegations also show that regulatory scrutiny is no longer limited to traditional banking institutions. As fintech businesses continue to develop complex products involving digital assets, cross-border payments and investment platforms, regulators are placing greater focus on understanding the substance of commercial arrangements rather than simply their legal form.”South African residents qualify for an annual SDA of R2m and an FIA of R10m.Ens Africa said the litigation raised broad legal and regulatory issues that extended well beyond a single market participant. “It highlights the thin line between financial innovation and regulatory compliance, particularly where fintech business models involve cross-border transactions, foreign exchange or crypto assets,” it said. “The current proceedings also highlight the importance of transparency in dealings with regulators... Consistency between a firm’s actual business model, its regulatory disclosures and its public representations is becoming more important as supervisory expectations continue to develop.”Business Times
