Cyprus and Cryptocurrency

Cyprus Cryptocurrency Laws
Regulation of Digital Currencies: Cryptocurrency, Bitcoins, Blockchain Technology

On November 25th, 2020, the Cyprus Securities and Exchange Commission (CySEC) passed Circular C417. The Circular is entitled “Prudential Treatment of Crypto Assets and Enhancement of Risk Management Procedures Associated With Crypto Assets.” The purpose of the Circular is to ensure that Cyprus Investment Firms (CIFs) adequately cover their investments in cryptocurrencies and adequately manage the risks associated with cryptocurrency trading. Also, CySEC issued the circular to guide CIFs that invest in cryptocurrency and provide them confidence that they are complying with Cyprus laws.

There are three requirements that CIFs must satisfy to operate within Cyprus. First, CIFs must receive authorization from CySEC to trade in cryptocurrencies. Second, CIFs must acquire sufficient capital to cover their cryptocurrency investments. Essentially, CIFs must determine a capital adequacy ratio. The Circular guide’s first three provisions guide how CIFs can adequately calculate the capital needed for cryptocurrency investments. Third, CIFs must carefully manage the risks associated with cryptocurrency investments. Specifically, the CySEC urged CIFs to revisit their risk management procedures periodically and ensure that all risks are duly considered. Additionally, CySEC charged CIFs with the duty to mitigate trading risks in cryptocurrency, including operational, cybersecurity, and reputational risks.

The Central Bank of Cyprus (CBC) also warned about the risks associated with cryptocurrency trading. Mainly, the CBC warned that cryptocurrencies are not classified as “legal tender.” The CBC then listed the four main risks that arise from cryptocurrency trading:

  1. There are no guarantees or legal obligations for reimbursement of lost or stolen cryptocurrencies.
  2. Cryptocurrency prices are notoriously volatile.
  3. Cryptocurrencies are often associated with illegal activities, such as money laundering and crime financing.
  4. Cryptocurrency exchanges do not have optimal security.

Consequently, the possibility of theft is significantly high. This possibility is a grave concern since, as mentioned above, there are no legal obligations for reimbursement. As a result, someone whose cryptocurrencies are stolen has no way to recoup their losses in Croatia.

 

On May 15, 2018, the Cyprus Securities and Exchange Commission (CySEC) published Circular C. 268. The Act is titled “Introduction of New Rules Governing Derivatives on Virtual Currencies.” In this Act, CySEC clarified several aspects of Cyprus’s cryptocurrency regulation. First and foremost, they announced that cryptocurrencies are currently unregulated by the CySEC.

Second, the Circular made clear that cryptocurrency derivatives can qualify as financial instruments under Cyprus law. Specifically, derivatives on cryptocurrencies can qualify as one of three financial instruments:

  1. as “any other contracts relating to securities […] which may be settled physically or in cash;”
  2. as “financial contracts for differences;” or
  3. as “any other derivative contracts relating to assets […] not otherwise mentioned in this Section, which has the characteristics of other derivative financial instruments.”

Accordingly, investment services regarding derivatives on cryptocurrencies may be required to be authorized explicitly by the CySEC, depending on the specific characteristics and uses of the investment services.

Third, the Act provides a non-exhaustive list of firm’s obligations providing investment services in derivatives on cryptocurrencies:

  1. These firms must behave honestly, fairly, and professionally and serve the best interest of their clients. Acting in their clients’ best interests requires that companies provide transparent and fair information and refrain from providing misleading information. Transparent and fair information includes providing clients with an accurate estimate of fees and costs.
  2. Companies providing derivatives on cryptocurrencies must guide their clients appropriately, including warning their clients of the risks associated with cryptocurrency investments. Also, CIFs must act in their client’s best interests.
  3. Firms are required to have proper product governance arrangements.
  4. Firms offering these financial services have to maintain adequate capital to cover the risks of cryptocurrency investments.

P.S. Insights on Cryptocurrency Legal Issues

Most jurisdictions and authorities have yet to enact laws governing cryptocurrencies, meaning that, for most countries, the legality of crypto mining remains unclear.

Under the Financial Crimes Enforcement Network (FinCEN), crypto miners are considered money transmitters, so they may be subject to the laws that govern that activity. In Israel, for instance, crypto mining is treated as a business and is subject to corporate income tax. In India and elsewhere, regulatory uncertainty persists, although Canada and the United States are relatively friendly to crypto mining.

However, apart from jurisdictions that have specifically banned cryptocurrency-related activities, very few countries prohibit crypto mining.

Our Freeman Law Cryptocurrency Law Resource page provides a summary of the legal status of cryptocurrency for each country across the globe with statutory or regulatory provisions governing cryptocurrency.  The globe below provides links to country-by-country summaries:

Podcast:
The Freeman Law Project – Cryptocurrency Regulation and Taxation: A Brief Primer


Is cryptocurrency legal in Cyprus?

Do you have questions about cryptocurrency, digital currencies, or blockchain technology?
Freeman Law can help with digital currencies, tax planning, and tax compliance.  Contact us now to schedule a consultation or call (214) 984-3410 to discuss your cryptocurrency and blockchain technology concerns.


WORKS CITED

Cyprus Securities and Exchange Commission | C417 – Prudential treatment of crypto assets and enhancement of risk management procedures associate. (2019). Cysec.gov.cy. https://www.cysec.gov.cy/en-GB/public-info/circulars/supervised/investment-firms/88504/

International legal business solutions – Global Legal Insights. (2021). GLI – Global Legal InsightsInternational Legal Business Solutions. https://doi.org/http://www.globallegalinsights.com

Rosenbaum, A. (2020, December 2). Cyprus Mail. Cyprus Mail; Cyprus Mail. https://cyprus-mail.com/2020/12/02/cysec-issues-first-cryptocurrency-regulations/

Cyprus: Crypto-Assets Regulation – IQ DECISION. (2020, July 11). IQ DECISION. https://iqdecision.com/en/cyprus-crypto-assets-regulation/

 

WORKS CITED

International legal business solutions – Global Legal Insights. (2021). GLI – Global Legal InsightsInternational Legal Business Solutions. https://doi.org/http://www.globallegalinsights.com

 

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