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Cyprus introduces Circular C417 - Regulation concerning Crypto currencies

On November 25th 2020, the Cyprus Securities and Exchange Commission (CySEC) issued its first Cryptocurrency regulation – Circular C417 – marking a beginning of the global and local regulatory environment that increasingly embraces cryptocurrency and its future potential.

The cryptocurrency industry and market has been steadily growing in the last few years, thanks to the advanced technological developments. Since the first Bitcoin was released in 2009, there have been more than 7,000 cryptocurrencies created. Unlike the criticism Bitcoin faced in the first few years, cryptocurrencies are now widely accepted and adopted in many countries as an exchanging medium.

We simply cannot ignore it anymore.

However, the legislative developments within the European Union (EU) have not been able to catch up with the trend and there aren’t any clear compliance regulations to protect the investors and consumers from the risk of cryptocurrency operations and investments.

Recent developments
Legal uncertainty is always a brake on innovation, the EU commission has worked on this in recent years. A draft regulation to establish a legal regime for crypto-assets throughout the EU was officially released this September, the Markets in Crypto-assets “MiCA”.

The MiCA package aims to ensure that the European Union’s financial sector remains competitive as it gives consumers access to more innovative products, whilst keeping consumer protection and financial stability intact. The European Commission by simplifying the rules and emphasising consumer safety expects to leverage synergy between highly innovative start-ups and as well as established firms. 

Following  EU direction, Cyprus introduced rules in 2018 to include Contracts For Differences (CFDs) on virtual currencies as financial instruments. Cypriot Investment Firms (CIFs) are also allowed to provide services related to and invest in cryptocurrencies, provided an authorisation has been obtained.

This newly published Circular C417 further provides the direction for CIFs to invest in cryptocurrencies and be assured is compliant.

Who will the Circular C417 apply to?
The Circular is addressed to all the Cyprus Investment Firms (CIFs) which have obtain permission to provide crypto-assets related services and transact in crypto-assets.

What are the new rules?
The Circular C417 is intended to regulate the treatment of crypto-assets and financial instruments relating to crypto-assets, as well as, proper compliance for CIFs.
Very briefly, it specifies the below key points CIFs should follow to operate and invest in crypto assets and related financial instruments:
  • Calculation of own funds and capital adequacy ratio for CIFs shall be subject to Counterparty Credit Risk and/or Market Commodity Risk methodology.
  • CIFs should assess the risk emanated from crypto-assets related activities for both of their own and their clients’ accounts within the Internal Capital Adequacy Assessment Process (ICAAP).
  • CIFs should disclose any material crypto-asset holdings and include information on: (i) the exposure amounts of different crypto-asset exposures, (ii) the capital requirement for such exposures and (iii) the accounting treatment of such exposures.
  • CIFs should revisit their risk management procedures and strategies and ensure that all risks associated with the crypto-assets are duly taken into consideration. CIFs should also examine and take mitigating measures against operational, cybersecurity and reputational risks.
For the more details of the regulation, please click here.

How would this affect the business in Cyprus?

As mentioned before, there is no reference in the current prudential framework for crypto-assets on the EU level. Before any official legal frame is introduced by the EU Commission, the Circular fills the gap for CIFs to expand their investment and operations in crypto-asset market while also be able to protect themselves and their clients.

The Circular is based on the European Bank Authority’s (EBA) report on crypto-assets and follows the 5th Anti-Money Laundering Directive, which will ensure a level of preparedness for local regulator and CIFs before an EU-level legislation enters into force.

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