News and developments
Cyprus-Regulations over Cryptocurrency and Blockchain.
This intention was first evident in 2018, when the Republic of Cyprus signed the ‘Declaration of the Southern Mediterranean Countries on Distributed Ledger Technologies’ and the ‘European Blockchain Partnership’, aiming to increase cooperation between the European Countries in the innovative distributed ledger technologies (DLT).[1] Whilst the same year, the Cyprus Securities and Exchange Commission (CySEC) established an Innovation Hub, which aims to act as a communication platform between CySEC and both supervised and non-supervised entities in the fields of Fintech[2] and Regtech[3]. Through communication, the Innovation Hub identifies the regulatory framework that needs to be established to meet evolving needs while also explaining to entities the existing regulations which are supervised by CySEC. These and other, actions of the Innovation Hub aim to improve the markets efficacy and enhance the investors protection.
Furthermore, the next year the Cyprus government published its National Strategy on Distributed Ledger Technologies, setting as goals the promotion of blockchain technology and other DLT, both in the public and the private sector and the creation of a proportionate regulatory framework that promotes innovation, legal certainty and protection for consumers and investors.[4]
Some of the above maxims seem to be included in the provisions of the 5th European Union Anti-Money Laundering Directive (“AMLD5”)[5], which was transposed into Cyprus Law through an amendment[6] of the Prevention and Suppression of Money Laundering and Terrorist Financing Law[7] (the “AML Law”). The AML Law, at the moment of writing, constitutes the main legislation that distinguishes and regulates cryptocurrencies in Cyprus. Through its amendment, key definitions relating to crypto-assets and crypto-asset service providers were introduced for the first time into Cyprus’ legal system. However, in line with the prementioned National Strategy, the Ministry of Finance is expected to soon bring the Bill on the Distributed Ledger Technology Law of 2021 (the “Bill”) to Parliament for voting. The Bill due to its various definitions, relating to blockchain, electronic signatures and smart contracts it’s expected to increase legal certainty in the sector.[8]
In light of the above and to better understand the relationship of Cyprus with the cryptocurrency sector we will provide, in the following sections, an overview of the current legal and regulatory framework, as well as a summary of how crypto assets and services are taxed in the country.
Footnotes [1] https://www.mise.gov.it/images/stories/documenti/Dichiarazione%20MED7%20versione%20in%20inglese.pdf and https://digital-strategy.ec.europa.eu/en/news/european-countries-join-blockchain-partnership [2] term used to describe any technology that delivers financial services through software, such as online banking, mobile payment apps or even cryptocurrency. [3] term used cloud computing technology through software-as-a service to help businesses comply with regulations efficiently and less expensively [4] https://www.parliament.cy/images/media/assetfile/Blockchain%20Strategy%20English_FINAL.pdf [5] Directive (EU) 843/2018 [6] L.13(I)/2021 [7] L.188(I)/2007 [8] https://mof.gov.cy/assets/modules/wnp/articles/202109/949/docs/dlt_bill_en_for_public_consultation.docx [9] Article 2 of L.188(I)/2007 [10] Ibid [11] Ibid [12] Article 61E (2) of L.188(I)/2007, https://www.cysec.gov.cy/CMSPages/GetFile.aspx?guid=5d9c99f3-f06e-4093-a7e9-697ee8165b86 [13] https://www.cysec.gov.cy/en-GB/entities/crypto-asset-services-providers-casps/ [14] Article 59 (1) (b) (vii) of L.188(I)/2007 [15] https://www.cysec.gov.cy/CMSPages/GetFile.aspx?guid=63682c11-468f-49f4-a6fb-4b0138b97e17 [16] https://www.cysec.gov.cy/en-GB/entities/crypto-asset-services-providers-casps/casp-register/ [17] https://www.cysec.gov.cy/en-GB/entities/crypto-asset-services-providers-casps/forms/90967/ [18] https://www.cysec.gov.cy/CMSPages/GetFile.aspx?guid=faf56e5b-c8b4-4000-af79-a4e87e213c16 [19] See Article 14 of the Directive [20] See Article 17 of the Directive [21] See Article 60 (g) of the AML Law [22] See n. 18 [23] https://www.cysec.gov.cy/CMSPages/GetFile.aspx?guid=13075523-a19e-43d9-8cce-e2c0e0f5bca9 [24] Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014. Available at: https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX:32014L0065 [25] Available at: https://www.centralbank.cy/images/media/pdf/The-Electronic-Money-Law-2012.pdf [26] Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions. Available at: https://eurlex.europa.eu/legal-content/en/ALL/?uri=CELEX%3A32009L0110 [27] Case C-264/14 Skatteverket v David Hedqvist , ECLI:EU:C:2015:718
2. Legal and Regulatory Framework
As mentioned, the AML Law is currently the main legislation regarding crypto-assets in Cyprus. First of all, the said legislation provides a definition for the term “crypto-asset”, which is defined as a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money but is accepted by persons as a means of exchange or investment and can be transferred, stored or traded electronically and is not:-
- fiat currency;
- electronic money; or
- “Financial instruments” as defined in Part III of the First Appendix of the Law on the Provision of Investment Services and Activities and Regulated Markets 87(I)/2017.[9]
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- exchange between crypto-assets and fiat currencies;
- exchange between crypto-assets;
- the management, transfer, holding and/or safekeeping, including custody, of crypto-assets or cryptographic keys or means that allow the exercise of control on crypto-assets;
- the offering and sale of crypto-assets, including the initial offering; and
- the participation or provision of financial services regarding the distribution, offer and sale of crypto-assets, including the initial offering
-
- reception and transmission of orders;
- execution of orders on behalf of clients;
- dealing on own account;
- portfolio management;
- provision of investment advice;
- underwriting and/or placing of crypto-assets on a firm commitment basis;
- placing of crypto-assets without a firm commitment basis;
- operation of a multilateral trading facility for buying and selling crypto-assets.
- All documents related to the foundation, composition and operation of the crypto company (LLC). Such as the certificate of incorporation, the certificate of shareholders and directors, an internal operation manual.
- A program of initial plan/Business plan for the following three years, which will include the marketing and promotional strategy of the company along with its financial and accounting planning.
- An AML manual, which will define an AML/CFT internal policy of the CASP.
- Documentation regarding the abovementioned crypto-assets’ addresses and public keys of the CASP.
- Documentation proving the existence of an internal system in the CASP that regulates the exchange of information and ensures the non-leakage of information.
- Certifications from the external auditors and legal advisers of the applicant.
- The applicant must ensure that members of the Board and anyone holding a managerial position are honest and competent, which is fulfilled if the person has:
-
- good reputation
- knowledge skills and experience and
- devotes sufficient time to the performance of its duties to the applicant
- The Board of Directors of the applicant must compromise of at least four (4) persons, who satisfy the above condition, out of which at least two must direct the business activities and the other two must be independent, non-executive members.
- The applicant must ensure that its beneficial owners are honest and competent, which is fulfilled if they have good reputation and the ability to maintain the strong financial position of the applicant.
- When operating online, the applicant must maintain a website that its fully owned and exclusively operated by the CASP.
- The applicant must have established appropriate policies and procedures to ensure its compliance, including the compliance of its executives, employees and assignees, with the AML Law and the Directive of CySEC for the Prevention and Suppression of Money Laundering and Terrorist Financing.[18]
- The applicant must have established appropriate policies and procedures and have appropriate systems and controls in place to ensure the prudent operation of the CASP, including minimizing the risk of theft or loss of its clients’’ crypto-assets.
- The applicant must ensure that the remuneration terms of the staff and any other arrangements with its staff, do not conflict with its staff duty to act in the best interest of its clients nor motivates its staff to implement aggressive promotion practices.
- The applicant must have established appropriate corporate governance arrangements, with clearly defined and transparent reference lines.
- The applicant must take all reasonable actions to ensure the continuous and regular performance of its activities and must have established an appropriate and up to date policy to ensure its continued operation, the recovery of data and the timely resumption of its activities, in the case where despite the reasonable measures in place the activity of the CASP have ceased.
- When outsourcing the performance of critical functions, the applicant must ensure that reasonable measures are taken to avoid any undue additional operational risk and that the quality of the internal controls of the CASP or the CySEC’s ability to monitor compliance, are not materially impaired.
- The applicant must have established proper administrative and accounting procedures, internal control mechanisms, effective risk assessment procedures and effective control and effective security and control mechanisms in place for its electronic data processing systems.
- Where the scope, nature, scale and complexity of its activity so require, the applicant must establish an internal control function that its independent of its other functions and operations, for the design and execution of the abovementioned internal control mechanisms.
- The applicant must have established appropriate security mechanisms in order to guarantee the security and authentication of the means of transfer of information, minimize the risk of data corruption and unauthorized access and to prevent information leakage, in order to maintain the confidentiality of the data at all times.
- The applicant must arrange for records to be kept of all of its activities, including the relevant correspondence, which shall be sufficient to enable the CySEC to exercise its supervisory functions and to take steps to ensure the CASP’s compliance with its obligations.
- The applicant must ensure that its employees are not involved in multiple duties, unless the exercise of multiple duties does not prevent or its is not likely to prevent such persons from carrying out any work or function with diligence, honesty and professionalism.
- The applicant must establish appropriate policies and procedures in order to ensure that its clients’ complaints are properly resolved.
- The applicant must ensure that its employees are honest and professionals and possess the appropriate knowledge for the tasks assigned to them.
-
- €1,000 per service or activity
- €2,000 per notice of change relating to the members of the Board of Directors of the CASP
- €5,000 per notice of change relating to the beneficiaries of the CASP.
- €1,000 per notice of change relating to the website of the CASP.
3. Taxation of crypto-assets and services
At the moment Cyprus has no specific legal framework in place for crypto-assets nor has the Cyprus Tax Department provided guidance on how such assets should be recognized, treated and taxed. There are two views on how crypto-assets should be taxed. One of the positions is that it should be taxed as trading income and therefore be taxed at 12,5%, which constitutes one of the lowest and most attractive corporate tax rates in Europe. The other approach is to consider crypto-assets as a financial instrument, in which case the proceeds from such sale will not trigger any taxation in Cyprus. In regards to the value added tax (VAT), the only guidance that exists today is from the European Court of Justice[27], which states that the exchange of fiat currencies for cryptocurrencies and vice versa are exempt from VAT. To conclude, without specific provisions in the legislation it is difficult to determine when and what type of taxation is to be applied on crypto trading in Cyprus but the above gives some guidance.4. Conclusion
Τhe above shows the important actions that Cyprus took and is taking until today in the field of crypto-assets. While at the same time showing, the challenges it has to face and resolve in the future. Nevertheless, it is considered that the opportunities created through them, for action and development in the field of crypto-assets, are countless. If you are interested in establishing your crypto company in Cyprus, we can provide the assistance and guidance you need in each step of the procedure.Disclaimer
The content of this publication is intended to provide a general guide on the subject matter and it is not to be considered as a legal advice. Legal advice should be sought based on the particular facts of your case.Footnotes [1] https://www.mise.gov.it/images/stories/documenti/Dichiarazione%20MED7%20versione%20in%20inglese.pdf and https://digital-strategy.ec.europa.eu/en/news/european-countries-join-blockchain-partnership [2] term used to describe any technology that delivers financial services through software, such as online banking, mobile payment apps or even cryptocurrency. [3] term used cloud computing technology through software-as-a service to help businesses comply with regulations efficiently and less expensively [4] https://www.parliament.cy/images/media/assetfile/Blockchain%20Strategy%20English_FINAL.pdf [5] Directive (EU) 843/2018 [6] L.13(I)/2021 [7] L.188(I)/2007 [8] https://mof.gov.cy/assets/modules/wnp/articles/202109/949/docs/dlt_bill_en_for_public_consultation.docx [9] Article 2 of L.188(I)/2007 [10] Ibid [11] Ibid [12] Article 61E (2) of L.188(I)/2007, https://www.cysec.gov.cy/CMSPages/GetFile.aspx?guid=5d9c99f3-f06e-4093-a7e9-697ee8165b86 [13] https://www.cysec.gov.cy/en-GB/entities/crypto-asset-services-providers-casps/ [14] Article 59 (1) (b) (vii) of L.188(I)/2007 [15] https://www.cysec.gov.cy/CMSPages/GetFile.aspx?guid=63682c11-468f-49f4-a6fb-4b0138b97e17 [16] https://www.cysec.gov.cy/en-GB/entities/crypto-asset-services-providers-casps/casp-register/ [17] https://www.cysec.gov.cy/en-GB/entities/crypto-asset-services-providers-casps/forms/90967/ [18] https://www.cysec.gov.cy/CMSPages/GetFile.aspx?guid=faf56e5b-c8b4-4000-af79-a4e87e213c16 [19] See Article 14 of the Directive [20] See Article 17 of the Directive [21] See Article 60 (g) of the AML Law [22] See n. 18 [23] https://www.cysec.gov.cy/CMSPages/GetFile.aspx?guid=13075523-a19e-43d9-8cce-e2c0e0f5bca9 [24] Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014. Available at: https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX:32014L0065 [25] Available at: https://www.centralbank.cy/images/media/pdf/The-Electronic-Money-Law-2012.pdf [26] Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions. Available at: https://eurlex.europa.eu/legal-content/en/ALL/?uri=CELEX%3A32009L0110 [27] Case C-264/14 Skatteverket v David Hedqvist , ECLI:EU:C:2015:718