The Cyprus Ministry of Finance issued a draft law regulating matters relating to distributed ledger technology (DLT), including blockchain, for public consultation on 6 September.
The aim is to facilitate the application of DLT (including blockchain), apply the principle of technological neutrality, and promote innovation and growth, while at the same time meeting international compliance standards and providing adequate protections for investors and consumers.
The Cypriot Council of Ministers approved a National Strategy for DLT & Blockchain in June 2019, which set out that the Ministry of Finance, in cooperation with the Tax Department and Registrar of Companies, should coordinate the drafting of a regulatory framework based on principles set out in the strategy.
The draft DLT Law 2021 is based on the provisions of this National Strategy and seeks to provide for:
- Definitions for DLT and crypto assets
- Legal certainty in respect of smart contracts and cryptocurrencies as an asset
- Authorising the Cyprus Securities & Exchange Commission (CySEC) as the competent authority to issue secondary legislation within the framework of its responsibilities for the supervision of cryptocurrency service providers.
As part of the consultation the Ministry of Finance, in seeking feedback from stakeholders and market participants on the shape and scope of effective regulations and procedures.
On 13 September, CySEC issued a Policy Statement on the Registration and Operations of Crypto Asset Services Providers (CASPs) to outline its finalised rules for CASPs under the Prevention & Suppression of Money Laundering & Terrorist Financing Law of 2007 and related CySEC Directives, elaborating on the next steps and on CySEC’s expectations.
The CASP is a concept that was introduced in Cyprus with the transposition of the EU’s 5th Anti-Money Laundering Directive into national law in June, which extended anti-money laundering controls to:
- Providers of exchange services between virtual currencies and fiat currencies (Exchange Providers); and
- Providers of custody services for virtual currencies (Custody Providers).
EU Member States are required to ensure that Exchange Providers and Custody Providers are registered and that persons who hold management functions or are beneficial owners of providers are fit and proper.
Accordingly, CASPs that provide or exercise services or activities on a professional basis in Cyprus, regardless of their registration to another EU Member State, will need to be registered on the CySEC Register and will need to always comply with any registration, organisational and functional requirements and with any other obligations established by CySEC.
Depending on the structure of a business, the crypto assets will either qualify as financial instruments under the Investment Services & Activities & Regulated Markets Law or as Electronic Money under the Electronic Money Law. Additionally, crypto assets can be a digital representation of value that is neither issued nor guaranteed by a central bank or a public authority.
This latest policy framework will require CASPs to align their businesses with anti-money laundering rules, which will impose obligations on:
- The fitness and probity of the CASP beneficial owners and persons holding a management position
- Conditions in relation to CASPs registration Organisational and operational requirements
- Preforming Know Your Client and other client due diligence measures
- Drawing the economic profile of clients
- Identifying the source of funds of clients
- Monitoring clients’ transactions
- Identifying and reporting suspicious transactions
- Undertaking a comprehensive risk assessment in relation to their clients and activities and take proportionate measures per client, activity and crypto asset in question.
CySEC expects this initiative to alleviate some, but not all, of the risks involved in crypto asset investments, which are expected to be further addressed at EU level under the proposed Regulation on Markets in Crypto Assets. CySEC will now begin to evaluate applications from existing or prospective CASPs.
CySEC chair Demetra Kalogerou said: “Our proactive engagement with crypto businesses under the CySEC Innovation Hub, aiming to support innovative businesses and to engage with providers of emerging financial technologies, ensured that our expectations were clearly communicated to market participants well in advance and that the Cypriot framework has captured the industry’s pace, alleviating thus the risks involved. Our work on financial innovation at national and EU level is ongoing and we are determined to encourage responsible innovation, whilst ensuring the orderly functioning of the markets.”
The introduction of regulatory provisions in Cyprus regarding crypto assets and their service providers is a positive step towards the creation of a comprehensive legal framework and is an essential part of process in providing status to crypto businesses in Cyprus.
Sovereign Trust (Cyprus) Limited is closely monitoring developments regarding the introduction of DLT technology and crypto assets in Cyprus. For further information or assistance, please contact Managing Director George Ayiomamitis by phone at +357 2573 3440 or by email to gayiomamitis@sovereigngroup.com
