The regulation concerning cryptocurrency has been issued by Cyprus Securities and Exchange Commission (CySEC). The regulations which were published at the end of November 2020 can be found in Circular C417. This will be the first-ever cryptocurrency rule that will be implemented in the country. The rule seeks to safeguard Cyprus Investment Firms (CIFs). It also seeks to create provisions to help cover investments in cryptocurrencies. Also, ensure that the risks involving cryptocurrencies are well managed.
The Cyprus Investment Firms will have to get authorization from CySEC to trade in cryptocurrencies. The past financial regulation does not explicitly regulate them, be it in Cyprus or any country in the EU. The first three provisions outlined in the Circular illustrate how the Cyprus Investment Firms must assess risks emanated from crypto-assets trading and financial instruments concerning crypto assets.
Discussions and assessments concerning risks associated with crypto assets activity should be included. But should be done with a sensitive analysis that reveals how the identified risks affect Cyprus Investment Firms estimations. Any mitigation will have to be discussed while any additional capital is held concerning the risks identified.
The Cyprus Investment Firms will have to reveal any material crypto-asset holdings and offer information on the following:
- Amounts of different crypto-asset exposures
- Capital requirement for such exposures
- Accounting treatment of such exposures
The Cyprus Investment Firms trading in crypto-assets and financial instruments related to crypto-assets will have to re-examine their risk management procedures. They also need to include strategies to ensure that all the risks related to this product are taken into consideration.
Section 68 of Law 144(I)/2007 states:
“Cyprus Investment Firms must have effective, sound and complete processes and strategies to maintain and access ongoing based on the types, amount and distribution of internal capital which they consider as adequate to cover the level and nature of risks which they might be or will be exposed to. The processes and strategies are subject to periodic interval review that will help ensure they remain proportionate and comprehensive to the scale, nature, and complexity of CIF activities.”
Following the circular CySEC, it explains the following:
- CySEC does not currently regulate all the activities related to virtual currencies unless a virtual currency attains the minimum criteria and falls under the existing regulatory framework provided by the CySEC.
- The Virtual Currencies derivatives are now in a position of qualifying as financial instruments under the law. Derivatives on Virtual Currencies might fall under the following financial instruments categories:
- Financial contracts for differences
- Any derivative contract that relates to securities that can be settled in cash or physically
- Any derivative contract that relates to an asset not mentioned in this section but has features of other derivative financial instruments.
3.Investment services provided about the derivatives on virtual currencies will need special CySEC authorization.
- The Derivatives on Virtual Currencies investment services provision by Cyprus Investment Firms has the following obligations:
- Act professional, honestly, and fairly for the best interest of your customers
- Offer fair, transparent, and not wrong information to clients
- Provide warnings and guidance on the risks that are associated with such types of investments
- Have enough capital
- Execute orders on favorable terms for your clients
- Have enough produce governance arrangements
Considering the crypto assets nature, Cyprus Investment Firms need to examine mitigating measures against cybersecurity, operational, and reputational risks. The Cyprus Investment Firms will have to get the right permission for the offered services. But should be following the financial instruments category the respective derivative on virtual currency belongs to. The enforcement actions will be encountered when such types of products are provided without any relevant permission.