The turnover of non-fiat currencies and electronic funds is regulated by the Central Bank, and the trading rules are established by the Securities Commission (CySEC). Thus, the volume of traded cryptocurrencies, according to applied norms in force since 2017, should not exceed 15% of the total turnover of the company, and the loan for instruments is reduced to 1:5 (the reason is increased market volatility).
In Cyprus, there is no clear regulation for working with crypto assets, and yet any operations with them must be in accordance with the legislation in force. Territories beyond the jurisdiction are not regulated by law, but the following operations are allowed:
- mining;
- functioning of ICO projects;
- transfer and possession of various digital currencies;
- exchange operations fiat-crypto assets and vice versa;
- creation of crypto services.
Crypto assets can be counted as inventories, intangible assets, as well as financial instruments, depending on their nature. In general, local regulators are inclined to believe that they are more similar to financial instruments in their essence. Therefore, the creation of investment and FinTech projects by default requires a CySEC license. Crypto exchanges in some cases do not require a license. In this aspect, each case and the nature of the assets involved should be carefully considered, checking them for signs of financial instruments. The correct approach will avoid the possible application of sanctions since the control of the regulator in the territory of the jurisdiction is quite serious.
The regulator also issues permits, obliging traders to inform buyers about the features of non-fiat funds and transactions, warn of the risks of failure to redress damages of losses and exchange rate instability. In some cases, international counterparties do not trust the Cypriot permits, but in general, opening an exchanger on the island is promising and, moreover, allows you to work throughout the EU. The attractiveness of this jurisdiction is increased by reduced tax rates and additional opportunities for non-resident businesses.
How local regulators determine the service provider in this area
According to the Securities and Exchange Commission, the service provider in this field is a person who provides to another person or on behalf of another person, who is not bound by the law on the prevention of the laundering of money, relating to proceeds of crime and financing of terrorism, one and more than the following types of services or carries out one of the types of activities:
- exchange between crypto assets and fiat currencies;
- exchange between crypto assets;
- management, transfer, possession and/or storage of crypto assets or cryptographic keys or means by which control over crypto assets is exercised;
- offer and/or sale of crypto assets, including initial offers;
- participation and/or provision of financial services regarding the distribution, offer and/or sale of crypto assets, including the initial offering.
According to the regulator, financial services regarding the distribution, offer and/or sale of crypto assets are:
- receiving and transmitting instructions;
- execution of orders on behalf of customers;
- dealing on own account;
- portfolio management;
- provision of investment advice;
- underwriting and/or placement of crypto-assets on a form commitment basis;
- placement of crypto-assets without a form commitment basis;
- operating of a multilateral trading facility for buying and selling crypto-assets.
Licensing rules
This jurisdiction takes into account the provisions of Eu Directives and the requirements of international legislation on AML and CFT. The National Central Bank checks exchangers, asking them for action plans, letters of recommendation from partners with a reliable reputation, and confirmation from banking structures.
A work permit is issued to firms that have registered as financial service providers. In particular, in particular:
- rent a space to organize a “real” office — a license is not issued for a virtual one;
- open an account in a local bank for allocating capital;
- hire management (these must be persons with experience in the financial sector) and staff;
- prepare internal instructions and policies in accordance with EU directives;
- create a description for the available capacities, software for operation and prevention of money laundering, disclosure of personal data;
- prepare tool descriptions in accordance with KYC regulations, etc.
To register a cryptocurrency exchange license in Cyprus you need to:
- evaluate and ensure the compliance of the beneficiaries and the management of the service provider with the requirements of the law, in particular on their reputation;
- fulfill the conditions of registration;
- comply with organizational and operational conditions;
- comply with the requirements of KYC procedures;
- form the economic profile of buyers;
- determine the source of funds for the implementation of operations;
- conduct constant monitoring of transactions;
- detect and report suspicious transactions;
- to assess risk regarding customers.
In addition, it is also required to meet the conditions regarding the size of the capital of the company:
- For Class 1, which concerns the provision of financial advice services, this is 50,000 euros.
- For Class 2, which concerns:
- receiving and transmitting instructions from customers;
- execution of orders on behalf of customers;
- carrying out transactions regarding the exchange of the assets for fiat currencies and vice versa;
- carrying out transactions related to the exchange of the assets at issue;
- participation and/or provision of financial services regarding the distribution, offer and/or sale of crypto assets, including the initial offering.
- placement of crypto at issue without a form commitment basis;
- The amount of capital is 125,000 euros.
- For Class 3, which concerns:
- management, transfer, possession and/or storage of crypto assets or cryptographic keys or means by which control over crypto assets is exercised;
- underwriting and/or placement of crypto-assets on a form commitment basis;
- The amount of capital is 150,000 euros.
The process of obtaining of cryptocurrency exchange license in Cyprus includes the following steps:
- Opening a local company.
- Collection of data about the company and its beneficiaries.
- Compilation of local policies, as well as ensuring compliance with organizational requirements.
- Formation of a documents package, including completing the relevant questionnaires, as well as payment of fees for consideration of the application.
- Submission of the generated package of documents for consideration by the regulator with the possible provision of additional information upon request.
- Issuance of a permit in case of a positive decision.
Compliance Basics
One of the main points of crypto license regulation in Cyprus is following compliance requirements. The applicant needs to follow the conditions:
- development and implementation of relevant policies, procedures and control measures aimed at combating money laundering and terrorism financing;
- continued assessment of associated risks and putting measures in place to mitigate them;
- identification of customers by asking them for personal and other data to form a customer profile, as well as to keep up-to-date information on it;
- maintaining internal records in relation to transactions;
- preparation and submission of reports on work to the Unit for Combating Money Laundering (MOKAS);
- evaluating each suspected transaction based on its nature, especially (1) in cases of large transactions, and (2) in cases of transactions that differ from ordinary ones, in particular, that do not have a clear economic or legal purpose;
- ensuring internal control to prevent money laundering and financing of terrorism;
- appointment of managers responsible for compliance;
- education of employees who work with the assets.
Compliance requirements apply to transactions that involve:
- exchange;
- transfer;
- participation in and provision of financial services related to an issuer’s offer and/or sale of the assets.
How “Prifinance” lawyers can help
Prifinance lawyers work on developing and issuing documents, interact with state bodies, open bank accounts, and also consult on customer-buyers relations. Prifinance lawyers will be happy to consider each concrete case and develop individual solutions for registering a crypto company and efficient operation of businesses in Cyprus and other jurisdictions.
