Cryptoassets: The Regulatory Approaches in Europe and Cyprus

Cryptoassets: The Regulatory Approaches in Europe and Cyprus

The existing EU financial legislation or the introduction of EU-wide rules for cryptoassets to ensure investor protection have been discussed for some time now.

It is without a doubt that the performance of a comprehensive cost-benefit analysis is required to determine what, if any, action is required at the EU level at this stage.

What are cryptoassets?

Cryptoassets, can be described as the broader category which encompasses, among others, cryptocurrencies and tokens, the common feature here being the technology used, for example mainly blockchains, but also other DLTs that have cryptography as their main ingredient.

The legal nature and legal status of crypto-related products

Starting with existing regulations, or in other words traditional regulations if we may say, which may have brought crypto-related products or assets, or specific crypto-related behaviours or uses or activities under their ambit.

Also, about upcoming laws and regulations which purport to regulate such crypto-related products or assets and their use including the approach of certain regulators or international initiatives to crypto-related assets or products and their use.

The EU is currently reviewing existing EU financial legislation to see how these rules apply or may apply to cryptoassets and initial coin offerings (ICOs), and we are using ICOs as including all types or kinds of token offerings, in other words, STOs, ITOs, IEOs and so on.

Towards this purpose, the EU among others called for more clarity at the EU level concerning how cryptocurrencies or cryptoassets are defined. EU would like to see a harmonized approach therefore it is no surprise that they took the view that action is necessary at the EU level to protect the investors but also to allow a levelled-playing field.

However, it is not only the EU; the same approach has been taken by the European Banking Authority (EBA) and ESMA, who also issued relevant reports on the suitability of the EU legislation in this area.

ESMAs Crypto Asset Advice suggests that most cryptoassets do not qualify as financial instruments, therefore, would not be possible for them to fall under the ambit of existing EU regulations on financial instruments, or, should be subject only to some minimal level of regulation, while, at the same time, identifying that, specific kinds of tokens are, indeed, financial instruments and should be, strictly speaking, regulated, by either declaring them as financial instruments and probably expand the relevant list of financial instruments covered by the regulations amending the relevant laws accordingly or, by creating new regulations that would fit innovation in this field.

EBA reached the same conclusion, that, most cryptoasset-related activities, are not covered by the EU financial services regulation and that member states’ divergent approach poses risks to investors and consumers.

ESMA supported the introduction of EU-wide rules for cryptoassets and crypto-activities.

The legal status of crypto-related products in Cyprus

Speaking of cryptocurrencies, in Cyprus, while no prohibition is directed for cryptocurrencies, CySEC and CBC have issued specific warnings and announcements regarding dealing with- trading in -or promoting cryptocurrencies.

Further warnings were issued about the risks associated with these virtual currencies, such as high volatility and no legal obligation to reimburse owners for the face value of the currencies, which are not backed-up by real assets.

Regulations for Initial Coin Offerings (ICOs)

Concerning ICOs, CySEC clarified that they should be invested in, by entities with experience and knowledge regarding these fund-raising vehicles.
CySEC further clarified that certain ICOs, depending on their function, may fall under the existing regulatory criteria.
A recent ESMA decision, explicitly provided where crypto-assets qualify as transferable securities or other types of MiFID financial instruments, then the full set of EU financial rules apply including the Prospectus Directive, the Markets in Financial Instruments Directive, and other related directives.

Cyprus Investment Firms(CIFs) offering derivatives on virtual currencies

Regarding (CIFs) offering derivatives on virtual currencies, these may now qualify as financial instruments and fall under the applicable investment law.
Therefore CIFs, when dealing with derivatives on virtual currencies, must obtain specific authorization by CySEC and abide by their general obligations under the existing investment law framework.

Extended scope of the application of the Anti-Money Laundering legal framework (implementing the 5th AML Directive)

The introduction of the amending AML law, as implemented extends the scope of application of the AML legal framework by significantly expanding its range of application. Service providers of cryptoassets, custodian wallet providers and virtual currency exchange platforms have now been included under its ambit. This, in essence, means that Cyprus legal framework is introducing cryptoassets, by defining them and bringing them within its scope. In other words, entities that provide services or are responsible for the distribution, the offer and or the sale of cryptoassets are now required to be registered in CySEc Registry of cryptoasset service providers and comply at all times with their obligations.

The MiCa Regulation (MiCaR) for cryptoassets

It is noteworthy to mention that in September 2020 the EU commission published a proposal for the regulation of cryptoassets markets in cryptoassets regulation the MiCA and includes all types of crypto-assets that are not yet covered by EU financial law, especially MiFID. It is currently under consultation but, once adopted and in force, it will be directly applicable in all EU member states.

The MiCa Regulation (MiCaR) is a great piece of legislation and has the ambition to set global standards for the oversight and regulation of digital, blockchain-based assets by implementing clear- cut rules and long-term legal certainty.

The Cyprus National Strategy

The Cyprus National Strategy, currently being examined, favours regulating products, activities and uses of blockchain and Distributed Ledger Technologies including cryptoassets.

To conclude, without doubt, the introduction of regulatory provisions in Cyprus will bring much clarity in the area as it will seek to impose requirements for the transparency of trading and the proper management of large exposures and default risk, all concerning virtual currencies.

The information above is the third part of what our Managing Director Xenia Neophytou discussed at the Cyprus Fintech Summit.  In our previous two articles, “The FinTech Sector and Innovative Research in Cyprus” and “The FinTech Landscape in Cyprus and Regulatory Updates”, you can find the first two parts of the discussion.

How can CX Financia help you?

For us at CX Financia, our interest in fintech and blockchain technologies was a natural progression. It is something our clientele is interested in and we have managed to successfully merge technology with regulation, creating a complete offering to our customers. We are actively assisting our clients from startups to financial institutions harness their ideas implementations.

We have been advising investment professionals to obtain licenses for:

Contact our team of experts to support you, based on your unique needs.


Get the latest business news, directly to your inbox