Cyprus:

CySEC Guidance Relating To Crypto Assets

Most Popular:  Article Cyprus, January 2021


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Crypto-assets are “a type of private asset that depend
primarily on cryptography and distributed ledger technology as part
of their perceived or inherent value. A wide range of crypto-assets
exist, including payment/exchange-type tokens (for example, the
so-called virtual currencies – VC’s), investment-type
tokens, and tokens applied to access a good or service (so-called
‘utility’ tokens).”1

CySEC Circular (C417) relating to crypto assets lays down the
first CySEC rules around crypto assets. This Circular aims at
establishing a common treatment by the CIFs when calculating their
own funds and capital adequacy ratio and enhancing the risk
management procedures applied by the CIFs when they deal with
crypto assets, until a common application of the current rules is
developed for crypto assets.

This is an important step towards cultivating a prudential
treatment of crypto assets and financial instruments relating to
crypto assets as well as enhancing the risk management of
transactions which include cryptocurrencies.

To start with, CySEC shed light on the way Cyprus Investment
Firms (CIFs) should calculate their own funds and capital adequacy
when it comes to transactions involving crypto assets and how to
report it.

In terms of risk management, CIFs should assess the risks
emanated from trading in crypto assets, and/or in financial
instruments relating to crypto assets, for their own account or for
their clients within the Internal Adequacy Assessment Process
(ICAAP).

“CIFs, which trade in crypto assets, and/or in financial
instruments relating to crypto assets, should revisit their risk
management procedures and strategies and ensure that all risks
associated with this product are duly taken into
consideration.” (C417)

CySEC also guides the CIFs, which trade in crypto assets and/or
financial instruments relating to crypto assets, to comply with
certain provisions of the Law. In specific, “CIFs must have in
place sound, effective and complete strategies and processes to
assess and maintain on an ongoing basis the amounts, types and
distribution of internal capital that they consider adequate to
cover the nature and level of the risks to which they are or might
be exposed to. These strategies and processes are subject to
regular internal review to ensure that they remain comprehensive
and proportionate to the nature, scale and complexity of the
activities of the CIF.” (s.104 (2) of Law 87(I)/2017)

CySEC makes reference to other legal provisions which the CIFs
trading in crypto assets and/or financial instruments relating to
crypto assets should take into account and, inter alia, guides CIFs
considering the nature of crypto assets, to examine taking
mitigating measures against operational, cybersecurity and
reputational risks.

To sum up, the above are considered a crucial step forward
driving towards the prudential treatment of crypto assets. We may
now expect more on this field and an enhanced risk management in
relation to crypto assets.

Footnote

1. EBA Report, ‘Report with Advice for the European
Commission’, 09.01.2019

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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