The Cyprus Securities and Exchange Commission (CySEC) last week
issued its first regulations regarding cryptocurrency.

The new rules laid down in Circular C417 are designed to ensure
that Cyprus Investment Firms (CIFs), make provision to cover
investments in cryptocurrencies (the regulations do not distinguish
among them), and that risks involving cryptocurrencies are managed

“It is a good first step for the country,” comments
Dimitris Papoutsis, a lawyer with Elias Neocleous & Co. in
Limassol. “The Circular addresses much-needed direction so
that CIFs can invest in cryptocurrency and be assured of

Papoutsis points out that the Circular cites the lack of
previous regulation for cryptocurrencies. “As noted in the
EBA’s report on crypto assets there is no reference in the
current prudential framework for crypto assets,” the Circular

“So it is natural that CySEC should fill this gap for CIFs
to be able to calculate their own funds and capital adequacy ratio,
accordingly,” he adds.

CIFs must first obtain authorisation from CySEC to trade in
cryptocurrencies, because they are not specifically regulated by
previous financial regulation, whether in Cyprus, or at the level
of the EU.

The first three provisions of the Circular specify how CIFs
should calculate capital adequacy for cryptocurrency investment,
and how to report it – there must be sufficient provision for
these investments.

Then, risks must be carefully managed, the Circular points

“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.

“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. 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.”

Considering the nature of crypto assets, CIFs should also
examine taking mitigating measures against operational,
cybersecurity and reputational risks, the Circular concludes.

“We can expect further regulation of cryptocurrencies under
the rubric of Anti-Money Laundering legislation in due
course,” Papoutsis concludes.

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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