Cyprus

Introduction Of New Rules Governing Derivatives On Virtual Currencies – Cryptocurrencies

The Cyprus Securities and Exchange Commission (CySEC) issued for
the first time regulations regarding cryptocurrency, which can be
found in Circular C417, published in the end of November 2020.
These rules have as a main aim to safeguard that Cyprus Investment
Firms (CIFs), make provision to cover investments in
cryptocurrencies and that risks involving cryptocurrencies are
managed property.

In accordance with the Circular, CIFs must first obtain
authorization from CySEC to trade in cryptocurrencies, as they are
not specifically regulated by previous financial regulation,
whether in Cyprus, or at the level of the EU.

The first three provisions outlined in the Circular, specify how
CIFs should calculate capital adequacy for cryptocurrency
investment, and how to report it.

Then, risks must be carefully managed. CIFs must assess the
risks emanated from trading in crypto assets, and/or in financial
instruments regarding to crypto assets, for their own account or
clients within the Internal Capital Adequacy Assessment Process
(ICAAP). The assessment and discussion of the risks associated with
the activity in crypto assets should be included together with a
sensitivity analysis that indicates in what way the risks
identified affect the CIF’s estimations. Furthermore, any
mitigations should also be discussed, stating any supplementary
capital that should be held in relation to the identifies
risks.

Correspondingly, CIFs must also disclose any material
crypto-asset holdings and provide information on the: exposure
amounts of different crypto-asset exposures; the capital
requirement for such exposures and the accounting treatment of such
exposures.

CIF’s, which trade in crypto assets, and/or in financial
instruments relating to crypto assets, must re-examine their risk
management procedures and strategies and ensure that all risks
related with this product are fully taken into consideration.

Based on Section 68 of the Law 144(I)/2007, which still applies,
states:

“CIF’s 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 exposes. 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”.

Finally, the circular concludes that, considering the nature of
crypto assets, CIFs should also examine taking mitigating measures
against operational, cybersecurity and reputational risks.

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