Introduction

A cryptocurrency is a digital medium of exchange that uses encryption techniques to control the creation of monetary units and to verify the transfer of funds.

Cryptocurrencies (Cryptos) such as Bitcoin, have allowed for the first time ever rapid and completely secure transfers of money, opening the horizon for decentralized and global economy.

Cyprus, Cryptos, and the latest developments

In the last few years, Cyprus has been increasingly taking steps to address and keep up with the international trends in cryptocurrency. For instance:

• The Cyprus Securities and Exchange Commission (CySEC) has launched an Innovation Hub focusing on Fintech, RegTech, Blockchain and other DLT technologies, aiming to act as a platform for both supervised and non-supervised entities allowing them to exchange knowledge and information and to ensure their investors’ protection.
• On 4 June 2018, the Republic of Cyprus signed the European Blockchain Partnership.
• On 30 August 2018, the Cyprus government formed an ad hoc working group to develop and implement blockchain technology in Cyprus. The working group has established a national strategy and a roadmap for up to 2021 aiming to regulate through a legal framework, cryptocurrencies, and the trading of cryptocurrencies, assuming a categorisation of cryptocurrencies into Security Tokens and Non-Security Tokens.
• On 4 December 2018 Cyprus along with 6 other participant European member states signed a declaration with the goal to promote blockchain application and to render Southern Europe a leader in emerging technologies such as DLT.
• On 10 February 2020, the CySEC issued a “Report on the Activities of CySEC’s Innovation Hub” denoting that the Innovation Hub attracted full-spectrum interest from both Fintech and Regtech companies, supervised entities, and entities not subject to supervision, from Cyprus and abroad.
• The University of Nicosia became the first in the world to offer a Master’s Degree in Digital Currency and has recently established the Institute for the Future (IFF) looking at how blockchain can co-exist with other technologies such as artificial intelligence and the Internet of Things

Why Cyprus?

Cyprus is the jurisdiction of choice for a great number of investors, mostly for financial reasons. In a nutshell:

• Investors enjoy one of the lowest corporate tax rates at 12.5%
• Attractive IP regime allowing tech companies to reduce taxes to 2.5% (the lowest in Europe)
• Security tokens may be regarded as equity or debt liability and therefore be excluded from both corporate tax and VAT
• Capital gains from the sale of securities are tax exempted
• Dividends paid abroad are tax exempted
• Tax exemptions on profits deriving from the sale of securities
• With respect to the value-added tax (“VAT”), according to the European Court of Justice judgment of case C-264/14 Hedqvist transactions concerning the exchange of traditional currencies for bitcoins and vice versa are exempt
• No mining restrictions of any kind

Further deductions may be applicable with careful tax optimization.

How does Cyprus regulate Cryptos?

Companies offering services relating to cryptocurrency are regulated only to the extent that their activities fall within the ambit of existing regulatory provisions.

According to the CySEC’s circular C.268 (replacing circular C244), issued on 15 May 2018, derivatives on cryptocurrencies are now capable of qualifying as financial instruments under the Investment Services and Activities and Regulated Markets Law of 2017. In particular, this decision came following the European Securities and Markets Authority’s (“ESMA”) decision on 27 March 2018 to include Contracts For Differences (“CFDs”) on virtual currencies into the scope of its product intervention measures.

A “financial instrument” means those instruments specified in Part III of the First Appendix of the Law. Derivatives on cryptocurrencies, tokens and digital coins may fall under the following:

(4): “[…] any other derivative contracts relating to securities […] which may be settled physically or in cash”

(9): “financial contracts for differences”

(10): “[…] any other derivative contracts relating to assets […] not otherwise mentioned in this Section, which have the characteristics of other derivative financial instruments”.

According to the CySEC, investment services in relation to derivatives on cryptocurrencies, tokens and digital coins will require specific authorisation by the CySEC depending on their specific characteristics.

Obligations of CIFs in respect to Cryptos

It thus goes without saying that CIFs conducting regulated activities in derivatives on cryptocurrencies, tokens, and digital coins) must be authorised and must comply with the applicable national legislation.

According to the CySEC CIFs should apply caution when considering whether to provide such services. In particular, the CySEC insists that CIFs should:

1. act honestly, fairly, and professionally, in accordance with the best interests of their clients
2. provide fair clear and not misleading information to their clients
3. provide appropriate guidance on and warnings of the risks associated with investments in those instruments
4. have adequate product governance arrangements
5. execute orders on terms most favorable to the client
6. maintain adequate capital

Please contact us for a full review on CIF’s obligations.

And what about Initial Coin Offerings?

ICOs should operate within the prescribed regulatory framework since ICOs should conduct regulated investment activities.

ICOs can serve as an alternative and less costly source of funding and even provide alternative investment opportunities to small-scale investors.

Contact us for more information and advice tailored to your needs.

Our Services

Our firm is extremely knowledgeable on the subject providing advice in the whole spectrum of matters relating to cryptocurrency and their corresponding financial regime. Our team provides the following services:

• Advice and assistance on all legal aspects of running and setting a crypto entity in Cyprus
• Creation and registration the crypto-entity with the CySEC
• Ensuring compliance with Cyprus and European legal framework of Cryptocurrencies
• Provision of tax advisory and audit services through our trusted affiliates