Cryptocurrency Regulations in Cyprus

Introduction - Government attitude

Cyprus is considered a friendly crypto jurisdiction.

The island’s location, its common law legal system, attractive tax framework, and its business-friendly infrastructure, combined the government’s balanced regulatory stance (compared to other EU countries with stricter regulations), creates a favorable environment for crypto-related activities.

As a result, Cyprus attracted the major global players in the fintech and crypto-assets industries, including Crypto.com, eToro, Revolut, Bitpanda and CMC Markets, offering a new dynamic and placing Cyprus high in the fintech and crypto-business jurisdiction list. In addition, Cyprus’ favorable visa regime for non-EU professionals, adds up to Cyprus becoming an ideal Fintech-Crypto hub. 

In recent years, Cyprus has shown that it wants to have an active role in the development of blockchain technology and especially that it wants to become a pioneering and secure financial center for the exchange of crypto assets and services. 

This intention was first evident in 2018, when Cyprus signed the 'Declaration of the Southern Mediterranean Countries on Distributed Ledger Technologies' and the 'European Blockchain Partnership', aiming to increase cooperation between the European Countries in the innovative distributed ledger technologies (DLT). 

Whilst the same year, the Cyprus Securities and Exchange Commission (CySEC) established an Innovation Hub, which aims to act as a communication platform between CySEC and both supervised and non-supervised entities in the fields of Fintech, to come together and share knowledge in order to accelerate their business models in line with the CySEC’s commitment to ensuring regulated entities’ investor protection.

The Cyprus government, by a Council of Ministers decision N.85.629 dated 30 August 2018, has formed an ad hoc working group to develop and implement blockchain technology in Cyprus. The national strategy aims to regulate, through a legal framework, cryptocurrencies and the trading of cryptocurrencies, assuming a categorisation of cryptocurrencies into Security Tokens and Non-Security Tokens. 

In February 2021, Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 (“AMLD5”) was transposed into Cyprus law through an amendment of the Prevention and Suppression of Money Laundering and Terrorist Financing Law 188(I)/2007 to 2019 (the “AML Law”). Currently, the AML Law is the only legal framework in Cyprus that recognises and defines “Crypto-Assets”.

Legal and Regulatory Framework

As mentioned, the AML Law is currently the main legislation regarding crypto-assets in Cyprus.

First of all, the said legislation provides a definition for the term "crypto-asset", which is defined as “a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money but is accepted by persons as a means of exchange or investment and can be transferred, stored or traded electronically and is not:

1. fiat currency;
2. electronic money; or
3. "Financial instruments" as defined in Part III of the First Appendix of the Law on the Provision of Investment Services and Activities and Regulated Markets 87(I)/2017”. 

In addition, the said legislation recognizes and defines the Crypto-Asset Service Providers ("CASPs"). As defined, a CASP is a person who provides or exercises one or more of the following services or activities to another person or on behalf of another person: 

1. exchange between crypto-assets and fiat currencies;
2. exchange between crypto-assets;
3. the management, transfer, holding and/or safekeeping, including custody, of crypto-assets or cryptographic keys or means that allow the exercise of control on crypto-assets;
4. the offering and sale of crypto-assets, including the initial offering; and
5. the participation or provision of financial services regarding the distribution, offer and sale of crypto-assets, including the initial offering

The abovementioned financial services regarding the distribution, offer, and/or sale of crypto-assets are also defined as the following investment services: 

1. reception and transmission of orders;
2. execution of orders on behalf of clients;
3. dealing on own account;
4. portfolio management;
5. provision of investment advice;
6. underwriting and/or placing of crypto-assets on a firm commitment basis;
7. placing of crypto-assets without a firm commitment basis;
8. operation of a multilateral trading facility for buying and selling crypto-assets.

Furthermore, the AML Law imposes the obligation on a person who is recognized as a CASP, to be formally registered with the CySEC, unless it is a CASP established and registered in a member state of the European Union ("EU"). 

Due to its supervisory role, CySEC, on 25 June 2021, issued the Directive (the "Directive") for the registration of CASPs pursuant to the AML Law. The Directive, being a secondary legislation, constitutes another component of the Cyprus legal framework, which regulates the formation, operation and modification of the CASPs Register and sets the requirements for their inclusion in the Register.

Regulated and Unregulated Crypto activities 

The following activities are regulated under the AML Law / CASP definition:

• Exchange (buy/sell): The exchange of cryptoassets for fiat currency and for other cryptoassets
• Initial coin offerings (“ICOs”) / Direct sales of tokens by issuer
• Cystody (hold).

Currently, the following activities are NOT regulated:

• Borrowing / Lending: at the time of writing, there is no local legal framework that regulates the yielding/staking activity of cryptoassets. To the extent that yielding/staking is undertaken by a third party on behalf of the owner of a cryptoasset then this activity may incidentally involve the management, transfer, retention, and/or safekeeping, including custody, of cryptoassets, cryptographic keys or any others means which permit the exercise of control over cryptoassets which falls under CASP definition, paragraph (c).
• Staking on proof of stake consensus mechanism: The method used for proof is immaterial, as there is no local legal framework regulating the yielding/staking activity of crypto-assets. As per the above, to the extent that staking involves custody of a third party’s crypto-assets then this would fall within the scope of the CASP definition.
• Mining.

New Developments - The introduction of Markets in Crypto Assets Regulation (MiCA)

The Markets in Crypto Assets Regulation (MiCA) entered into force in June 2023. Cyprus is preparing for the transition to the MiCA into Cyprus legislation on 30 December 2024. 

As a result of this transition, CySEC has stopped accepting new applications for CASPs under national laws. 

The MiCA institutes uniform EU market rules for crypto-assets. The requirements under MiCA are broadly similar to requirements under the existing EU financial services regimes, including requirements relating to disclosures, governance and licensing.

However, as there are nuances between MiCA and the existing regime, firms engaging in cryptoasset activities will need to consider whether they will fall under the MiCA definition of "cryptoassets" or whether they are subject to another regulation, to ensure that they adhere to the appropriate regulation, in particular for transferable securities which may constitute a financial instrument falling under the Markets in Financial Instruments Directive II (MiFID II). 

Who does MiCA apply to? 

Broadly, MiCA applies to three categories of persons:

1. issuers of cryptoassets.  This does not necessarily mean the entity or firm that has created the cryptoassets. Instead, the issuer of a cryptoasset is the "legal person who offers to the public any type of cryptoassets" or "seeks the admission of such cryptoassets to a trading platform for cryptoassets". The framework that applies will also depend on what type of cryptoasset is being offered;
2. cryptoasset service providers (CASPs). This includes any person whose occupation or business is the provision of one or more cryptoasset services to third parties on a professional basis; and 
3. any person, in respect of acts that concern trading in cryptoassets that are admitted to trading on a trading platform for cryptoassets operated by an authorised cryptoasset service provider, or for which a request for admission to trading on such a trading platform has been made. 

What types of cryptoassets are in scope of MiCA? 

MiCA applies with respect to "cryptoassets", which are defined very broadly as "a digital representation of a value or a right that uses cryptography for security and is in the form of a coin or a token or any other digital medium which may be transferred and stored electronically, using distributed ledger technology or similar technology". This definition is aimed at capturing not only cryptocurrencies, such as Bitcoin and Ethereum, but also stablecoins and utility tokens. 

What is not covered by MiCA? 

MiCA does not apply to security tokens which would quality as transferable securities and other cryptoassets that qualify as financial instruments for the purposes of MiFID II, deposits, securitisation positions, insurance or pension products. DeFi protocols and truly "unique" nonfungible tokens (NFTs) are largely outside the current scope of MiCA.

The idea behind the latter is to allow artists and firms to create individual digital assets without being buried in regulatory paperwork. Companies behind NFT collections, however, will have to provide a white paper that explains what their product is and how they operate on the blockchain.

Taxation

Taxation on profits

Currently, there’s no tax law that regulates the taxation of income arising from cryptos. However, this does not mean that Tax authorities will not tax the crypto profits.

In May 2021, Tax authorities issued an internal directive (16/2021) explaining the logic behind the tax treatment of cryptos. The general principal is whether the profit arising from cryptos are of Income nature or of Capital nature. Generally, the proceeds will be considered as of Income nature if the cryptos were bought with the intention of being sold for profit and therefore be taxed accordingly: 12.5% for companies and 0%-35% for physical persons.

The proceeds will be considered as of Capital nature if the cryptos were bought and kept with the intention of producing additional income i.e. income from staking (and most probably should not be taxed).

The badges of trade are widely accepted standards which can help to a great extend to determine the intention and the nature of a transaction.

It should be noted that Cyprus has one of the lowest and most attractive corporate tax rates at 12.5%. Therefore, crypto trades will be better off trading crypto via a Cyprus company rather than as physical persons.

Taxation - VAT

With respect to the value-added tax (“VAT”), at the moment, there’s no local nor EU vat legislation, and the guidance with respect to the VAT treatment of cryptocurrencies is limited, and most of it comes from the European Court of Justice judgment of case C-264/14 Hedqvist, which provided the basis for the VAT treatment of transactions concerning the exchange of traditional currencies for Bitcoins and vice versa, noting that these are exempt from VAT.

This decision is of paramount importance because it recognizes Bitcoin as currency and not as a commodity. On the matter of Security Tokens, based on their function these may be deemed to be equity or debt liability and may therefore be excluded from both corporate tax and VAT.

Conslusion

It is apparent that Cyprus is considered an important Fintech-Crypto hub, attracting many of the major global fintech and crypto-assets companies like Crypto.com, eToro, Revolut etc. 

However, it’s not without challenges: the upcoming MiCAR law will determine the new legal environment, and should be considered in depth before taking any actions. In addition, furnishing your crypto business with a bank account could be challenging.

How can TOTALPRO help?

TOTALPRO has significant experience in the set up of companies as well as regulated entities licensed by CySEC (i.e. for CASP company or a crypto Fund) in Cyprus. Our professional team can assist and guide you through in all aspects of your application.

We can act as your single point of contact to set up your business (licensed or not), obtain residency permits for you and your family, and comply with all ongoing requirements.

Please get in touch with us for a free consultation at info@totalpro.eu 

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.