Cyprus isn’t just part of the European Union but also an attractive place for crypto investors. Although as of early 2023, there is no law regulating the crypto market in Cyprus, the local authorities are paying due attention to digital assets.
Let’s look at the specifics of Cypriot legislation regarding the crypto market, the government’s plans for developing the industry, and the key opportunities for blockchain companies and individuals.
How the Cypriot Government Regulates the Crypto Market
The Cypriot government made its first attempts at digital asset regulation in March 2014. At that time, the Central Bank of Cyprus, the Ministry of Finance, and the Ministry of Energy, Commerce, Industry, and Tourism issued a joint statement. They reported that trading, buying, and owning digital assets involved great risks because BTC’s exchange rate was highly volatile. Furthermore, users were warned that the state didn’t regard cryptocurrency as legal tender or a financial instrument, and that’s why the government didn’t provide clear mechanisms for compensating possible losses from operations with digital assets.
On top of that, cryptocurrencies were defined as “non-regulated digital products which are not issued by a central bank.” There was no direct ban on crypto transactions, but the Cypriot agencies’ joint statement also recommended exactly where digital assets should be used and what goods they should be “exchanged” for.
On February 14, 2018, the Cyprus Securities and Exchange Commission (CySEC) issued a statement regarding the regulation of digital assets. The agency noted that virtual assets were a digital expression of value not backed by the Central Bank of Cyprus or any other government agency. The CySEC reps stressed that cryptocurrency had no legal status as it wasn’t legally regulated. In fact, the regulator reiterated its previous statements and said that crypto transactions were directly related to financial risks.
Cryptocurrency Regulation Under EU Laws
Since Cyprus is a member of the European Union, the country’s government must align its legal framework with European directives, including those related to operations with digital assets. The EU government authorized the CySEC to maintain a register of investment firms operating with digital assets in Cyprus and issue them special licenses.
The CySEC took specific steps for industry regulation in May 2018. Given the decision of the European Securities and Markets Authority (ESMA), the CySEC published Circular C268 on May 15, 2018. The document includes contracts for differences (hereinafter referred to as CFDs) related to cryptocurrency within the scope of regulation. Therefore, crypto CFDs used by companies began to be considered by the CySEC as financial instruments.
In addition, the CySEC started to follow Directive 2014/65/EU on Markets in Financial Instruments. The document clearly indicates that cryptocurrency may be recognized by the Cypriot regulator as an underlying asset if used in financial derivative instruments (derivatives), viz:
- CFDs;
- options;
- futures.
As the previously mentioned derivatives can act as financial instruments, investment firms dealing with them may need a license from the CySEC. It all depends on the characteristics of the financial instruments and the methods of their use.
On February 23, 2021, the Cypriot government published amendments to Directive (EU) 2018/843 (AMLD5) on the prevention of the use of the financial system for the purposes of money laundering. Thereafter, it came into effect for financial services related to sales, offerings, or distributions of digital assets.
AMLD5 notes that the digital asset industry needs to introduce unified and adequate anti-money laundering mechanisms. Consequently, the anonymity provided by blockchain networks becomes limited.
In 2022, Kyriacos Kokkinos, Spokesman for the Cypriot government, said that the country was still developing a legal framework to regulate the cryptocurrency sector. Kokkinos added that regulating the digital asset market would entail innovations, however, the Cypriot authorities remained cautious about introducing cryptocurrency into the country’s economy. The official also highlighted Malta’s experience, which became an attractive spot for cryptocurrency investors and blockchain companies.
Opportunities for Blockchain Companies in Cyprus
Companies must obtain a special license from the CySEC to conduct legitimate activities related to digital assets. The Commission is entitled to carry out audits to confirm the company’s compliance with legal requirements.
Generally, firms are licensed by the CySEC to engage in investment activities that allow them to:
- hold and manage digital assets;
- transmit or accept different types of orders concerning digital assets;
- monitor investments;
- place digital assets by providing guarantees on behalf of the company.
To obtain a CIF license, companies need to meet several conditions:
- registration and location of the head office in Cyprus only;
- availability of a business plan and a financial forecast;
- availability of anti-money laundering guidelines;
- companies must have executive and non-executive directors (four people);
- the company must have an accountant, a lawyer, an auditor, and an AML policy compliance officer.
The main advantages of the CIF license include the ability to open a representative office and operate in any country of the European Union. Another advantage is the conditions for the company’s required capital — from €50,000 to €730,000. The amount of capital depends on the specific services the company plans to provide.
Speaking of taxation, legal entities are offered a corporate tax rate of 12.5% — one of the lowest in the entire European Union. Plus, Cypriot companies don’t have to pay taxes on dividends paid to non-residents and on the alienation of securities.
In early August 2022, the CySEC granted the license to Revolut, a global FinTech platform. According to In Business News, Revolut plans to establish a cryptocurrency hub in Cyprus, providing over 17 million platform users from Europe with digital asset transactions.
In October 2022, Binance opened a regional office in Limassol and received an investment license from the CySEC.
Cryptocurrency for Ordinary Users
In Cyprus, individuals can use crypto to pay for certain goods and services. For example, eight types of cryptocurrencies, including SOL, XRP, and ETH, can be used to pay in the Cypriot restaurant Think 30, located in Nicosia. Digital assets can also be used to purchase real estate through the Cyprus company DOM.
In November 2019, the Cypriot government and blockchain companies Pundi X and Borghese Ventures signed an agreement under which the parties began integrating AI and blockchain into the Cypriot economy. The companies mainly develop payment solutions for large retail chains and merchants to accept crypto payments. They also work on services in education, healthcare, logistics, and real estate. Moreover, specialists from Pundi X and Borghese Ventures plan to develop blockchain solutions for the efficient operation of government agencies in Cyprus.
The island’s government didn’t prohibit crypto mining, but such activities are subject to income tax, the rate of which is calculated progressively. For instance, if the annual income of a miner is up to €19,500, no income tax is payable; if the income ranges from €19,501 to €60,001 per year, the income tax rate will be between 20% and 35%.
Hence, despite the lack of a unified law on crypto regulation, Cyprus is a friendly jurisdiction for this industry. Innovative FinTech companies and crypto enthusiasts can count on appealing taxation conditions. In 2023, the local government will continue working on a uniform law to regulate the industry, eventually aligning with the EU’s regulatory framework.
