The Cyprus Investment Firms Law 87(I)/2017 provides the legal framework for the provision of investment services and activities.
Derivatives whose underlying asset are cryptocurrencies are now explicitly regarded as financial instruments and fall under the “Investment Services Law”.
Such a development took place following the recognition of CFDs on cryptocurrencies as financial instruments under MiFID II by the European Securities and Markets Authority (ESMA) back in 2018 and subsequently the authorisation and supervision of their providers across the European Union.
Subsequently, the provision of investment services in relation to financial instruments such as contracts for differences (CFDs), options and futures with cryptocurrencies as underlying asset, in and/or from Cyprus, requires specific authorisation by the Cyprus Securities and Exchange Commission (CySEC) in the form of a Cyprus Investment Firm (CIF).
CySEC issued the circular to guide CIFs that invest in cryptocurrency and provide them confidence that they are complying with Cyprus laws. There are three requirements that CIFs must satisfy to operate within Cyprus.
- First, CIFs must receive authorization from CySEC to trade in cryptocurrencies.
- Second, CIFs must acquire sufficient capital to cover their cryptocurrency investments. Essentially, CIFs must determine a capital adequacy ratio. The Circular guide’s first three provisions guide how CIFs can adequately calculate the capital needed for cryptocurrency investments.
- Third, CIFs must carefully manage the risks associated with cryptocurrency investments. Specifically, the CySEC urged CIFs to revisit their risk management procedures periodically and ensure that all risks are duly considered.
Additionally, CySEC charged CIFs with the duty to mitigate trading risks in cryptocurrency, including operational, cybersecurity, and reputational risks.
Being a member of the European Union, Cyprus follows the EU laws such us the Markets in Financial Instruments Directive (MiFID). This enables the use of the Single Passporting EU right, meaning the licensed investment firm can promote its services across the EU and establish branches and representative offices within the EU without additional capital requirements.
A Cyprus Investment Firm, depending on its license, can offer the below services:
- Forex Trading.
- Portfolio Management.
- Investment Advice.
- Brokerage Services.
- Cryptocurrencies Derivatives.