Cryptocurrency Regulation in Cyprus Prior to 2024

Overview

Prior to 2024, Cyprus, as part of the European Union, aligned its cryptocurrency regulations with the EU framework, particularly the Markets in Crypto-Assets (MiCA) and anti-money laundering (AML) standards. These developments were part of a broader global trend to create a unified regulatory framework for digital assets, enhancing user security and functionality.

Adoption of EU Directives and Local Laws

Directive (EU) 2018/843, known as AMLD5, was transposed into Cypriot law in February 2021, amending the existing Prevention and Suppression of Money Laundering Law. This amendment was the primary legal framework recognizing and defining “Crypto-Assets” in Cyprus. Crypto-assets were defined as a digital representation of value not issued or guaranteed by a central bank or a public authority, not attached to a legally established currency, and not possessing a legal status of currency or money. They were recognized as being accepted by persons as a means of exchange or investment, capable of being transferred, stored, or traded electronically​​.

The Cyprus Securities and Exchange Commission (CySEC) established an Innovation Hub to foster a more crypto-friendly approach. This platform allowed both supervised and non-supervised entities to collaborate and share knowledge, aligning business models with investor protection regulations. The government also formed an ad hoc working group to develop and implement blockchain technology in Cyprus, with a focus on creating a legal framework to regulate blockchain and cryptocurrencies​​.

Regulatory Warnings and Compliance

The Central Bank of Cyprus (CBC) had issued warnings as early as February 2014, highlighting that cryptocurrencies were not considered legal tender. The CBC emphasized the lack of regulatory measures to cover losses from the use of virtual currencies if the platform holding them collapsed, indicating the inherent risks involved​​.

The CySEC, in March 2014, outlined the risks associated with buying, holding, exchanging, or trading in cryptocurrencies. These announcements were part of an effort to inform the public about the potential risks involved in cryptocurrency transactions​​.

The AML Law aimed to address issues related to cryptocurrencies by setting out parameters and requirements for Crypto-Asset Service Providers (CASPs). This was a significant step towards the regulation of crypto-asset-related activities in Cyprus​​.

ICO Regulations and Taxation

Initial Coin Offerings (ICOs) were not prohibited in Cyprus. Following the amendment of the AML Law in February 2021, ICOs fell under the services provided by CASPs. Any entity wishing to perform an ICO had to register with the CySEC as a CASP, complying with all the requirements set by the CySEC. Funds derived from ICOs were subject to tax as they were deemed to be taxable income, with Cyprus offering one of the lowest and most attractive corporate tax rates at 12.5%​​.

CASP Registration and Fees

To regulate crypto-asset-related activities, any provider carrying out activities relating to crypto-assets had to register in the relevant CySEC registry as a CASP. The applicant was required to pay a fee of EUR 10,000 with their application for registration as a CASP. This fee was non-refundable if the application was rejected, but no other fee was payable to the CySEC for the first year of registration if the application was successful​​​​.

Conclusion

Before 2024, Cyprus’ approach to cryptocurrency regulation was shaped by a combination of EU directives and local legal amendments. The country focused on aligning with international standards for AML, establishing platforms for innovation and collaboration, and implementing regulatory frameworks to manage the risks associated with digital assets. The regulatory environment was characterized by a balance between fostering innovation and ensuring financial stability, reflecting the evolving nature of cryptocurrency regulation globally.