MiCA and the Cyprus Crypto-Assets Legal Framework

1. The Markets in Crypto-Assets Regulation

The EU Council which represents all 27 EU member states, has unanimously approved earlier this month the Markets in Crypto-Assets Regulation (MiCA).

MiCA introduces a harmonised crypto-assets regulatory framework, according to which persons dealing with crypto-assets, must operate in the whole of the EU and the EEA. In a nutshell, MiCA imposes requirements on crypto platforms, token issuers and traders for transparency, disclosure, authorisation, and supervision of transactions. It will replace existing national frameworks that apply to crypto-assets not covered by existing EU financial services legislation and it will require crypto-asset service providers having operations in the EU, to obtain authorisation to operate in the EU and observe its provisions.

MiCA will start to apply 18 months after it was published in the EU Official Journal -meaning as the end of 2024. EU member states shall adopt and publish by then, laws and regulations necessary to comply with the provisions and requirements of MiCA.

With MiCA, the 27 EU member states will have a unified approach to crypto-assets regulation and companies licensed in an EU country will be able to “passport” their operations into other EU countries.

2. The Cyprus Legal Framework

On February 2021, Cyprus has revised its AML Law to bring it in line with the EU AMLD5 Directive and it has incorporated in it provisions and process for the application and obtaining by crypto-assets service providers (CASPs) of a license to provide crypto-assets related services. The Cyprus Stock Exchange Commission has been designated as the responsible supervisory authority. On 25 June 2021, CySEC issued a directive (secondary legislation) setting out regulations for the formation and operation of CASPs, which we summarise below.

LICENSE CATEGORIES

There are three types of licenses that may be obtained, each for a different range of services and requiring different initial capital requirements, as follows:

Class 1 License

Services: Provision of investment advice.

Initial capital: €50.000

Class 2 License

Services: Services referred to in Class 1 and/or any of the following:

• Reception and transmission of client orders.
• Execution of orders on behalf of clients.
• Exchange between crypto-assets and fiat currency.
• Exchange between crypto assets.
• Participation and/or provision of financial services related to the distribution, offering and/or sale of crypto-assets, including the initial offering.
• Placement of crypto-assets without firm commitment.
• Portfolio management.

Initial capital: €125.000

Class 3 License

Services: Services referred to in Classes 1 & 2 and/or any of the following:

• Administration, transfer of ownership, transfer of site, holding, and/or safekeeping, including custody, of crypto-assets or cryptographic keys or means enabling control over crypto-assets.
• Underwriting and/or placement of crypto-assets with firm commitment.
• Operation of a multilateral system, which brings together multiple third-party buying and selling interests in crypto-assets in a way that results in a transaction.

Initial capital: €150.000

LICENSING PROCEDURE

The main requirements to obtain a crypto-asset service provider license are the following:

Cyprus entity: Incorporation of an entity in Cyprus.

Initial Capital: Meet the minimum capital conditions stated above.

Management: Four directors (two executive and two independent non-executive) of good repute, knowledge, skill, and experience.

Policies and procedures for smooth operation, operational risks, conflict of interest, business continuity, archiving, data protection and safeguarding of information.

Mechanisms and policies for accounting and internal auditing.

Substance: Have an operational office in Cyprus with staff to perform key functions.

Ownership: Owners to be honest, of good repute and capable to ensure that the company shall be in good financial standing.

Website: Maintain a suitable and functioning website.

Compliance: Anti-money laundering, compliance, risk, corporate governance, data protection policies and procedures.

APPLICATION FEES

The application fee for the obtaining of a Crypto Asset Services Provider authorisation is €10.000 (not refundable if the application is rejected), with an annual renewal fee of €5.000.

3. Cyprus: EU Tech-hub with Comprehensive Regulatory Framework

Cyprus is a rising tech-hub within Europe. The island’s location, its common law legal system, attractive tax framework, and its business-friendly infrastructure, combined with the dynamic created by major global players in the fintech and crypto-assets industries, including Crypto.com, eToro, Revolut, Bitpanda and CMC Markets, having set up on the island, place Cyprus high in the fintech and crypto-business jurisdiction list.

With MiCA now finally been shaped, offering thus excellent opportunities for crypto companies to set up in an EU country and to passport operations throughout the EU, it can be foreseen that Cyprus will gain further traction as an EU tech-hub, while it enhances its legal framework, to ensure MiCA compliance and to regulate other blockchain technologies that fall outside MiCA, so to remain a sensible destination with stability, predictability, and legal certainty for crypto and blockchain entrepreneurs.