Cryptocurrency Regulations in Cyprus
Introduction – Government attitude
Cyprus stands out as a welcoming jurisdiction for cryptocurrency activities. Its strategic location, common law system, appealing tax structure, and pro-business environment, paired with a moderate regulatory approach (unlike stricter EU counterparts), make it an attractive spot for crypto ventures.
This has drawn leading global fintech and crypto firms like Crypto.com, eToro, Revolut, Bitpanda, and CMC Markets, boosting Cyprus’s status as a top-tier fintech and crypto hub. The country’s lenient visa policies for non-EU professionals further enhance its appeal as a Fintech-Crypto center.
In recent years, Cyprus has demonstrated a keen interest in advancing blockchain technology, aiming to emerge as a trailblazing and reliable financial hub for crypto asset trading and services. This ambition surfaced in 2018 when Cyprus joined the ‘Declaration of the Southern Mediterranean Countries on Distributed Ledger Technologies’ and the ‘European Blockchain Partnership,’ fostering collaboration among European nations on cutting-edge distributed ledger technologies (DLT).
That same year, the Cyprus Securities and Exchange Commission (CySEC) launched an Innovation Hub, serving as a bridge between CySEC and fintech entities—regulated or not—to exchange insights and speed up business development while prioritizing investor protection. On August 30, 2018, via Council of Ministers decision N.85.629, the Cyprus government set up a dedicated working group to craft and roll out a blockchain strategy, aiming to regulate cryptocurrencies and their trading through a legal framework that distinguishes between Security Tokens and Non-Security Tokens. In February 2021, Cyprus adopted Directive (EU) 2018/843 (“AMLD5”) into its Prevention and Suppression of Money Laundering and Terrorist Financing Law 188(I)/2007-2019 (the “AML Law”), marking the only current legal recognition of “Crypto-Assets” in Cyprus.
Legal and Regulatory Framework
The AML Law serves as the primary legislation governing crypto-assets in Cyprus. It defines a “crypto-asset” as “a digital form of value, not issued or backed by a central bank or public entity, not tied to an official currency, lacking legal tender status, yet accepted for exchange or investment, transferable, storable, or tradable electronically, excluding:
- fiat currency;
- electronic money; or
- ‘Financial instruments’ per Part III of the First Appendix of the Law on the Provision of Investment Services and Activities and Regulated Markets 87(I)/2017.”
The law also identifies Crypto-Asset Service Providers (“CASPs”) as entities offering or performing services like:
- converting crypto-assets to fiat currencies;
- swapping between crypto-assets;
- managing, transferring, holding, or safekeeping crypto-assets, including custody of cryptographic keys or control mechanisms;
- issuing and selling crypto-assets, including initial offerings;
- providing financial services related to distributing, offering, or selling crypto-assets, including initial offerings.
These financial services encompass investment activities such as:
- receiving and transmitting orders;
- executing orders for clients;
- trading on own account;
- managing portfolios;
- offering investment advice;
- underwriting or placing crypto-assets with or without firm commitment;
- operating a multilateral trading facility for crypto-asset transactions.
The AML Law mandates CASPs to register with CySEC, except for those already registered in another EU state. On June 25, 2021, CySEC issued a Directive under the AML Law to regulate the CASP Register’s creation, operation, and updates, setting entry requirements as secondary legislation.
Regulated and Unregulated Crypto activities
Regulated activities under the AML Law / CASP definition include:
- Exchange (buy/sell): Trading crypto-assets for fiat or other crypto-assets.
- Initial coin offerings (“ICOs”) / Direct token sales by issuers.
- Custody (holding).
Unregulated activities currently include:
- Borrowing / Lending: No local framework governs crypto yielding/staking; if a third party manages it, it might overlap with CASP custody duties under paragraph (c).
- Staking on proof-of-stake systems: The consensus method doesn’t matter, as staking/yielding lacks regulation, though third-party custody could fall under CASP rules.
- Mining.
New Developments – The introduction of Markets in Crypto Assets Regulation (MiCA)
The Markets in Crypto Assets Regulation (MiCA) took effect in June 2023, with Cyprus set to integrate it into local law by December 30, 2024. Consequently, CySEC has paused new CASP applications under national rules. MiCA establishes consistent EU crypto-asset market rules, aligning with existing financial service standards on disclosure, governance, and licensing. Firms must assess whether their crypto-assets fit MiCA’s definition or fall under other regulations like MiFID II for transferable securities, due to subtle differences.
Who does MiCA apply to?
MiCA targets three groups:
- Issuers of crypto-assets: Legal entities offering crypto-assets publicly or seeking trading platform admission, with rules varying by asset type.
- Crypto-asset service providers (CASPs): Those professionally providing crypto services to third parties.
- Persons involved in trading crypto-assets on authorized platforms or seeking such admission.
What types of crypto-assets are in scope of MiCA?
MiCA covers “crypto-assets,” defined broadly as “digitally represented value or rights secured by cryptography, including coins, tokens, or other digital forms transferable via DLT or similar tech,” encompassing cryptocurrencies (e.g., Bitcoin, Ethereum), stablecoins, and utility tokens.
What is not covered by MiCA?
MiCA excludes security tokens qualifying as transferable securities or financial instruments under MiFID II, deposits, securitization positions, and insurance/pension products. DeFi protocols and truly unique NFTs are mostly exempt, though NFT collections require a white paper detailing their purpose and blockchain operations.
Taxation
Taxation on profits
No specific tax law governs crypto income, but tax authorities may still impose taxes. In May 2021, an internal directive (16/2021) clarified crypto tax logic: profits are “Income” if bought for resale (taxed at 12.5% for companies, 0%-35% for individuals) or “Capital” if held for income generation like staking (likely untaxed). Trade badges help determine intent. Cyprus’s low 12.5% corporate tax rate favors trading via companies over individual accounts.
Taxation – VAT
No local or EU VAT laws target cryptocurrencies. Guidance stems from the European Court of Justice’s C-264/14 Hedqvist ruling, exempting Bitcoin-to-fiat exchanges from VAT by treating Bitcoin as currency, not a commodity. Security Tokens, depending on their role, might avoid both corporate tax and VAT as equity or debt.
Conclusion
Cyprus shines as a key Fintech-Crypto hub, hosting giants like Crypto.com and eToro. Challenges loom, though: the incoming MiCA law will reshape the legal landscape, requiring careful review, and securing bank accounts for crypto firms can be tricky.
How can Papasavvas & Liskavidou help? Papasavvas & Liskavidou excels in establishing companies and CySEC-licensed entities (e.g., CASPs or crypto funds) in Cyprus. Our skilled team can navigate your application process, serving as your go-to contact for business setup, residency permits, and ongoing compliance.
Contact us for a free consultation at info@lplawyersfirm.com. This article offers general guidance; seek expert advice for your specific situation.
