As the provider of credit and the custodian of people’s wealth, the Cypriot banking sector holds a crucial position in the country’s economy.
From the traditional banking system to the emergence of the current digital age, the integration of technology has enabled banks to streamline their operations, increase efficiency, and offer innovative services to their customers.
Over the past decade, the emergence of crypto-assets has disrupted the traditional banking industry, offering new and innovative ways to store and transfer value. Crypto-assets are being adopted by individuals and businesses alike. As the use of crypto-assets grows, so do the challenges and opportunities facing the banking industry. The relationship between banks and crypto-assets is still developing and will likely continue to evolve as the regulatory landscape and consumer demand for crypto-assets change.
This article highlights the ongoing digital transformation of the banking sector. It further explores the evolving relationship between banks and crypto-assets and provides an overview of the regulatory landscape for Cyprus banks when it comes to crypto-assets.
Developments in the Financial Services Sector
The financial services industry is undergoing a significant digital transformation around the world. The pandemic has accelerated a trend where more than half of the customers in the Cypriot banking sector now prefer to interact with banks through digital channels. Digital transformation in banks offers several benefits to customers, including faster and more efficient transactions, personalized banking experiences, and enhanced security through the use of advanced technologies like artificial intelligence and data analytics. Despite implementation of digital transformation initiatives, there are still considerable steps to be taken.
Additionally, the relationship between traditional banks and fintech companies has evolved from one of competition to one of collaboration. Initially, FinTech companies were seen as disruptors of the traditional banking industry, however, as fintech companies have grown and gained credibility, many traditional banks have recognized the benefits of partnering with them to enhance their offerings and remain competitive in the rapidly evolving financial landscape. FinTech companies are in a position to provide product design and tech expertise, whilst banks provide the funding, infrastructure, clientele, and distribution channels.
As the banking industry continues to evolve in the digital age, the use of crypto-assets has also become increasingly prevalent. This is driven by the recognition of the potential benefits that crypto-assets and blockchain technology can offer, including amongst others, faster and more secure transactions, reduced costs, and increased transparency.
Relationship between the Banking Sector and Crypto-Assets
The relationship between banks, blockchain and crypto-assets is complex and evolving. Despite this cautious initial approach of Cypriot banks, there have been moves made by CBC to further explore the potential of innovative technologies, such as distributed ledger technologies (DLT) and blockchain, which underlie many digital currencies and financial products. The CBC is testing new technologies via its innovation hub, which will further foster CBC’s strategic initiative to promote innovation in the financial sector, benefitting Cyprus’ path to digital transformation.
Thus far, the majority of banks under the supervision of the European Central Bank (ECB) have refrained from dealing with crypto-assets. However, as per ECB’s report from a ‘Survey on Digital Transformation and the Use of Fintech’ some banks have looked into leveraging DLT to enhance their efficiency, cut costs, and provide novel services to their customers.
Overall, while the use of DLT in Cyprus banks is still relatively nascent, there is growing interest and activity from international financial institutions and companies in crypto-assets and other digital assets that enable programmable money. Such leveraging of crypto-assets can be seen from custodial bank BNY Mellon, which in its efforts to support client demand for a trusted provider of both traditional and digital asset servicing, announced in Q2 2022 that its “Digital Asset Custody platform is live in the U.S. with select clients now able to hold and transfer bitcoin and ether”. Previous to that, credit card company Mastercard introduced “a new program to enable financial institutions to bring secure crypto trading capabilities and services to their customers”.
There is growing interest and activity from established institutions in crypto-assets and innovative technologies. This trend is expected to pave the way for wider adoption and greater acceptance of crypto-assets and blockchain technology in the banking and overall financial sector.
Regulatory Landscape in Cyprus
In Cyprus, the regulatory landscape for crypto-asset activities and services is still evolving. The Fifth Money Laundering Directive (5MLD) extended the Fourth Money Laundering Directive (4MLD) regime to providers engaged in exchange services between virtual and fiat currencies and to custodian wallet providers. The Prevention and Suppression of Money Laundering and Terrorist Financing Law, (L188(I)/2007) was amended to harmonise domestic legislation with such provisions. Furthermore, the Cyprus Securities and Exchange Commission (CySEC) established a regulatory framework for crypto-asset service providers (CASPs) which includes amongst others, requirements for licensing, disclosures, and conduct of business.
Cyprus is a member of the European Union (EU) and operates within the wider scope of monetary policy and financial regulation of the EU. Crypto- assets are to be regulated under the Regulation on Markets in Crypto Assets (MiCA), which is the first cross-jurisdictional regulatory and supervisory framework, that aims to facilitate the adoption of DLT and crypto-assets in the financial services industry.
An interseting point that MiCA makes is that the framework should “enable crypto-asset service providers to scale up their businesses on a cross-border basis and facilitate their access to banking services to enable them to run their activities smoothly”. It could be argued that the implementation of MiCA will make the EU banking industry more receptive to service providers dealing with crypto-assets.
On an international level, the Basel Committee’s oversight body has endorsed a global prudential standard for banks’ exposures to crypto-assets, for implementation by 1 January 2025. The standard will “provide a robust and prudent global regulatory framework for internationally active banks’ exposures to crypto-assets that promotes responsible innovation while preserving financial stability”. The BCBS standard is not yet legally binding until it is transposed in the EU. If banks intend to participate in the crypto-assets market, they will be required to adhere to the prudential standard and take into account all the relevant provisions.
Conducting crypto-asset activities from Cyprus
According to a Eurobarometer survey conducted in summer 2022 to assess how EU citizens engage with changing financial services and products in Europe it was found that approximately 8% of EU citizens have crypto-currencies. Furthermore, in accordance with a graphic prepared by data analyst Gilbert Fontana using data from the European Commission’s Eurobarometer, Cyprus ranks amount the EU countries that have the highest proportion of citizens invested in crypto, with an investment figure of 13%. Such numbers indicate a growing interest in this emerging asset class both on an EU and Cypriot level.
Cyprus is considered an attractive destination for investment services institutions and the investment services sector has significantly grown in recent years. CySEC’s years of experience as a financial services regulator, coupled with an efficient regulatory framework harmonized with EU directives and regulations, has welcomed international businesses across forex, CFD brokers, investment funds and the entire FinTech spectrum.
Cyprus has positioned itself as a key destination for companies wishing to headquarter and develop their business in crypto-assets in Cyprus.
It can be argued that new companies will benefit from a well-developed financial system that is open to innovation and from the networking and potential for cooperation with the several key financial services players already licensed and established in Cyprus, that could essentially complement their business with potential synergies. In addition, companies established in Cyprus will be able to enjoy the freedom to provide crypto-asset services throughout the EU, without the need for additional physical presence in the rest of the EU.
The growing interest and involvement of the Cypriot market in crypto-assets, along with its ever-evolving financial services and banking sector, denote that Cyprus has a promising future when it comes to opening up to these markets and is well equipped to open its doors and support key players in the overall financial services industry.
Overall, the financial services industry is going through a transformational period. There are new opportunities for growth and profitability and customers can be offered more choices in financial products and services. Digitisation, along with crypto-assets and the incorporation of DLT and blockchain technology are expected to play a major role in the future of the financial services industry in Cyprus