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The enactment of the 5th Anti Money Laundering Directive via amendment of Law 188(I)/2007 constitutes the introduction of mandatory crypto assets regulation in Cyprus. In light of further emerging national and European regulation, a balance should be struck between initiative and consistency.
On 18 February 2021 Cyprus enacted the 5th Anti Money Laundering Directive (EU)2018/843 (‘AMLD5’) into its national law, through amending Law 188(I)/2007 on ‘Prevention and Suppression of Money Laundering and Terrorist Financing’ (‘the Amended Law’). Transposition of the AMLD5 into national law was required by 10 January 2020, which resulted in Cyprus receiving a letter of formal notice by the Commission.
The Amended Law achieves multiple results, such as the creation of Ultimate Beneficial Ownership (‘UBO’) Registries. It also crucially introduces crypto assets into Cypriot Law. This introduction follows Circular no. C417 published in November by the Cyprus Securities and Exchange Commission (‘CySEC’) addressed to Cyprus investment firms, containing guidelines on ‘Prudential treatment of crypto assets and enhancement of risk management procedures associated with crypto assets’ (for a detailed analysis on Circular no. C417 please refer to our previous article here).
The principal function of the Anti-Money Laundering Directives is to oblige regulated entities to perform customer due diligence (i.e. identify and verify clients’ identities, monitor transactions and report suspicious transactions) to prevent money laundering and terrorist financing by criminal elements. The original Directive has undergone four revisions to mitigate ever-developing risk, and the specific aims of AMLD5 can be summarised as follows:
- To Increase transparency on ultimate ownership of companies and trusts;
- To improve access to information for financial intelligence units through centralised bank account registers;
- To extend rules to virtual currencies, tax related services, and art traders, and lift the anonymity on electronic money;
- To enhance cooperation and exchange of information between supervisors and the ECB; and
- To improve assessment criteria and checks for high-risk third countries.
Crypto assets under the Amended Law
The Amended Law introduces crypto assets under article 2(1) in somewhat broader fashion to ‘virtual currencies’ defined in article 3(18) AMLD5. They are defined as:
“a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by persons as a means of exchange or investment and which can be transferred, stored or traded electronically and that is not,
(a) Fiat currency, or
(b) Electronic money, or
(c) Financial instruments as defined in Part III of the First Appendix of the Law on the Provision of Investment Services and Activities and Regulated Markets”.
(emphasis on the additions)
Similarly, the definition of a crypto assets service provider in article 2(1) goes further than reference to ‘the exchange between crypto assets and fiat currencies’ contemplated under article 2(1)(3)(g) AMLD5, to include persons who professionally engage in:
- Exchange between crypto assets;
- Management, transmission, transfer, holding and/or safekeeping of crypto assets or cryptographic keys;
- Offer and/or sale of crypto assets, including the initial offering; and
- Participation and/or provision of financial services regarding the distribution, offer and/or sale of crypto assets, including the initial offering.
Furthermore, under the Amended Law CySEC must compile and maintain a Register of crypto asset service providers, which includes entities that offer such professional services irrespective of registration in another Member State. CySEC may issue directives to determine the preconditions for registration, the obligations of registered members, as well as the obligations of persons with a managerial function and/or of beneficiaries.
Both CySEC’s circular no. C417 and the Amended Law reveal Cyprus is taking a proactive approach to crypto assets regulation. The Amended Law goes further than the AMLD5 by adopting elements from the recommendations of the Financial Action Task Force (FATF) first adopted in 2012, and last updated in 2020. As the original FATF recommendations were taken into account in the 4th Anti Money Laundering Directive, integrating the updated recommendations appears prudent, given the ultimate aim is to combat continually evolving money laundering practices. Also, the Amended Law, unlike circular no. C417, creates legal obligations, therefore the introduction of a form of mandatory regulation concerning crypto assets is a positive step.
A word of caution however, in light of a recent report by the European Banking Authority (EBA) observing divergent national policies on crypto assets, the anticipated Cyprus Law on Distributed Ledger Technologies, and the emerging Markets in Crypto Assets (MiCA) regulation. Cyprus and other Member States should exercise reasonable care when adopting national measures which differ to existing European regulation to avoid creating disparities, given effective crypto asset regulation in the Common Market can only be achieved at European level.