12° Nicosia,
29 May, 2024

K. Treppides & Co Ltd: Cryptocurrencies/Digital Assets and Regulation

Alexis Dalitis
Senior Manager
K. Treppides & Co Ltd

It is commonly identifiable that the FinTech industry is being developed and infiltrates in the everyday lives of people exploring their edges. The deafening fall of the traditional trading has led the financial sector to create new fields of commodities for filling the chasm created.

The loss of control in the use of the above products in some cases brought calamitous consequences to their users. Consequently, their verve use has created the need of protection through an ‘invisible’hand called regulation.

Following the latest trend with the Virtual Financial Assets (VFAs) or Cryptocurrencies or Digital Assets and the Blockchain technology behind them, a booming and contagious effect is spreading between Continents since they are considered to be the ‘golden key’ to a new age.

What are the Virtual Financial Assets, which seems like they will dominate the financial markets in the coming years? Can we trust this new peculiarity? What is the role of the regulators and what are their main concerns?

Starting with the first point, it seems that that there are 3 types of VFAs. A VFA can be used as a mean of payment to merchants who accept this type of settlement. Also, the VFAs are used as an investment expecting to realize profits with its disposal while another type of VFA is that acquired by an investor with the intention to receive services from its issuer in the future. It is noted that a VFA can be of hybrid nature combining more than one types in its characteristics.

The role and mission of regulators is to ensure investors protection and a robust supervision of the market they regulate

In Cyprus, the use of VFAs as a way of payment is currently on its first stages of implementation since just like every new area that affects people’s daily routine, is difficult to become part of their habits. The reaction was similar when fiat money, credit/ debit cards and online banking were initially introduced, but anyone can notice how the majority of daily transactions are executed nowadays.

Can we trust the new trend?

It seems that a considerable number of people believes in the fintech revolution, especially in the West (i.e. USA, Latin America) and East (i.e. Japan) where the use of cryptocurrencies has been embedded in their lives.Taking into consideration that today the terrestrial borders have become a distant idea, new technologies are travelling at the blink of an eye. As the trading platforms and the online ledgers based on Blockchain and Cryptocurrencies are galloping in the USA and Asia, Europe also takes its part in that global typhoon.

The legislation that the Maltese government has implemented for the regulation of VFAs appears as the preamble of a pan-European regulation (like MIFID for Investment Services) to come in force after assessing the case of Malta. Considering the above, it seems that in a few years we will have no choice but to trust and use the new trend.

What is the role of the regulators and what are their main concerns?

As for every economic activity which comes to deal with investors’ money, the role and mission of regulators is to ensure investors protection and a robust supervision of the market they regulate.

Specifically, for the cryptocurrency markets, the main concerns are two. The first is to immunize that the entities looking for capital raising through Initial Coin Offerings (ICOs) are not scams and that they have the necessary skills, expertise, infrastructure and governance arrangements to complete their project as described in their whitepaper andbecome listed in regulated exchanges where VFAs are traded. In that respect, the purpose is to lead the investors to choose only registered ICOs which are traded on highly regulated crypto exchanges/brokers.

The second important area that regulators are concerned about it, is the increased Money Laundering (ML) Risk for businesses involved in the cryptocurrencies market. Undoubtedly, the identification and assessment of the source of wealth for the people holding cryptocurrencies is a big challenge. How is the AML risk currently proposed to be tackled by regulators which have recently implemented their regulation for VFAs?

The MFSA in Malta requires VFA Agents (the professional consultants on VFAs), to have robust Know Your Client (KYC) systems and controls in place to address and mitigate the money laundering of terrorism risks which are pertaining from their specific business model. It is emphasized that there is no ‘one-size-fits-all’ approach in this respect. For example, with respect to a VFA Agent onboarding solely clients whose source of wealth comprise exclusively of traditional assets (e.g. cash, property etc.), a traditional KYC tool would suffice. On the other hand, where a VFA Agent wishes to onboard clients whose source of wealth include VFAs (e.g. bitcoin), such VFA Agent is expected to have an appropriate KYC tool in place in order to verify such sources. Therefore, it is up to the VFA Agents, using the risk-based approach to assess their clients who can be either ICO issuers or VFA service providers i.e. brokers, crypto exchanges and conclude whether they can recognize the identity of their client, the purpose of the intended business relationship requested and the source of the client’s wealth.

The BMA in Bermuda has also regulated with a comprehensive set of legislation, the Fintech community focused on blockchain and digital asset businesses. This includes amendments made to Bermuda’s AML and banking legislation. The amendments are as simple as need to include the VFA business under the AML Act, which is basically a similar approach to what the Maltese regulator has adopted. As described above, this is the KYC risk-based approach with extra identification tools and measures to be taken on the discretion of each counterparty, always having in mind the purpose of clearly identifying the client/investor and the source of his wealth. Where this cannot be verified, the business relationship should not be concluded.

To conclude, in consideration of all the above, it is obvious that the fintech industry and specifically the VFAs or cryptocurrencies provide a wide range of opportunities for the market participants (regulators, services providers, banks) as well as significant risks to manage. However, the risks do not imply draconian measures and negative stance from the authorities which may sign an ad hominin attack not only against the cryptocurrencies but also to the upcoming new inventions that may lead to a brave new world until the next technological recession.

K. Treppides & Co Ltd, the largest independent consulting firm in Cyprus, with established international presence and offices in London and Malta. Offers a full range of legal, tax, accounting, consulting and financial advisory services to international Investors that are operating within a wide range of industry sectors. The company possesses many years of experience and a team of experienced members of staff who remain on hand to assist individuals and businesses throughout the entire investment process, in and through Cyprus.

Contact Details:

Nicosia: Treppides Tower, Kafkasou 9, Aglantzia, CY 2112, Nicosia, Cyprus
Limassol:Kristelina Tower, 12 Arch. Makarios III Avenue, Mesa Geitonia, CY 4000 Limassol, Cyprus
London:7 Milner Street, London SW3 2QA
Malta: Level 1, Somnium, Tower Road, Swatar, Birkirkara BKR 4012
Tel:  +357 22678944, +357 25822722

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