Forex, cryptocurrencies, and regulation
By Christina Panayiotou
Treppides & Co Ltd
Derivatives on virtual currencies / cryptocurrencies, such as contracts for differences (CFDs), options and futures, can qualify as financial instruments under MiFID II. Subsequently, the provision of investment services in relation to financial instruments with cryptocurrencies as underlying asset in and/or from Cyprus, requires specific authorisation by the Cyprus Securities and Exchange Commission (CySEC).
Such a development took place following the recognition of CFDs on cryptocurrencies as financial instruments under MiFID II by the European Securities and Markets Authority (ESMA) back in 2018 and subsequently the authorisation and supervision of their providers across the European Union. Trading of such instruments by retail clients is governed by the national product intervention measures imposed by the competent authorities of the EU Member States, aiming to increase investor protection. The national measures commonly comprise by limitations on the leverage, whereas in some cases, national competent authorities have decided to ban such products for retail clients (e.g. general ban of CFDs in Belgium, crypto-derivatives are banned in the United Kingdom).
When it comes to derivatives on virtual currencies, Forex Companies in Cyprus are subject to the rules and obligations arising from the Investment Services and Activities and Regulated Markets Law, including acting honestly, fairly and professionally in accordance with the best interest of clients, provision of fair, clear and not misleading information, provision of information and risk warnings, as well as having adequate product governance arrangements in place.
Such products, since they are subject to fluctuations of the underlying cryptocurrency assets, are falling under the scope of packaged retail and insurance-based investment products (PRIIPs) regulation. Therefore, retail clients shall be provided with a Key Information Document (KID) including information enabling them to make an informed investment decision and compare different PRIIPs.
An essential element of providing over the counter (OTC) derivatives on cryptocurrencies, is the formation of prices, whereas Cyprus Investment Firms (CIFs) should ensure that reference prices used are gathered from publicly available sources of good repute. The pricing sources must be subject to an ongoing evaluation and review in order to comply with the best execution requirements. As cryptocurrencies regulations are constantly evolving, including the recent introduction of Crypto Asset Service Providers (CASPs) registers, Forex Companies would be in a position to further strengthen their sources of price information and subsequently the level of their compliance with the best execution requirements.
The risks associated with the derivatives on cryptocurrencies as underlying asset should be considered when calculating the capital adequacy of the firm and in the context of the framework of the Internal Capital and Risk Assessment (ICARA). Also, an additional capital buffer is expected to be maintained, in order for such firms to enhance their resilience in light of the volatile nature of virtual currencies.
Treppides & Co Ltd is the largest independent consulting company in Cyprus with an established international presence and offices in Great Britain and Malta. Today the company employs approximately 200 professionals. It offers a full range of consulting, tax, accounting services to groups, companies and investors operating internationally in a variety of financial and business sectors. The Company, which started its operations in 1985, has 36 years of expertise and an elite team of experienced executives who can guide and assist investors and businesses during the establishment process and subsequent investment activity in Cyprus and internationally.
Nicosia: Treppides Tower, Kafkasou 9, Aglantzia, CY 2112, Nicosia, Cyprus
Limassol: Andrea Kariolou 38, Ayios Athanasios, CY 4102, Limassol Cyprus
London:7 Milner Street, London SW3 2QA
Malta: Level 1, Somnium, Tower Road, Swatar, Birkirkara BKR 4012