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Crypto-assets are “a type of private asset that depend primarily on cryptography and distributed ledger technology as part of their perceived or inherent value. A wide range of crypto-assets exist, including payment/exchange-type tokens (for example, the so-called virtual currencies – VC’s), investment-type tokens, and tokens applied to access a good or service (so-called ‘utility’ tokens).”1
CySEC Circular (C417) relating to crypto assets lays down the first CySEC rules around crypto assets. This Circular aims at establishing a common treatment by the CIFs when calculating their own funds and capital adequacy ratio and enhancing the risk management procedures applied by the CIFs when they deal with crypto assets, until a common application of the current rules is developed for crypto assets.
This is an important step towards cultivating a prudential treatment of crypto assets and financial instruments relating to crypto assets as well as enhancing the risk management of transactions which include cryptocurrencies.
To start with, CySEC shed light on the way Cyprus Investment Firms (CIFs) should calculate their own funds and capital adequacy when it comes to transactions involving crypto assets and how to report it.
In terms of risk management, CIFs should assess the risks emanated from trading in crypto assets, and/or in financial instruments relating to crypto assets, for their own account or for their clients within the Internal Adequacy Assessment Process (ICAAP).
“CIFs, which trade in crypto assets, and/or in financial instruments relating to crypto assets, should revisit their risk management procedures and strategies and ensure that all risks associated with this product are duly taken into consideration.” (C417)
CySEC also guides the CIFs, which trade in crypto assets and/or financial instruments relating to crypto assets, to comply with certain provisions of the Law. In specific, “CIFs must have in place sound, effective and complete strategies and processes to assess and maintain on an ongoing basis the amounts, types and distribution of internal capital that they consider adequate to cover the nature and level of the risks to which they are or might be exposed to. These strategies and processes are subject to regular internal review to ensure that they remain comprehensive and proportionate to the nature, scale and complexity of the activities of the CIF.” (s.104 (2) of Law 87(I)/2017)
CySEC makes reference to other legal provisions which the CIFs trading in crypto assets and/or financial instruments relating to crypto assets should take into account and, inter alia, guides CIFs considering the nature of crypto assets, to examine taking mitigating measures against operational, cybersecurity and reputational risks.
To sum up, the above are considered a crucial step forward driving towards the prudential treatment of crypto assets. We may now expect more on this field and an enhanced risk management in relation to crypto assets.
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1 EBA Report, ‘Report with Advice for the European Commission’, 09.01.2019
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