Custodial wallet / SaaS in Cyprus

Regulation (EU) 2023/1114 on Markets in Crypto-Assets (MiCA):

CASPs offering "custody and administration of crypto-assets on behalf of clients" will require authorization as a CASP under MiCA. CySEC will be the competent authority for authorizing and supervising CASPs in Cyprus.

Existing CASPs in Cyprus will need to adapt their operations and potentially re-apply or notify for authorization under MiCA.

Article 67: CASPs providing custody services must hold crypto-assets on behalf of clients separately from their own assets. They must ensure that client crypto-assets are not used for their own account and are identifiable from the CASP's own crypto-assets.

This means dedicated accounts or mechanisms to ensure client ownership is protected, particularly in case of the CASP's insolvency.

Article 67(4): CASPs providing custody services must either have a professional indemnity insurance policy or own funds equivalent to the potential liability risks arising from their activities. The amount of such insurance or own funds must be sufficient to cover losses that may arise from negligence, errors, omissions, fraud, or operational failures. ESMA will develop regulatory technical standards (RTS) to specify the minimum monetary amount of the professional indemnity insurance or own funds.

Article 67: CASPs must establish, implement, and maintain an internal policy on safeguarding client crypto-assets, which shall include appropriate technological and organisational measures to ensure the security of the crypto-assets.

This includes robust IT systems, secure storage of cryptographic keys, access controls, cybersecurity protocols, and business continuity plans. While not explicitly naming "cold storage," the emphasis on "appropriate technological and organisational measures" for safeguarding keys and assets strongly implies that cold storage (or equivalent highly secure offline methods) will be a standard requirement for significant holdings to meet MiCA's security obligations.

Application Process: Submission of a detailed application to CySEC.

Minimum initial capital requirements apply, typically tiered based on the scope of services. For custody and administration of crypto-assets, it falls under Class 2 services, requiring a minimum capital of €125,000.

Physical Presence: The CASP must have a physical presence in Cyprus and demonstrate substance.

Directors and key personnel must be "fit and proper," with adequate knowledge, experience, and integrity. For specific regulated entities, such as Cyprus Investment Firms (CIFs) under CySEC, at least four board members (two executive, two non-executive) must be present, with at least two executive directors managing day-to-day operations and physically residing in Cyprus. However, under general Cyprus company law, a private company requires at least one director, and a public company requires at least two directors.

Directive (EU) 2018/843 (5AMLD): Crucially extended the scope of EU AML rules to include crypto-asset exchanges and custodian wallet providers, requiring them to be regulated and subject to AML/CFT obligations.

CySEC Directive for the Prevention and Suppression of Money Laundering and Terrorist Financing (Regulatory Administrative Act 342/2021) for CASPs. This specific directive, issued by CySEC, outlines the detailed AML/CFT obligations for CASPs, including registration, operational requirements, and specific procedures.

CySEC Policy Statement PS-01-2021 currently outlines practical requirements for Crypto-Asset Service Provider (CASP) registration and ongoing compliance in Cyprus. However, this framework is in the process of being superseded by the EU's Markets in Crypto-Assets (MiCA) regulation, with CySEC mandating that existing CASPs in Cyprus must apply for authorization under MiCA by February 27, 2026.

Identification and Verification of Customer Identity:

Natural Persons: Full name, date and place of birth, nationality, permanent residential address, unique identification number (e.g., passport or ID number). Verification requires reliable, independent source documents and/or data.

Legal Entities: Company name, legal form, registration number, registered address, names of directors and company secretary, articles of association, and proof of legal existence.

Identification of Beneficial Ownership: For legal entities, identifying and verifying the ultimate beneficial owner (UBO) who directly or indirectly holds 225% or more of the shares or voting rights, or otherwise exercises control.

Source of Funds (SoF) / Source of Wealth (SoW): Especially for higher-risk clients or significant transactions, CASPs must take reasonable measures to establish the source of the funds and/or wealth involved.

Enhanced Due Diligence (EDD): Must be applied in high-risk situations, including:

Business relationships with Politically Exposed Persons (PEPs), their family members, or close associates.

Customers residing in or conducting transactions with high-risk third countries (as identified by the EU or FATF).

Non-face-to-face business relationships without adequate safeguards.

Transactions involving unusual patterns, high value, or complex structures.

Ongoing Monitoring: Continuously monitoring the business relationship and transactions to ensure consistency with the CASP's knowledge of the customer, their business, and risk profile. This includes monitoring for suspicious patterns or unusual deviations.

Internal Reporting: Employees must report suspicions to the appointed Money Laundering Reporting Officer (MLRO).

MLRO's Duty: The MLRO must evaluate the internal report and, if a suspicion is formed, submit an STR to the Unit for Combating Money Laundering (MOKAS), which is Cyprus's Financial Intelligence Unit (FIU).

Tipping-off: CASPs and their employees are strictly prohibited from disclosing to the customer or any third party that an STR has been or will be submitted, or that a money laundering investigation is underway.

Duration: Records must be kept for at least five (5) years from the completion of the transaction or the termination of the business relationship.

Internal Policies and Procedures: CASPs must establish and maintain robust internal AML/CFT policies, controls, and procedures, including a comprehensive risk assessment. These should be documented in an "AML Manual."

Money Laundering Reporting Officer (MLRO): Appointment of a suitably qualified and experienced MLRO at management level responsible for overseeing AML/CFT compliance.

Staff Training: Regular and ongoing training for all relevant employees on AML/CFT risks, regulations, and internal procedures.

Entity Targeted: eToro (Europe) Ltd (a major global trading platform also offering crypto services). Violation Type: Non-compliance with regulatory requirements related to organizational requirements, safeguarding clients' funds, and prevention of money laundering and terrorist financing (AML/CFT). This included deficiencies in operational risk management, internal controls, and measures taken to prevent money laundering and terrorist financing. Outcome: Imposition of an administrative fine. eToro (Europe) Ltd stated it has taken corrective measures.

Entity Targeted: Bitpanda GmbH (a well-known European digital investment platform operating as a registered VASP in Cyprus). Violation Type: Non-compliance with the AML/CFT Law, specifically regarding internal controls and measures for the prevention of money laundering and terrorist financing, and deficiencies in customer due diligence procedures. Outcome: Imposition of an administrative fine. Bitpanda GmbH took corrective measures.