On-shore VASP in Cyprus

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 Directive for the Register of Crypto-Asset Service Providers:

Application Process: Submission of a detailed application to CySEC.

The entity must meet local management and control tests to maintain its status, not strictly be a legal person established in Cyprus.

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.

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.

Organisational requirements in Cyprus continue to include robust internal controls and compliance with data protection laws, while effective risk management systems, IT systems, security mechanisms, and business continuity plans have been significantly enhanced and made more prescriptive through the Security of Networks and Information Systems Law (N.89 (I)/2020 as amended by N.60 (I)/2025) implementing the NIS2 Directive, which mandates specific technical, operational, and organisational measures for essential and important organisations with compliance by October 2024.

AML/CFT Compliance: Comprehensive AML/CFT policies, procedures, and internal controls, including customer due diligence (CDD), ongoing monitoring, record-keeping, and suspicious transaction reporting.

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

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.

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.

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.

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

Identification and Verification of Customer Identity:

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:

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).

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

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.

Cyprus introduced a dedicated crypto tax framework via new Article 20E of the Income Tax Law, effective January 1, 2026, replacing the previous application of existing tax laws by analogy.

Tax treatment in Cyprus is determined by objective 'substance over form' rules requiring genuine economic activity and demonstrated management & control, rather than by the holder's subjective intention (e.g., short-term vs. long-term trading).

If a company (resident in Cyprus) engages in cryptocurrency trading as its primary or significant business activity, all profits derived from such activities are subject to the 12.5% corporate income tax rate.

From 2026, profits from crypto mining and staking carried out on a commercial or professional basis in Cyprus are subject to a separate flat tax rate of 8% under Article 20E, which replaces the progressive income tax rates for such gains.