Technologies such as DLT, 5G networks, Artificial Intelligence and the Internet of Things have already crept into transforming the world we were used to living in. In particular, DLT gained significant momentum in the international arena as a key technology that could allow the public to control their data, enhance democratization with decentralized avenues and bypassing intermediaries, and to execute transactions through smart contracts. From the outset, Cyprus intended to regulate DLT aspects and its strategy aimed to promote the development of DLT through innovation, pilot applications and close cooperation between the private and public sectors, with the ultimate goal of establishing an attractive business environment for companies involved with DLT.
Defined Terms:
“Block” data structure comprising ordered ledger records and a block header.
“Blockchain” a distributed ledger system with confirmed blocks, organised in a sequential chain using cryptographic techniques for linkage.
“Cyprus” Republic of Cyprus.
“CySEC” the Cyprus Securities and Exchange Commission.
“Consensus” agreement among nodes that a transaction is valid and that there is a consistent set and ordering of the transactions stored in the distributed ledger.
“Digital asset” asset that exists only in digital form or which is the digital representation of a physical asset (digital doppelgänger).
“Distributed application” application that runs on a distributed system.
“Distributed ledger” a ledger that is shared and synchronized, and distributed across a set of nodes. It is designed to be tamper evident, append only and immutable containing confirmed transaction records Interoperability: ability of two or more systems or applications to exchange information and to mutually use the information that has been exchanged.
“MiCA” Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Markets in Crypto-assets, and amending Directive (EU) 2019/1937.
“Oracle” (also referred to as distributed ledger technology (DLT) oracle)” a service that updates a distributed ledger using data from outside of a distributed ledger system.
“OTC” Over-the-counter.
“Permissioned” requiring an identity, authorization and access according to an access control policy to do a particular thing or things.
“Permissionless distributed ledger system” distributed ledger system wherein its nodes and DLT users do not need to be permissioned to do a particular thing or things.
“Private distributed ledger system” distributed ledger system in which a controlled and limited set of nodes communicate with, and are discoverable only by, one another in the operation of the system.
“Public distributed ledger system” distributed ledger system in which any node can participate in the operation of the system.
“Smart contracts” contracts whose terms are recorded in a computer language instead of legal language. Smart contracts can be automatically executed by a computing system, such as a suitable distributed ledger system.
“Time Stamp” time variant parameter which denotes a point in time with respect to a common time reference.
“Token” representation of a digital asset, held within a distributed ledger system.
EU Initiatives
The European Blockchain Partnership was created on the 10th April 2018 to enhance innovation related to Blockchain technology aiming to preserve its international competitive advantage. Moreover, in the political arena, the European Parliament, recognising the potential and opportunities of DLT, adopted a resolution on DLT and blockchain on the 3rd October 2018. The resolution calls for an innovative legal framework that will be developed based on the principle of technology neutrality, while including the necessary safeguards to ensure consumer, investor and environmental protection, legal certainty, transparency, and facilitating the necessary actions in preventing and combating corruption, tax evasion, unlawful payments, anti-money laundering and the misappropriation of assets.
Cyprus Strategy
Cyprus signed the European Blockchain Partnership on the 4th June 2018 and signed the joint ‘Declaration of the Southern Mediterranean Countries on Distributed Ledger Technologies’ on the 4th December 2018, with the aim to enhance cooperation in the digital sector and to render Southern Europe a leader in emerging technologies including DLT. The Cyprus strategy sought to build upon these efforts and aimed to promote a reasonable understanding and due implementation of DLT and blockchain technology in Cyprus.
Legal and Regulatory Framework
The legislation and regulation of DLT which should be aligned with European law should also be balanced and proportionate, albeit permitting room for innovation and growth and simultaneously offering protection to investors and consumers. In other words, the applicable legal and regulatory framework must be based on the principle of technological neutrality while providing legal certainty, especially toward the encouragement of smart contracts use in Cyprus. Needless to stress that this framework should address any potential risks arising from using DLT applications in any criminal activities.
According to The European Supervisory Authorities Joint Report on “FinTech: Regulatory sandboxes and innovation hubs” there are initiatives in Cyprus promoting DLT in the financial sector, as well as some start-ups that are using or exploring the use of DLT. In addition, CySEC established an Innovation Hub in October 2018. The aim of the Innovation Hub is to provide a dedicated point of contact for firms to raise enquiries with competent authorities on FinTech-related issues and to seek non-binding guidance on the conformity of innovative financial products, financial services or business models with licensing or registration requirements and regulatory and supervisory expectations.
Recent developments
Despite the aforesaid efforts and prolonged consultations that took place between national public and private organisations, the proposed legislation, namely, the Distributed Universal Technology Act of 2021, concerning DLT has recently been rejected by the Cyprus Ministry of Finance pursuant to the negative feedback of the Legal Service. Reasons put forth related to unconstitutionality and redundancy given the forthcoming EU MiCA Regulation. This has resulted in shocking disappointment and negative sentiment from all stakeholders. Particularly considering that during the past few years, a myriad of international technology companies have migrated to Cyprus to set up their base as a gateway to the EMEA region.
Future expectations
Consequently, Cyprus now anticipates the final vote of MiCA on 19 April 2023 by the EU competent authority ultimately to potentially rely on MiCA to regulate issuers of unsecured cryptocurrencies and trading venues (OTCs) or wallets which hold cryptocurrencies to safeguard investors. It therefore remains to be seen how DLT will further be regulated in Cyprus although it may only be a matter of time considering developments at a European and international level.
Individuals and corporations engaged in the DLT, blockchain and cryptocurrency community should remain optimistic since there seems to be only one way forward in this environment. Particularly considering that various major transactions, including for instance in Cyprus real estate, can be facilitated using crypto assets through a crypto asset exchange OTC with a qualified custodian holding the funds in escrow.
Disclaimer: This article is intended for informational purposes only and should not be construed as legal advice. For specific legal guidance on Cyprus legal matters, it is advisable to consult with a qualified legal professional. If you have any questions or require any legal advice or assistance, please do not hesitate to contact us at contact@kourtellos.com.