The Legal Status of the Cryptocurrencies and the Regulatory Framework in the Republic of Cyprus and the TRNC

Cryptocurrency is a form of virtual currency that is decentralized i.e neither backed by central bank nor funded by any government. Cryptocurrencies operate via peer-to-peer exchanges, depending on no financial institution for the transactions. You can find more details on the mechanism of cryptocurrencies in our ‘What is a Cryptocurrency and How It Differs from the Conventional Concept of ‘Money’’ article available on our website.

Cryptocurrencies provide certain benefits over traditional currencies, including faster transactions, lower transaction fees and certain tax benefits. They provide a novel degree of convenience to consumers. Due to the anonymous nature, entities or individuals are able to use this system to transfer funds without interference of traditional financial systems. On the other hand, they present challenges to law makers with respect to money laundering and tax evasion issues, while also posing certain risks to consumers and investors.

There is a massive gap in TRNC law concerning cryptocurrency i.e there is absolutely no mention of it anywhere in the legislation. Despite this, many Bitcoin and various crypto trading centers are becoming available everywhere around TRNC, allowing trade and transactions to take place here. Since there is no legislation providing what the traders can and cannot do, the authorities in TRNC cannot determine what the traders and exchange offices are allowed to do and also what is forbidden. What is even more interesting that there seems to be no robust effort to update the legislation to conform with the ever-advancing digital world.

I believe there are some steps that can be taken to conform with the global standards, without having to make drastic changes that will require too much time and effort. The Banking Law of TRNC does not define ‘money’ at the initial definitions section. A potential legislative reform adding the concept of ‘money’ into law and defining cryptocurrency as a form of money would undoubtedly place cryptocurrency into the regulatory framework governing monetary transactions. On the other hand, it is doubtful how wise it would be to incorporate cryptocurrencies into Banking Law when the most prominent quality of cryptocurrencies is their decentralized operation without a bank or institution. Due to the decentralized nature, instead of incorporating cryptocurrency into Banking Law, it might be wiser to create an Investment Law. This new legal instrument can be made to cover both traditional forms of investment while providing a legal backup for novel investment models such as investing in digital currencies. The US is planning to enact Cryptocurrency Act 2020, an entire legal instrument dedicated for cryptocurrencies. While this seems too unrealistic for the TRNC for the time-being it shows the possibility of introducing new forms of money into public space through legislation. Conclusively, in Northern Cyprus, there exist no legal framework whatsoever, making Northern Cyprus both a gold star and a high-risk endeavor in the field of crypto investment.

In the Republic of Cyprus there is also no separate legal instrument governing cryptocurrencies. However, they are perceived as financial instruments and are said to be covered under the Cypriot Investment Law. Central Bank of Cyprus’s statement on the issue is that “bitcoin is not illegal, but, at the same time, neither it is subject to control or regulation”. Thus, we can say that in Cyprus it is legal to buy, mine and exchange Bitcoin. Currently, crypto trading in Cyprus is bound by the rules that general civil law provides.

Cryptocurrencies, mostly Bitcoin, has already caught the attention of law enforcement agencies, legislators, regulators and tax authorities. They are trying to comprehend how they can fit it into already existing regulatory frameworks. However, it continues to worry the authorities as the current legal system may not be adequately mature or adapted to govern virtual forms of money. Currently in Cyprus, as in most countries without specific legislation, the legality of Bitcoin activities depends on what you do with it; if you don’t trade for something illegal, mere trading does not break laws.

In Cyprus, under the Investment Law there exists regulatory instruments requiring authorization of investment related services. However as mentioned there are no crypto-specific regulatory instruments governing this sort of investment. Despite this lack of specific regulation, the Central Bank of Cyprus asserts that investment activities concerning virtual currencies should also be licensed in accordance with the law. Therefore, it is expected from cryptocurrency traders and ICO organizers to be in compliance with the present regulatory framework where applicable.

Cyprus has created a Center of Innovation with various tech companies as members. Among these companies there are blockchain user financial asset companies, with digital money investments. The aim of this center is to facilitate connection between regulators and investors so that the regulating authorities can work on regulations conforming with crypto trading. The goal is to create regulated financial ecosystem that protects investors while supporting tech and finance firms. CySEC – the Cypriot monetary regulatory agency- is the front runner in forming a regulatory framework for crypto trading and is currently investigating technical, legal and administrative aspects for creating this framework. However this aim is still at discussion stage.

The main concern governing both the authorities in TRNC and the Republic of Cyprus is the tax issues and the potential risk of money laundering. This is due to anonymous and decentralized nature of the cryptocurrency and the lack of a financial intermediary that can be overseen by Governments. This sort of a technological advancement will continue to exist; thus, instead of excluding crypto trading from legal platforms and thus making it attractive for criminal activities, the wisest form of action would be to find a way to cooperate with this innovation. For instance, the US is planning to introduce a specialized legislation i.e The Cryptocurrency Act 2020. They aim to introduce classifications of tokens resting on a cryptographic ledger, rules, regulations and of course, regulatory mechanisms overseeing transactions of digital assets – which if you ask me is a questionable way of regulating assets whose primary difference is a decentralized nature. Conclusively, I believe the wisest act for most countries, namely the TRNC, would be to recognize the existence of digital currencies and incorporate it to the current legislation until the governments expertly draft crypto-specific legislation.