Introduction
Primary legal and regulatory considerations
Introduction
This update summarises the relevant considerations when launching an initial coin offering (ICO) through Cyprus. For this purpose, it is assumed that the ICO is structured through Cyprus as a Cypriot company. Alternative vehicles may also be appropriate depending on the intended structure of each individual ICO.
Unlike many other popular jurisdictions for ICOs, Cyprus is an EU member state and, as such, founders must comply with the panoply of single market regulation. However, as they are largely unregulated at present, the benefits of launching an ICO in Cyprus can be significant. These include:
- an EU base;
- a central time zone;
- access to the jurisdiction's vast array of tax treaties; and
- white-list status among tax authorities globally.
Primary legal and regulatory considerations
The following laws are the most relevant to structuring an ICO through Cyprus:
- the Payment Services Law 2009, which implements the EU Payment Services Directive (2007/64/EC);
- the Investment Services and Activities and Regulated Markets Law 2007, which implements the EU Markets in Financial Instruments Directive (2004/39/EC);
- the Prevention and Suppression of Money Laundering and Terrorist Financing Law 2007, which implements the Third EU Anti-money Laundering Directive (2005/60/EC);
- the Electronic Money (E-Money) Law 2012, which implements the EU E-Money Directive (2009/110/EC);
- the Prospectus Law 2005, which implements the EU Prospectus Directive (2003/71/EC);
- the Alternative Investment Fund Managers Law 2013, which implements the EU Alternative Investment Fund Managers Directive (2011/61/EU);
- the Alternative Investment Funds Law 2014;
- the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS); and
- EU Regulation 910/2014, which regulates the use of electronic identification.
This update provides a short description of the issues which each law seeks to address. The extent to which each such law is relevant to an ICO will depend on the ICO's specific terms and structure.
Payment Services Law
The main purpose of the EU Payment Services Directive has been to address the fragmentation of the European payment services market and increase competition in the payment services sector. Accordingly, the Payment Services Law regulates all types of electronic and non-cash payment, such as credit transfers, direct debits, card payments and mobile and online payments.
In certain circumstances, an ICO may constitute the provision of a payment service.
Investment Services and Activities and Regulated Markets Law
Under the Investment Services and Activities and Regulated Markets Law, a party cannot carry on or purport to carry on investment services and activities on a professional basis unless it holds a licence granted under the Investment Services and Activities and Regulated Markets Law. 'Financial instruments' are defined in a list of instruments common in today's financial markets. However, there is no specific mention of digital tokens or cryptocurrencies. Each ICO will need to be evaluated on its merits, although it seems that many ICOs would not be caught within the scope of the Investment Services and Activities and Regulated Markets Law, as they would not amount to financial instruments as defined. However, ICOs which offer tokenised securities may be caught within the scope of the Investment Services and Activities and Regulated Markets Law.
Prevention and Suppression of Money Laundering and Terrorist Financing Law
The Prevention and Suppression of Money Laundering and Terrorist Financing Law needs careful consideration with respect to all ICOs launched through Cyprus. The law and directives issued by the relevant supervisory authorities focus primarily on the regulated sector in Cyprus and prescribe certain policies and procedures to be put in place by Cyprus-regulated entities with respect to money laundering. Given the general application of the Prevention and Suppression of Money Laundering and Terrorist Financing Law, ICO teams are advised against thinking that if their intended ICO falls outside the ambit of the law, they need not concern themselves with anti-money laundering issues. Whatever the final determination is, there are solutions available in the market to mitigate against any person launching the ICO from falling foul of the Prevention and Suppression of Money Laundering and Terrorist Financing Law.
The Prevention and Suppression of Money Laundering and Terrorist Financing Law implements the Third EU Anti-money Laundering Directive, which has recently been replaced by the Fourth EU Anti-money Laundering Directive (2015/849/EC). The Fourth EU Anti-money Laundering Directive is due to be implemented in Cyprus towards the end of 2017. Significantly, on July 5 2016 the European Commission adopted proposals for legislation to amend the Fourth EU Anti-money Laundering Directive (these amendments being referred to informally as the 'Fifth EU Anti-money Laundering Directive'), which will require cryptocurrency exchanges and wallets to conduct know-your-customer checks and identify suspicious activity by users and investors. As such, Cypriot ICOs are expected to be expressly caught by the anti-money laundering regime in the near future.
E-Money Law
The EU E-Money Directive modernises the regulatory framework applicable to electronic money institutions and addresses a number of inconsistencies which have disrupted the level playing field between payment services and e-money institutions. The E-Money Law implements this regime in Cyprus and removes obstacles which previously prevented the entry of new players into the sector.
As with the Payment Services Law, the E-Money Law may impose ICO regulation in certain circumstances.
Prospectus Law and collective investment schemes
The Prospectus Law requires that a prospectus be published in respect of 'a public offer of securities', which means a communication to persons in any form and by any means that presents sufficient information on the terms of the offer and the securities to be offered so as to enable an investor to decide to purchase or subscribe to these securities. Determining whether the tokens offered in an ICO can be considered securities in this respect will be key. To the extent that they are, certain exemptions may apply which do not require a prospectus to be published.
Undertakings for collective investment in transferable securities will not be relevant in ICOs, but the Alternative Investment Funds Law may apply where an ICO operates as a collective investment scheme offering equity or equity-like instruments.
FATCA and CRS
FATCA and the CRS relate to the automatic exchange of information between jurisdictions for the purposes of combating tax evasion. The extent to which these pieces of legislation will be relevant to an ICO will depend on the structure and, in particular as regards FATCA, the beneficial ownership of the company acting as issuer in the ICO. Although not directly relevant to the launch of an ICO, these issues need to be considered when preparing an ICO.
EU Regulation 910/2014
This regulation is relevant to determining the requirements for accepting electronic signatures or purchase agreements for tokens. The ICO subscription process must comply with the regulation's requirements.
Contract law
To the extent that the purchase of tokens will be governed by Cypriot law agreements and terms and conditions, Cypriot contract law will need to be observed. Contract law in Cyprus is governed by Cap 149 of the Contract Law, the common law of the Cypriot courts and English common law principles adopted in Cyprus. Cypriot contract law is based on English contract law and offers a flexible and commercially sensitive regime under which business can be conducted.
For further information on this topic please contact Aki Corsoni-Husain or Elina Mantrali at Harneys Aristodemou Loizides Yiolitis LLC's Limassol office by telephone (+357 25 820020) or email ([email protected] or [email protected]). The Harneys website can be accessed at www.harneys.com.