articles | 26 February 2014

Central Bank says Bitcoin is not illegal but warns of associated risks

The Central Bank directly acknowledged for the first time recently that bitcoin is not illegal, but again highlighted the risks of using an unregulated digital currency.

“Bitcoin is not illegal, but at the same time neither is it subject to control or regulation,” sources at the Central Bank said. The sources, who did not wish to be named, said that other than warning people of the potential risks involved there was not much else the Central Bank can do. The banking regulator has previously twice issued a warning to consumers, saying there are risks involved in trading in virtual currencies, in line with a December ruling issued by the European Banking Authority (EBA). This hesitation has resulted in the Cyprus Stock Exchange and the Securities and Exchange Commission (CySEC) getting cold feet, despite initial eagerness to allow bitcoin-traded products, such as derivatives.

The Central Bank warnings came just as bitcoin marketers Neo & Bee were poised to launch their business here. Following a media blitz, Neo & Bee opened its flagship branch in Nicosia. The company has already partnered with a number of businesses accepting payment in bitcoin, including So Easy Stores, LTV and Telemarketing. Neo & Bee have in the meantime been seeking some stamp of approval from regulators, something which would boost their status. They’ve met with CySEC and talked bitcoin, although it’s understood that the company’s overtures to the Central Bank have so far gone unheeded.

The Central Bank seems not to know what exactly to do with bitcoin, which is classed neither as a currency in the conventional sense, nor as a financial instrument – and hence is beyond the realm of regulation. And when it comes to virtual currencies, Cyprus law draws a blank. “It’s a grey area,” an official at the Central Bank said.

Neo & Bee want to convince CySEC to green-light trading in bitcoin-based financial derivatives – a first globally. But in order for derivatives to be based on bitcoin, bitcoin first needs to be classed as a financial instrument or at least a commodity. But even before that, a financial instrument must be deemed as a currency, and central banks alone have that discretion. It’s unlikely, however, thatthe Central Bank of Cyprus would endorse bitcoin before the European Central Bank gives the digital currency the nod or, at the least, issues some guidelines.

CySEC chairwoman Demetra Kalogirou said their hands are tied as they must comply with MiFID (Markets in Financial Instruments Directive) and with the rules of the European Securities and Markets Authority (ESMA). Currently MiFID does not address virtual currencies. But some time in the next few weeks CySEC officers will take part in ESMA panel discussions on bitcoin. “Without the OK from MiFID or ESMA, there’s not much we can do. CySEC cannot on its own decide that bitcoin is a financial instrument,” Kalogirou said. One of the concerns is that, precisely because of the lack of regulation, bitcoin is vulnerable to money laundering. However Kalogirou conceded that Neo & Bee in Cyprus do want to be regulated. For their part, Neo & Bee say they’re enforcing their own AML (Anti-Money Laundering) and KYC (Know Your Customer) protocols that are in line with EU standards.

But authorities counter that self-enforcement may not be enough. Danny Brewster, CEO of Neo& Bee, said that if neither the Central Bank nor CySEC will regulate their business, perhaps an entirely new regulatory body can do the job. This body could be financed by business trading in bitcoin, he added.

As authorities and the public alike grapple with bitcoin, a banker attacked the crypto-currency, saying its adoption could chip away at Cyprus’ already tattered reputation as a financial centre. In an email, and evidently alluding to Neo & Bee, former vice-chairman of Bank of Cyprus Evdokimos Xenofontos said: “In Cyprus it appears nobody can stop them and through their bitcoin promotion Cyprus is being promoted as the champion of innovative money laundering”. He added: “As a payment system or banking service bitcoin must be regulated by the Central Bank. As an investment product it must be regulated by CySEC. Its prospectus to the public must be approved by CySEC.” Xenofontos beamed his email out to a host of officials, including the Attorney-general, the Central Bank governor, the finance minister, CySEC and several MPs asking them to take action.

But financial industry sources dismissed these concerns as misguided. They said that Neo & Bee do not require permission to deal in payments or conduct bitcoin exchanges. They also said Neo & Bee was not obliged to submit its prospectus to CySEC because, although the company had raised money from investors, it did so by using crowd-funding in the UK.

Source: Cyprus Mail

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