Crypto-investment funds liquidity & CASP

In an article authored by our Crypto-Assets team, early in 2021, we shared the following expectations for the year:

  • more institutional interest in crypto assets along investment funds dedicated to cryptos to be launched. […]
  • the use of blockchain to grow exponentially, especially as the coronavirus pandemic has accelerated the digital transformation in all aspects of commerce, finance and everyday life.
  • the CBDC projects by a number of nations will accelerate, including a decision by the European Central Bank (ECB) on the digital euro […].

The article was titled Bitcoin, cryptos and blockchain and it feels that since the time of its publication a lot of things have happened. Yet, we are only talking about the products and by-products of an asset class that was not around when the financial markets collapsed in 2008.

In the following commentary, the Crypto-Assets team at SALVUS re-visits Bitcoin’s inception, the creation of a new asset class and CySEC’s crypto-assets services providers (CASP) regime. We add our latest assessment on the implication this registration, as a CASP, holds for crypto-liquidity and crypto-investment funds.

    1. Bitcoin and the birth of a new asset class
    2. Why regulate Crypto-assets (and fast)
    3. Crypto-investment funds under CySEC
    4. CASP and crypto-liquidity provision

1. Bitcoin and the birth of a new asset class

In the last decade or so, a new asset class has been created; the crypto-assets class.

It all started in 2009 with Bitcoin, the first project, a cryptocurrency, on the now widely understood and adopted technology of blockchain. Nowadays, the term cryptocurrency has become mainstream. Since that first Bitcoin was mined, many more cryptocurrencies, providing different offerings with unique characteristics have been developed. As with everything new that is this disruptive and scalable, there have been many instances of fraud, cyber theft, and pure mis-selling of these cryptocurrencies as investment products. Consequently, regulators are catching up to reduce these instances.

In 2018, the European Commission published a proposal on the Regulation of Markets in Crypto-Assets (MiCA). Since MiCA introduced and defined the term crypto-assets, it has become a widely used and the most appropriate term for an asset class category that encompasses all such digital projects including cryptocurrencies and beyond. Fast-forward to 2021, crypto-assets are still on a rollercoaster ride with regulation. The need for and the benefits from regulation in crypto-assets are by now obvious. As more and more regulators are accepting to register crypto-businesses, CySEC has become one of the latest to do so.

2. Why regulate Crypto-assets (and fast)

Blockchain, the technology used to develop crypto-assets projects, allows for several exciting capabilities and one that is the most controversial, anonymity.

The fact that the initial digital projects were all built around earlier concepts of new types of money, resulted in the first crypto-assets being cryptocurrencies. Cryptocurrencies mimic physical, government-regulated currencies which are also known as fiat currencies. Thus, the majority of the newly formed crypto-assets became an alternative medium of transacting, anonymously.

This anonymity capability of crypto-assets has attracted all sorts of crowds, pioneers, enthusiasts, and a segment interest in bypassing anti-money laundering (AML) laws, especially the well-known travel rule. Effectively, the travel rule mandates for the transactional parties to provide, obtain, store and report information on the recipient, the receiver, and the source of funds. In other words, it is a way of knowing who sends what assets and where such assets came from. Understandably, conformity with the AML travel rule is an indispensable requirement and will be part of any regulation in crypto-assets.

CySEC, the AML and counter-terrorist financing (AML/CTF) supervisor for crypto-asset operations undertaken in or from Cyprus, will now accept applications for the registration of crypto-businesses. This will enable crypto-assets services providers (CASP) to apply for registration, and as part of their application, the crypto-business will be subject to specific organisational and operational requirements with the said travel rule, along with other AML policies and procedures, being a particular area of scrutiny.

3. Crypto-investment funds under CySEC

CySEC is also the regulator for investment funds in Cyprus. Although the jurisdiction has been steadily growing, it still seems to be disregarded by the – even more rapidly – growing sector of investment funds investing in crypto-assets. We expect the CASP registration development to change the landscape positively in the following path forward:

  • By obtaining a CASP-status registration, the regulator and in turn the banks, will give credibility to the crypto-businesses that comply with the regulatory framework and AML laws. Complications in establishing such crypto-ventures shall be minimised.
    • It follows, that a regulated investment fund will be in a position to establish arrangements with such crypto-assets services providers registered in Cyprus, or the EEA, without any negative implication in their relationship with the regulator or the banks.
      • One such CASP arrangement concerns liquidity provision of crypto-assets for investment funds with a crypto-focused investment strategy

In short, crypto-investment funds should now, not find any obstacles in establishing themselves in Cyprus under CySEC, and in deploying their crypto-investment strategy in alignment with AML laws and the regulatory framework.

4. CASP and crypto-liquidity provision

Liquidity providers (LP) are key participants in financial markets and, unlike the more traditional markets of shares and bonds, the crypto space is still developing a reliable ecosystem of such providers. A liquidity provider acts at both ends, buying and selling particular assets at certain prices. It means that an LP is making the market, providing the all-important liquidity investment firms and investment funds required to hedge their risks and to deploy their investment strategies.

The crypto assets services providers (CASP) registration specifies three (3) classes of crypto-asset activities under CySEC, and two of them cover for this LP business model. Specifically, a combination of the crypto-asset activities

  • Within CASP Class #2, allow for the registration of LPs as institutional brokers business models and
  • Within CASP Class #3, allow for the registration of LPs as crypto-exchanges business models.
CASP ClassType of crypto-asset activity and serviceInitial Capital
Class 1CASP that provide investment advice50,000 EUR
Class 2CASP that provide investment advice
and/or
any of the following services:
• reception and transmission of client orders
• execution of orders on behalf of clients
• exchange between crypto-assets and fiat currency
• exchange between crypto-assets
• participation and/or provision of financial services related to the distribution, offering and/or sale of crypto-assets, including the initial offering
• placement of crypto-assets without firm commitment
• portfolio management.
125,000 EUR
Class 3CASP that provide investment advice
and/or
any of the following services:
• reception and transmission of client orders
• execution of orders on behalf of clients
• exchange between crypto-assets and fiat currency
• exchange between crypto-assets
• participation and/or provision of financial services related to the distribution, offering and/or sale of crypto-assets, including the initial offering
• placement of crypto-assets without firm commitment
• portfolio management
and/or
any of the following services:
• administration, transfer of ownership, transfer of site, holding, and/or safekeeping, including custody, of crypto-assets or cryptographic keys or means enabling control over crypto-assets
• underwriting and/or placement of crypto-assets with firm commitment
• operation of a multilateral system, which brings together multiple third-party buying and selling interests in crypto-assets in a way that results in a transaction.
150,000 EUR

It is for this reason and in our opinion, a tremendous by-product of the latest CASP registration development, that liquidity provision in crypto-assets for investment funds in Cyprus will flourish and in turn help crypto-investment funds gain legitimacy. This will do so by both, CASP registered in Cyprus and CASP registered in the EEA that have proceeded to notify CySEC they will be undertaking crypto-asset operations in Cyprus.

Therefore, we expect the recent CASP initiative by CySEC to further strengthen the overall investment funds jurisdiction and be part of the reason the assets under management in Cyprus continue to grow.

Let there be (crypto) liquidity.

SALVUS is ready to listen to the specific needs and challenges of your crypto-business.

Please feel free to contact us via email at [email protected] or call us at +357 7000 7898 if you would like to find out more about how a crypto-assets services provider (CASP) registration can be successfully obtained or would like any additional information. Our Crypto-Assets team looks forward to being of value.

#StayAhead

The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.

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