CYPRUS Law and Practice Contributed by: Angelina Fitoz, Svetlana Remezova, Darya Averyanova and Sude Dogan, Lawitt Buro
Reclassification Risk (Collective Investment) If assets are pooled and actively managed with an expectation of return, staking arrangements may be reclassified as an alternative investment fund, trigger - ing AIFMD requirements. Tax Distinction Staking rewards are treated as ordinary income. Sub - sequent disposal of rewarded tokens falls under the crypto disposal tax regime. 10.7 Crypto-Related Lending Crypto-lending in Cyprus is no longer treated as a purely contractual activity. In 2025–26 it is regulated according to its economic substance, particularly where it resembles custody, investment pooling or Lending is not a standalone MiCA service, but most providers fall within the CASP regime because they hold or administer client assets. This triggers segrega - tion, prudential and conduct obligations, and restric - tions on marketing “interest” in a way that could cre - ate conflicts of interest. Credit and Consumer Law Crossover Where lending involves EMTs or fiat credit backed by crypto-collateral, payment or banking rules may apply. Retail lending additionally triggers consumer credit requirements, including clear pre-contractual disclosures and fair margin and liquidation terms. Yield and Pooling Risk If client assets are pooled and deployed for a shared return (eg, DeFi yield strategies), the structure may be reclassified as an alternative investment fund, bringing it within the AIFMD framework. Tax Treatment (2026) Lending yield is generally taxed as ordinary income, while liquidation of collateral is treated as a taxable disposal under the separate crypto gains regime. Disclosure Expectations credit provision. MiCA Perimeter CASPs offering “earn” or lending programmes must ensure clear risk disclosure, transparent liquidation
mechanics and credible asset-reserve practices to prevent hidden rehypothecation. 10.8 Cryptocurrency Derivatives Cryptocurrency derivatives in Cyprus are treated as financial instruments, not as ordinary crypto-assets. They fall under MiFID II (Law 87 (I)/2017), not MiCA. Licensing Any firm offering crypto-CFDs, futures or options must be authorised as a Cyprus investment firm (CIF). A MiCA CASP licence alone is insufficient. Providers are subject to full prudential supervision under the IFR/IFD framework, including capital and risk-management requirements. Retail Protections CySEC applies strict safeguards to retail clients: lev - erage is capped at 2:1, margin close-out rules are standardised, negative balance protection is manda - tory, and trading incentives are prohibited. Reporting and Market Abuse Crypto-derivatives fall under the Market Abuse Regu - lation and MiFIR reporting regime. Firms must report transactions and operate surveillance systems to detect manipulation affecting either the derivative or its underlying crypto-asset. Tax Treatment (2026) Unlike spot crypto gains taxed under the separate 8% regime, profits from crypto-derivatives are generally treated as trading income and taxed at ordinary cor - porate or personal income tax rates. 10.9 Decentralised Finance (DeFi) As of February 2026, DeFi in Cyprus is regulated using a strict “substance over form” approach. Purely tech - nical decentralisation does not remove regulatory obli - gations if control or economic benefit can be identi - fied. Regulatory Status Under MiCA MiCA excludes services provided in a fully decen - tralised manner with no intermediary. In practice, this exemption is interpreted narrowly. If an identifiable person, foundation or company exercises control (eg, holds admin keys, upgrades contracts, earns fees),
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