CYPRUS Law and Practice Contributed by: Angelina Fitoz, Svetlana Remezova, Darya Averyanova and Sude Dogan, Lawitt Buro
the activity is treated as intermediated and requires CASP authorisation. Centralisation Markers Providing a front-end interface, retaining govern - ance powers or receiving protocol fees may bring the operator within the licensing perimeter. DeFi cannot be used to avoid regulation where functional control exists. SecurityTokens in DeFi If a platform enables trading of security tokens, MiFID II applies regardless of structure. Such activity requires authorisation as a Cyprus operation under the EU DLT Pilot Regime. AML and Tax Overlay Even where a protocol itself falls outside MiCA, Cyprus-based on-ramps must comply with Travel Rule obligations. Gains realised through DeFi activity remain taxable under the general crypto tax frame - work. 10.10 Regulation of Funds In Cyprus, crypto-focused funds operate under the collective investment regime supervised by CySEC together with the new statutory crypto tax framework. Regulatory Structure Most vehicles are AIFs or RAIFs aimed at professional or well-informed investors. Retail access remains lim - ited. The RAIF is widely used because it is supervised via its external AIFM rather than directly authorised. AIFMD II now requires stronger liquidity tools for volatile digital assets – eg, redemption gates or side pockets. Custody and Valuation Funds must appoint an independent depositary, which may delegate technical custody to a MiCA-authorised CASP. Robust valuation policies are required, includ - ing clear NAV methodology and treatment of forks or airdrops. Tax Treatment From 1 January 2026, gains from crypto disposals are taxed at a flat 8% instead of the standard corporate
rate. Losses are ring-fenced to crypto gains within the same year. AML and Reporting Crypto funds are obliged entities under AML law and must comply with Travel Rule and DAC8 reporting requirements, including automatic exchange of inves - tor and transaction data. 10.11 Virtual Currencies In Cyprus, the terms “virtual currency” and “block - chain asset” were historically used interchangeably, but the legal terminology has now aligned with the EU framework. As of 2026, “crypto-asset” is the standard term under MiCA and the updated tax regime. Evolution of Terminology Under AMLD5, the term “virtual currency” focused mainly on digital means of exchange. With MiCA and the 2026 tax reform, this has been replaced by the broader concept of “crypto-asset”, defined as a trans - ferable digital representation of value or rights using DLT. Scope of Crypto-Assets The crypto-asset category includes utility tokens, asset-referenced tokens (ARTs), electronic money tokens (EMTs) and security tokens. Security tokens fall under MiFID II, while other categories are governed by MiCA and, where relevant, the e-money regime. Tax Alignment From 1 January 2026, most non-security crypto-asset disposals are taxed at a flat 8%. Crypto-assets are not treated as fiat currency and do not benefit from foreign CySEC now uses MiCA terminology in all registers and reporting. The term “virtual currency” remains relevant only in legacy AML documentation created before the transition. 10.12 NFTs exchange tax exemptions. Regulatory Convergence In Cyprus, NFTs are assessed using a fungibility and financial use test. Their regulatory status depends on whether they function as unique digital collectibles or as financial products.
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