Consultation Papers were released on May 4th by the Cyprus Securities & Exchange Commission. These papers request that procedural requirements with Cyprus Investment Firms be enhanced, ensuring that client funds are protected in the growing blockchain industry. Proposed enhancements from CySEC include these firms having to engage with Central Banks, Authorised Financial Associations, or Credit Institutions when accepting client funds. This will ensure that a reliable and secured third-party will protect these funds until a time where withdraws are required.
Investment firms licensed with the Cyprus Securities & Exchange Commission have advised of the individual penalties for entities that don’t comply. Additional requirements under the Consultation Paper demand that monthly reports be provided, ensuring that CIFs don’t have ulterior motives with clientele funds. It should be noted that blacklisted sites previously implemented ulterior motives when they weren’t banned. CySEC will avoid that issue moving forward with these new procedural requirements.
The Cyprus Securities & Exchange Commission has permitted that CIFs can prioritize funds with Payment Service Provides, or Electronic Fund Institutions. These financial entities can only be engaged for the exclusive purpose of managing client funds. Those brokerages or firms that don’t comply with these procedural requirements will have to prove their proper diversification of client funds to avoid punishment. This will include performing Due Diligence Protocols bi-yearly to ensure that unknown financial errors can be resolved.
Formal objectives in the protocols are as followed: “According to paragraph 6(3) of the Directive, where a CIF deposits client funds with a bank or money market fund of the same group as the CIF, then the CIF must limit the funds that are deposited with any such group entity or combination of any such group entities so that the funds do not exceed 20% of all such funds.”
The second directive includes: “CIFs must notify the entity of par. 6(1) of the directive, with whom the clients’ account is opened, that they are obliged to keep clients’ funds separate from their funds. This communication should be kept in the CIFs’ records and be available for review by CySEC.”
The final listed requirement comprises of: “CIFs must demonstrate to CySEC that they have done everything in their powers to obtain separately titled accounts, including using another third party. If a CIF cannot demonstrate to CySEC that it has fully applied the abovementioned requirements, then CySEC may request from the CIF to segregate an equivalent amount of its funds in a separately titled account in another jurisdiction where the CIF can comply with the requirement of paragraph 4(1)(e) of the directive.”