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CySEC Announces the launch of a FinTech and RegTech Innovation Hub in Cyprus

14 Aug 2018

The Cyprus Securities and Exchange Commission (CySEC) issued an announcement on 27 July 2018 regarding the establishment of an Innovation Hub in Cyprus aiming to keep track of developments in the FinTech and RegTech industries and promote communication between all relevant stakeholders. This update outlines relevant details about this exciting new project as well as the EU-led initiatives that made it possible.

The launch of a new Innovation Hub

The Cyprus Innovation Hub, which is intended to become operational in September 2018, has been designed to permit supervised and non-supervised entities in innovative or new FinTech industries to acquire ongoing access to CySEC staff and resources. It is intended that the platform will enable entities to comprehend and consequently implement applicable regulatory requirements that may be relevant to the products they seek to bring to the market.

In its announcement CySEC highlighted that FinTech entities will be able to gain access to specialised regulatory expertise, industry and academic roundtables (a copy of the announcement is here.) They will have the ability to revert to CySEC with relevant feedback, pointing out any risks and also the benefits of these new innovative investment products and platforms, using Distributed Ledger Technology (DLT), ie blockchain. In turn this will influence CySEC’s decision making process and simultaneously furnish CySEC with the opportunity to cultivate rules and regulations which are more suitable, accurate and up to date.

As mentioned by the chairwoman of CySEC Demetra Kalogirou, “The establishment of the Innovation Hub marks an important and exciting step for CySEC’s supervision of new and innovative FinTech companies in Cyprus. In promoting closer ties with these fledgling but fast-growing industries, we aim to best protect investors by fully understanding the risks and benefits these new products bring.”

More details are due to follow from CySEC soon as regards the precise aspects and qualifying terms for the project.

Cypriot and EU FinTech initiatives

The Innovation Hub has been drawn up following close cooperation between CySEC and other competent authorities in Cyprus including the Central Bank of Cyprus and the Ministry of Finance. Harneys have, from the outset, been actively involved with these authorities and other stakeholders in Cyprus with a view to assist the jurisdiction, tapping into the considerable interest from regional industry players keen to set up crypto and FinTech businesses on the island.

At the same time, and in light of Cyprus’ position as a member state of the EU, it is clear that the Innovation Hub draws considerable inspiration from programmes and initiatives pursued by institutions at EU level. Chief among these programmes has been the EU’s FinTech Action Plan, announced by the European Commission in March 2018.

Under the Plan the Commission has acknowledged the rapid advances of FinTech and RegTech technologies, which in turn has led to significant structural changes in the financial sector. Equally it has been noted that a key risk is the possibility of excessively rigid regulatory frameworks in the EU which in turn may lead to a risk of “undesired outcomes”. Further, the European Supervisory Authorities (ESMA, EBA and EIOPA, collectively the ESAs)[1] have been looking to revise the suitability of regulatory frameworks in an attempt to assess developments; mitigate risks and enhance security and integrity of emerging technologies in the aforementioned sector.

Europe’s 23 Step FinTech Action Plan

Within the Action Plan the European Commission has set out 23 steps to encourage in a safeguarded manner the adoption of new FinTech solutions, and encourage innovation in the financial sector for the benefit of EU economy, citizens and industries.

The key recommendations, as outlined by the Commission in its press release of March 2018, comprise the following:

  • Urging the ESAs by Q1 of 2019 to record their supervisory practices and authorising approaches for innovative FinTech business models which will enable the Commission to supervise same and consider on the issuance of relevant guidelines;
  • Establishing an expert group to assess any unjustified regulatory obstacles to financial innovation in the financial services regulatory framework;
  • Establishing an EU FinTech Laboratory where, according to Valdis Dombrovskis, European and national authorities will engage with tech providers in a neutral, non-commercial space.[2]
  • Establishing an EU Blockchain Observatory and Forum aiming to assess on the challenges presented by crypto assets and distributed ledger technology and record the strategies to advance new developments in cloud computing and artificial intelligence.
  • Launching a blueprint with best practices on regulatory sandboxes, based on relevant guidance from the key competent ESAs;
  • Proposing the issuance of an EU Regulation on investment-based and lending-based crowdfunding service providers (ECSP) for business aiming to set a proportionate framework allowing crowdfunding platforms to function cross-border under an a unified passporting regime;
  • Monitoring developments in crypto-assets and Initial Coin Offerings (ICOs), and assessing whether regulatory action is required at EU level;
  • Other initiatives announced include a consultation on the digitisation of regulated information published by listed companies on EU regulated markets (by Q2 2018); and the creation of workshops to develop information-sharing of cybersecurity.

Across Europe, the Commission noted that 13 member states have established ‘FinTech facilitators’, being either innovations hubs or ‘regulatory sand-boxes’ (as at March 2018). Cyprus has now added itself to that growing collectivity.

Food for thought

The FinTech Action Plan in many ways is similar to the action plans established by the EU under their “Lamfalussy Process” which in turn led to seminal components of pan-EU regulation, comprising MiFID[3] and the creation of the European Security and Markets Authority. In our view, and in light of the rapid development of FinTech in numerous industries, as well as a number of diverse approaches taken at member state level, it seems that we are at a similar cross-road in European legislative development.

Harneys’ Role

Harneys actively engages in the area of Financial Technology and Innovation and advises some of the world’s top institutions in the jurisdictions we cover, including Cyprus. We welcome the formation of the Innovation Hub in Cyprus as an exciting step which we hope will foster more effective regulation and the provision of assistance and advice to prospective clients actively engaged in this industry.

[1] ESMA: European Securities and Markets Authority, EBA: European Banking Authority, EIOPA: European Insurance and Occupational Pensions Authority.

[2]Mr Dombrovskis is Vice-President for Financial Stability, Financial Services and Capital Markets Union.

[3] MiFID: Markets in Financial Instruments Directive, currently known as MiFID II: Directive 2014/65/EC.