The Cyprus Securities and Exchange Commission (CySEC) has released a policy statement on cryptocurrency assets, calling on service providers to comply with regulations and warning investors of the risks involved.

The policy statement, released on Monday, notes that the commission’s intentions were to foster innovation in the financial technology space while adhering to legislation pertaining to money laundering and illicit funds.

“This initiative will mitigate some, but not all, of the risks involved in investing in cryptocurrency assets, although these are expected to be addressed at a later time by the European Union and under the relevant legislation,” CySEC said, explaining that it will begin evaluating and processing applications by prospective cryptocurrency asset service providers. Interested parties could find out more from its policy statement on the commission’s website.

The policy statement lists the rules for cryptocurrency asset service providers as these are based on existing legislation on combating money laundering and terrorist financing, as well as the European Commission’s directives on the matter.

“Our timely communication with cryptocurrency companies, facilitated by the European Central Bank’s Innovation Lab framework, aiming to support innovative businesses and to provide consultation to emerging financial technology (fintech) providers, has made our expectations clear,” CySEC president Demetra Kalogerou said.

“Our work on financial innovation at both the national and European level is ongoing and we are determined to encourage responsible innovation, while at the same time ensuring the smooth operation of markets,” Kalogerou added.

CySEC also stated that cryptocurrency assets have one common characteristic – the utilising of cryptography and Distributed Ledger Technology.

“Distributed Ledger Technology includes Blockchain, an innovative technology which allows for the decentralised validation and storage of transactions, data and other information, and is supported by a cryptographic system which uses private and public keys,” CySEC said, before proceeding to explain how the technology works.

The commission explained that, in some cases and depending on their structure, cryptocurrency assets may meet the definition of financial instruments. This would make them subject to legislation on investment services as defined by the European Commission’s e-money directive (EMD), as well as the Markets in Financial Instruments Directive (MiFD 2).

“Also, these assets may be considered a digital representation of value that is neither issued nor guaranteed by the Central Bank of Cyprus or other public authority,” CySEC said.

It emphasised that investors should understand the serious risks involved in such assets before they invest in cryptocurrency assets.