George Theocharides: As regulators, we will need to sharpen our knives to safeguard the financial system and protect investors

George Theocharides, Chairman of the Cyprus Securities and Exchange Commission (CySEC), explains why the Markets in Crypto-Assets Regulation (MiCA) is a big step for Europe, talks about the lessons learned from regulating a high concentration of brokerage firms, discusses the boons and banes of AI and tells GOLD magazine how CySEC is adapting to keep pace with an ever-evolving industry.

The Markets in Crypto-Assets Regulation (MiCA), which you have described as “a big step for Europe” is just around the corner. Why is MiCA such a game-changer? And to those thinking that crypto is no longer too risky to integrate into mainstream finance, do you have any advice before they dive in?

MiCA is a big step for Europe since it has established uniform rules for transparency and disclosure requirements related to the issuance, offering or admission to trading, authorisation and supervision of crypto-asset service providers’ operations. It also covers organisation and governance for certain issuers, protection of crypto-asset holders and clients of crypto-asset service providers, and market abuse rules. It’s a major first step but it’s not the end of the road because the industry is continuously evolving and the regulations need to evolve too. Since crypto service providers will be passporting their services across the European Union, there will be a lot of scrutiny around gaining access to this privilege. As regulators, we will need to sharpen our knives to safeguard the financial system and protect investors. It’s also a very good step for investor protection, because we already know that, due to being largely unregulated, the industry has led to investor detriment. Moreover, investors are advised to remain vigilant since MiCA doesn’t cover the full spectrum of crypto assets, such as Non-Fungible Tokens (NFTs) or Decentralised Finance (DeFi), which will remain outside its scope.

In a rapidly evolving market, CySEC can’t afford to stand still. You’ve already opened up 20 new positions to bring in fresh talent but what more does CySEC need to stay ahead? Are there other challenges that you’re tackling to keep pace with this ever-changing industry?

Having a strong team is crucial. Hand in hand with this, we have increased our investment in surveillance technology and developed proprietary systems to ensure the effectiveness of regulatory and enforcement systems. In addition to this investment in technology, our Regulatory Sandbox ensures that there is scope for innovation to be monitored and trailed in a safe and controlled environment. As regulators, we must stay ahead of the curve. We must innovate and invest in technology and people to ensure that regulation is appropriate and robust enough to address the challenges of a dynamic marketplace, driven by technology and innovation. Only by acting in this way can regulators help ensure that markets are a safe and competitive place to do business in globally. It is our role to recognise future trends and anticipate potential risks and side effects. This means that not only do we need to keep pace with developments, such as in AI, but we must be able to move swiftly to protect investors from new and emerging risks, while at the same time harnessing technology and driving innovation that will support our supervision and increase the efficiency of our operations. At CySEC, our regulatory agenda is based on maintaining high standards of investor protection and investor confidence which, in turn, leads to the healthy growth of the market and encourages the development of innovative new products and services.

Cyprus has become a major hub for cross-border investment services in Europe. What has driven this concentration of firms in Cyprus and how is CySEC handling the unique challenges that come with regulating such a large number of such firms? What lessons have been learned since the island became the go-to destination?

Cyprus is ranked first among EU member states in providing cross-border investment services, partly through our proximity to Israel, which has several companies active in this field. We were able to attract these companies and to start developing the sector for the Cyprus economy. The creation of this ecosystem has helped boost Cyprus’ economy through the establishment of new companies, the hiring of staff and the direct and indirect taxes they generate.

Today, as the global marketplace has expanded and more businesses are taking advantage of cross-border opportunities, Cyprus’ early experience in cross-border investment services means that we can offer significant expertise in this sector – particularly in technology, compliance and the legal aspects of handling cross-border payments. We are also well placed to provide a better understanding of the sector to other regulators and national authorities. Given the risks, particularly those related to distributing complex financial products, the activities of firms offering these services are heavily regulated and our supervision has been developed to reflect this and to protect investors. Cypriot investment firms with cross-border activities are included in a programme of increased supervision by CySEC, focusing on the way their products are marketed, the client onboarding process and the information they provide to clients, as well as ensuring full compliance with EU regulation and Cypriot law. We have been clear that there can be no last chances when investors are put at risk.

Artificial intelligence is revolutionising finance and you’re right in the middle of it as Chair of ESMA’s Risk Standing Committee. By 2025, 30% of Natural Language Processing (NLP) applications are expected to be in banking and finance, so what’s your take on AI’s growing influence? What risks does it pose and how are regulators like CySEC gearing up to deal with this new reality?

AI is already a reality. We are seeing it in financial markets and elements of regulation have already been formulated around the way it is being used by fund managers. On the other side of the coin, AI is a powerful tool that can be used to detect regulatory breaches, for example in the detection of the mis-selling of funds. So, the European Securities and Markets Authority (ESMA) and other financial regulators have placed AI use in the finance sector under increasing scrutiny. While ESMA notes that an increasing number of managers are leveraging AI in the development of their investment strategies, risk management and compliance in the asset management sector, few have developed a fully AI-based investment process and fewer still publicly promote the use of AI. While there are clearly numerous opportunities for the application of AI in the securities industry, ESMA’s analysis shows that the actual level of implementation varies widely, both by sector and entity. NLP is becoming widespread across all sectors, analysing large amounts of text to identify specific unstructured information. In the asset management sector, AI is used in the investment process, for risk management and compliance. ESMA has noted that few investment funds disclose the use of AI in their investment strategies.

However, ESMA does consider that risks related to AI use in the industry are material, although they appear to be still limited. It is clear that, while AI has the potential to make business processes and decision-making materially faster, it will become more complex and possibly less transparent, and this will be of concern to regulators. With that in mind, ESMA continues to monitor developments in AI to ensure that the risks are well understood and taken into account and that increased uptake of AI does not lead to the concentration of business among the few.

You’ve mentioned CySEC’s Regulatory Sandbox, which was launched in June 2024. Can you elaborate on how it can foster responsible innovation while ensuring the safety of Cyprus’ financial landscape?

This initiative marks a significant milestone in advancing financial, regulatory and supervisory technologies (FinTech, RegTech, SupTech) in the financial services sector in Cyprus. In the last decade, we have seen the growth of a technological ecosystem and CySEC is part of it. The Regulatory Sandbox will provide testing opportunities for innovative solutions in a controlled environment under the monitoring and guidance of CySEC. Our goal is to support the development of cutting-edge solutions that meet technological advancements, without compromising market integrity and investor protection.

Online scams are evolving fast, with some fraudsters even pretending to be CySEC itself. How can retail investors avoid these traps in a world of increasingly sophisticated fraudulent schemes?

CySEC has invested heavily in monitoring and surveillance technology to detect fraudulent activity, particularly aimed at the investing public. You will probably be aware of the increasing number of warnings posted by CySEC, alerting investors to fake websites and scammers impersonating CySEC and our staff, as well as to unauthorised entities and the list of non-approved domains to help investors avoid potential scams and fraudulent activities. This is a core element of our supervisory activities. We frequently proceed with campaigns via CySEC’s social media accounts, aiming at increasing the understanding of the investing public from a very early age and pointing out the myriad pitfalls of taking investment claims at face value, particularly when these are promoted online and through social media by so-called ‘finfluencers’.

Finally, on a personal note, you started as an electrical engineer before making a major career pivot into finance. What sparked that transition, and do you ever find yourself drawing from your engineering background in your current role as a financial regulator?

After obtaining my BA in Electrical Engineering & Electronics from the University of Manchester (UMIST) and working a few years as an electrical engineer, I moved to San Diego, California to pursue an MBA. Through these studies, I had the pleasure of being introduced to the world of finance. I was fascinated and found a lot of similarities – in methodology and data analysis – with my engineering background. It was then that I decided to pursue further studies in finance and I moved to Tucson, Arizona to pursue my PhD.

This article first appeared in the October edition of GOLD magazine. Click here to view the interviews with the 13 CFOs.