Private consumers seeking to invest in virtual assets through investment funds, despite the massive losses incurred by investors in certain cryptocurrencies, should be aware they are doing so without the protection of financial regulatory oversight, Luxembourg financial regulator the CSSF said.
The CSSF document was titled “Notice to private consumers in the context of investment funds providing exposure to virtual assets”.
The CSSF noted that “virtual assets, including so-called virtual currencies, continue to gain traction in the financial sector”. The CSSF went on to say that “this market trend can also be observed in the contest of collective investment undertakings (investment funds) being established to provide direct or indirect exposure to such virtual assets.”
Noting that providing consumer education is an integral part of its mission the CSSF warned that “material exposure to virtual assets may in some instances be gained through investment funds (and where applicable, the managers thereof) that are not subject to any prudential supervision.” This term (prudential supervision) has been defined as “a legal framework focussed on the financial safety and stability of institutions and the broader financial system.”
‘Lesser level of consumer protection’
Recalling its recent “Warning regarding virtual currencies” document, the CSSF said it “would like to draw consumers’ attention to the fact that the risks associated with an investment in virtual assets, coupled with the absence of any prudential supervision by the CSSF of the relevant funds, should therefore be very carefully considered by consumers as this potential translates into a lesser level of investor protection.”
Emilie Allaert, head of the Luxembourg Blockchain Lab, affirmed that “any type of investment, be it digital or within the regulated capital market, includes risks.” She added that “it is essential to remind investors not to invest more than what they can afford to lose. Regulation is coming which will mitigate the risks in the future.”
The CSSF advised consumers that, prior to making an investment into virtual assets, whether through an investment fund or otherwise, consumers should make themselves familiar with such assets and do their own research into the risks of investing in them.
Training being developed
The Luxembourg Blockchain Lab has been developing, together with the Digital Learning Hub and the House of Training, a curriculum of training sessions to provide the general public, as well as specialised staff, the necessary skills to understand virtual assets. “Education is key to have a rational approach, Luxembourg is proactive and has investor protection at heart,” Allaert said.
The CSSF referred to its “guidance for consumers in the context of virtual assets” press release published on 27 April 2022 and available on the CSSF website, which itself referred to a CSSF “Warning regarding virtual currencies”, dated in March 2018, which pointed out the risks of “volatility and price bubble risk”, as well as “lack of protection and risk of theft”, as well as “liquidity shortage” among others, associated with virtual currencies. The regulator emphasised that the specific risks mentioned in that document also apply to exposure though investing in such assets through an investment fund, “which potentially might not be subject to any prudential supervision.
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