Digital assets are the talk of the Luxembourg financial centre and across Europe, with Mairead McGuinness, the European commissioner for financial services emphasising how the financial sector digitalisation can provide better access to products and services. New regulation is on the way to allow providers to build up the trust they need to overcome the negative publicity that has been attached especially to cryptocurrencies.
Companies active in Luxembourg are at the forefront of harnessing digital assets in service of the financial industry.
Four categories
According to Jean-Baptiste Graftieaux, CEO of Bitstamp, there are 15,000 digital assets today, in four categories: cryptocurrency, platform tokens, such as Ethereum, utility tokens, mostly used in game, and transactional tokens. Bitstamp is a regulated European crypto exchange serving five million retail and 5,000 institutional clients around the world, and providing access to 56 digital assets.
Speaking at last week’s Alfi European Asset Management conference, Graftieaux explained that his firm has developed a full suite of products for institutional clients, including brokerage and over-the-counter, and maintains a high pool of liquidity, enabling it to serve banks, payment service provider, portfolio managers, family offices and high net worth individuals seeing exposure to crypto.
Record year
Dave Sparvell, CEO of Swissquote Bank Europe, said that his firm is the only bank offering crypto trading and currency in Luxembourg, and possibly even in Europe. He explained that last year was a record year for providing cryptocurrencies to consumers. His firm, which is registered as a Virtual Asset Service Provider, or Vasp, looks forward to the Markets In Crypto-Assets regulation, known as Mica, as a way to help establish stability for the sale of crypto assets.
“You really need some stability and some certainty before you can, as an advisor for example, start putting your customers into these sort of asset classes that, until recently, could even have been banned,” he said.
Swissquote’s Sparvell said his customers find the platform aspect of the blockchain economy interesting, which he compared to the Microsoft Windows operating system of the future. He mentioned in this context Ethereum, Cardano and Solano. Direct exposure to crypto, he said, will give players more opportunity than going through an indirect route through for example an exchange-traded fund.
Very beneficial effect
Marco Cora, board member at Azimut, explained that his asset management firm sees three dimensions to blockchain: it observes that firms that embrace blockchain tend to be very successful. Though crypto assets are highly volatile, they have a very high Sharpe ratio, and have a very beneficial effect when added to portfolios, he said.
Azimut, he said, also sees blockchain as a way to extend its business logic through using it to replace older systems, for example in the area of subscription and redemption of funds. It can facilitate presenting investments to potential investors. It also sees a cost benefit, with blockchain reducing issuer costs by a “2-3 factor of capital”.
Delivering monetary policy
Cora explained that his firm’s Chief Operating Officer has often spoken about how crypto assets could help monetary policy goals of moving financial support to small and medium-sized firms, but face restrictions on access to such assets. He acknowledged these limits stem from a desire to protect smaller investors.
“While this is treating the symptom, it’s also almost causing the problem in a certain sense, because by forcing the minimum size required to be very high, it reduces the number of users,” which he said has a consequence of reducing the return.
Returning to the lower costs of Blockchain-enabled assets, Cora said that this enables a very large reduction in minimum denomination, currently not permitted by the regulations.
“If we can work with the regulator to lower the minimum denomination slightly, we then expand the number of investors that have access to it. In turn, this increases the liquidity which may make the regulator comfortable with reducing the denomination and so forth, in generating a positive feedback loop where these assets become more liquid, more fungible, more transferable, and easier to move around,” explained Cora.