Crypto assets, as an asset class, have seen soaring valuations and scandals over the years. One Luxembourg AIFM thinks this country’s nascent crypto asset ecosystem is primed for growth from institutional investors when all the puzzle pieces finally fit together.
6 Monks, also known as ‘6M’, which describes itself as an independent Luxembourg AIFM servicing alternative investment funds, recently announced that it had passed a significant milestone by obtaining in March a CSSF license that made it the first AIFM to offer its special range of services to third-party funds.
An AIFM - Alternative Investment Fund Manager -plays a crucial role in upholding the integrity and performance of the alternative investment sector. Its role encompasses a wide range of functions that are essential for the effective operation of alternative investment funds. This includes investment management, risk control, regulatory compliance, and investor relations, among other duties.For certain types of Luxembourg funds, the AIFM, and not the fund itself, acts as the entity subject to direct supervision by CSSF.
6M’s head of risk management is Julian Wolff (photo), who said the license will enable his firm to work with funds seeking to employ investment strategies in private equity, Web3 and, most controversially, crypto-assets.
Regulation is the goal
“The main objective of 6M is to apply for a license that has never been requested before, with the objective to deliver the services, allowing the asset manager and the fund promotor to run their activities through a regulated vehicle, a European regulated vehicle,” said Wolff in an Investment Officer interview.
Web3 is the third generation of the World Wide Web, featuring decentralisation and openness due to its incorporation of blockchain technology. It brings together blockchain, cryptocurrencies, decentralised applications, non-fungible tokens, and other advancements.
Wolff said the blockchain and Web3 present “an opportunity for investments, as an asset class.”
Growing ecosystem
With its license in hand, 6M is in a position to do business with existing depositary banks that can also offer crypto services.
“6M was kind of the missing piece of the puzzle because the depositary cannot work without an AIFM and an AIFM cannot work without the depositary,” he said.
“We want to act as a fund house, providing the full range of services to third parties, to asset managers and fund sponsors,” he added, pointing out that the 6M’s license allows them to provide support in terms of portfolio management, risk management, and central administration.
Market ready
“At 6M, we strongly believe that the market is ready for crypto, there is already demand from institutional investors.”
Wolff explained that he sees the recent SEC decision to allow the listing of Bitcoin in the US as evidence that the market is now ready.
Wolff said his firm is also seeing demand from existing crypto funds, located principally in the Cayman Islands or Europe, under a “lightly regulated” scheme.
Limited options
Wolff pointed out that European funds under this scheme could not obtain EU passports, preventing them from distributing and marketing their funds in other countries. These funds can’t attract institutional investors because the size of the funds does not permit maximum investor protection.“They are limited in terms of volume because they cannot go above a certain threshold, by law,” he said.
A second group of crypto funds made their home in jurisdictions that were more crypto-friendly in 2018, he explained. One of the main countries is the Cayman Islands. “The Cayman funds dedicated to crypto have the same limitations – no EU passports, no institutional investors, etc.,” he said.
By choosing 6M, Wolff explained “an asset manager can focus on the two aspects that are very important for him: the fundraising on one side and the deployment of the asset strategy on the other side.”
Bad signals
Wolff acknowledged crypto’s complex history. “There have been in the past some bad signals,” he said. He pointed out that crypto is still not a mature investment class, with Bitcoin only ten years old.
However, he sees the crypto market “getting more professional, year after year, in many different ways.” Large financial institutions like Société Générale have made large bets on the future of crypto. “We know now that very well-known actors in the finance industry are moving forward with crypto,” he said.
One major reason is the passage of the Markets in Crypto-Assets directive, which provides a regulatory framework for such activities. While a service provider to funds exposed to crypto, 6 Monks is not a crypto service provider and thus is not subject to MiCA. It “is not exactly the same,” he said.
Key topics
“Governance, risk, management compliance are key topics even for crypto,” Wolff said.
Reaching these standards is what Wolff sees as critical for developing crypto. “If we want to get the institutional investors and institutional actors involved in this area, we need to reach the same level of requirements.”