A year of negative crypto-asset industry headlines has left interest in the asset class undiminished, according to a survey of 127 industry practitioners released on Thursday. Respondents agreed crypto assets will be important for the future of Luxembourg’s asset management industry. Local crypto actors attribute crypto-asset failures elsewhere to poor governance and due diligence failures but, all the same, are happy to see increased regulatory activity in this area.
The survey was published Thursday by the Luxembourg House of Financial Technology and PwC Luxembourg, with the support of Alfi. It reports, among other things, that most participants agreed that “the global crypto-assets market is still in its early stages and holds significant potential” or that it is “reaching an inflection point towards broader adoption and maturity.” (sic)
Nearly a third of participants see recent shocks to the crypto-assets market as being “due to corporate governance and due diligence failures”, while about a quarter see this moment as “an opportunity to rebuild.”
“The collapse of FTX illustrated an absence of trustworthy financial information, compromised systems integrity, faulty regulator oversight and concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals,” said John Caslin, director of investment management and innovation at the Carne Group, in an interview published with the survey.
Significant improvement
There’s been a “significant increase” in industry participants who see that Luxembourg is now aligned with the leading financial centres in Europe in this area. Only 1/5 of those surveyed see Luxembourg as a leading jurisdiction globally. But respondents ranked this country ahead of both the UK and France.
Addressing this country’s role in the crypto-assets space, a large majority called for Luxembourg to take a strong stance. The report lists the entry into force of the Blockchain III law and the update of the CSSF on virtual assets for undertakings for collective investment as the key government initiatives of the year.
Asset managers can set up Specialised investment funds or Reserved alternative investment funds - Sifs or Raifs - to offer crypto-assets, with both direct and indirect exposures allowed, with a maximum exposure of 100%. They are reserved for professional investors and must use an authorised Alternative investment fund manager with a license extension required, as well as a local depositary bank, with the option of a third-party crypto assets custodian.
Only minority holds crypto
Only 8% of the Luxembourg population owned crypto assets as of December 2022. There are 10 virtual asset service providers or equivalent. Luxembourg is positioning itself as a crypto-funds hub, but fewer than 1% of such asset managers are located in Luxembourg.
Broader adoption of crypto assets in Luxembourg, the survey said, is held back by a relatively immature market infrastructure, as well as the high volatility of these assets, as well as the widespread perception of money-laundering risks “perceived to be inherent to this asset class.”
This question of infrastructure maturity is seen as a “major roadblock to the integration of crypto-assets into the traditional asset management industry.” An important component of the infrastructure is the availability of crypto-custody options.
“Custody, internal controls, regulatory oversight, and governance seem to be the key areas in which the industry is likely to evolve in the next 18 months,” said Caslin.
Some cynicism
Since the last version of the survey, there has been an increase in the number of respondents who say that they see “no investment rationale whatsoever.” Still, a significant number see either some or high potential from these assets. Crypto assets are seen as a good diversification option, but the perception of its utility as an inflation hedge has shrunk.
A third of respondents say that regulations such as MiCA are “a critical prerequisite for industry development”, but a small percentage say “they are carefully considering such regulations when developing their value proposition and products.”
Chicken & egg
“Financial regulation is a chicken-and-egg situation,” said Gildas Blanchard, head of industry affairs for Alfi, also in a Q&A in the report. “In the case of funds investing in crypt-assets, we are convinced that regulatory certainty is a fertile ground for product innovation.”
“Regulation brings clarity and protection,” said Jean-Baptiste Graftieaux, the group CEO of Bitstamp in his Q&A. “This will allow new investors into the asset class that currently cannot invest due to mandate restrictions.”
A majority supported the idea of strengthening investor education as an absolute imperative.