Luxembourg’s financial regulator CSSF has clarified its position on allowing alternative investment funds to invest in crypto assets, as per a recent update to its virtual assets FAQ. The CSSF emphasised that only alternative investment funds, or AIFs, aimed at “well-informed investors” could invest directly or indirectly in virtual assets.
Crypto investments are “not suitable” for ordinary retail investors using Ucits vehicles, the supervisor said.
“The update means that retail investors qualifying as well-informed investors could now invest in any Raif, Sif or Sicar investing in virtual assets where, before the update, only institutional or professional investors could do so,” explained Gast Juncker, a partner with the Elvinger Hoss Prussen law firm.
In the 22 February update of its FAQ document on virtual assets, CSSF said “investments in virtual assets as defined in the AML/CTF Law could be compatible with funds aimed at well-informed investors, as opposed to those aimed at the retail investor”. A previous version of this paragraph only spoke about “professional investors”.
Investing in virtual assets “is not suitable for all kind of investors and/or all investment objectives,» CSSF said.
Well-informed investors are institutional, professional or other investors confirming in writing their their status as ‘well-informed investor’ and invest a minimum of 100,000 euros or has been assessed by a credit institution, an investment firm, a management company or an authorised AIFM that certifies his or her expertise, experience and knowledge in adequately appraising the contemplated investment, according to Juncker.
Specific definitions
“It’s more of an alignment as to some specific definitions for the entities that can be offered these crypto assets by the Luxembourg funds,” said Philippe Noeltner, a partner in Allen & Overy’s international capital markets practice.
The CSSF has been consistent in its refusal to accept such products for retail investors. However, Noeltner noted that Germany’s BaFin regulator has accepted bitcoin ETFs for retail distribution.
Noeltner noted that the CSSF move fits nicely within broader moves towards support for crypto assets in Luxembourg.
Extending boundaries
“What I do find interesting is that the CSSF keeps extending regulatory boundaries into the crypto and DLT space, like the Luxembourg government’s pro-active stance from a legislative point of view,” he said.
Noeltner pointed to the way the government has introduced laws “reinforcing the possibility to use DLT in order to record and register financial instruments.”
Arendt & Medernach banking & financial services partner Marc Mouton said there is a trend of the most prominent and large global asset managers to set up virtual asset funds. “The market in this space is evolving and becoming more mature.”
Regulatory framework
Mouton saluted the CSSF’s decision to update the FAQ. “We welcome that the regulatory framework follows this evolution and provides an appropriate and balanced basis for this.”
“It will enable a broader range of investors to have an alternative to investing themselves directly in virtual assets,” said Mouton.
He explained that the ability to invest in a virtual asset “enables investors to benefit from the services of sophisticated asset managers, which have more expertise and resources” at hand.
Market questions
The timing of a CSSF FAQ update “is often driven by questions from the market,” explained Juncker of EHP.
“I think we should welcome this clarification for the alternative investment sector,” said Dara Ingallo, an Allen & Overy knowledge lawyer in the firm’s funds and asset management practice.
Ingallo pointed out that the update as worded relieves them of the burden of carving out their investor base to invest directly or indirectly into virtual assets.
Not very typical
Still, Ingallo admitted that she was taken aback by the FAQ’s introduction of the concept of ‘well-informed investors’ “The distinction between retail and well-informed investors is not very typical for retail products, we usually have the distinction between retail and professional or institutional investors.”
Mouton of Arendt pointed out that before the FAQ update, the ability to invest in virtual assets was limited to professional investors.
“In my view, further clarification and guidance from the CSSF is needed on the use of this term for Part II UCIs,” said Ingallo.
ECB attacks SEC move
The CSSF move comes in the wake of a strongly-worded European Central Bank blog posting attacking the SEC’s decision to allow bitcoin investments.
“It seems wrong that Bitcoin should not be subject to strong regulatory intervention, up to practically forbidding it.” said the blog post.
Asked to respond, Mouton of Arendt said “A careful approach remains appropriate considering the very speculative nature of this type of asset.” However, he explained “investments in virtual assets are a reality and it is probably preferable to regulate them” He explained that MiCA enables investments to be made where the use of highly qualified asset managers «can reduce a number of risks for investors.”
Asked to react to the SEC›s decision to allow Bitcoin ETFs and on the contrarian ECB blog post, a spokesperson said that “CSSF does not comment on the decisions or communications of other supervisory authorities”.
Investment Officer Luxembourg is keen to expand its coverage of AIF funds investing in crypto currencies and other virtual assets. What is your experience with crypto AIFs in Luxembourg? Let us know via email to editor@investmentofficer.lu.