On April 6, 2023, the Commission de Surveillance du Secteur Financier (CSSF) released an update to its Frequently Asked Questions (FAQs) regarding virtual assets and undertakings for collective investment (UCIs). The update includes modifications to Question 2 and the publication of Question 3A. 

Investment conditions for AIFs aimed at Professional Investors

Question 2 of the CSSF FAQ was updated to clarify the conditions under which investments in virtual assets can be made by AIFs aimed at professional investors, but not those aimed at retail investors. These investments can be made as long as they comply with existing regulatory requirements and do not affect the fund's risk profile. An AIF can invest directly and indirectly in virtual assets, provided its units/shares are marketed only to professional investors, and the AIFM must obtain an authorization extension from the CSSF for this new investment strategy. 

Risk assessment and internal control functions

The CSSF underlines that investments in financial instruments, such as derivatives or transferable securities with underlying virtual assets, are to be considered as indirect investments in virtual assets. The CSSF highlights the importance of proper risk assessment and internal control functions when integrating virtual assets into investment policies. Investment managers must make a case-by-case assessment of the impact of virtual assets on the risk profile of investment funds and ensure transparency and timely disclosure to investors. 

Clarification on licensing requirements

The CSSF has also included in its updated FAQ, Question 3A, which clarifies that an "Other-Other Fund-Virtual assets" license is not required for a Luxembourg IFM managing an AIF investing in virtual assets through one or several target funds (TF). However, when the AIF invests more than 20% of its NAV in one or several TFs, an IFM authorization for the "fund of funds" strategy is required.

Assessing risks related to virtual assets

The CSSF emphasizes the importance of assessing the risks related to investing in virtual assets, and IFMs must evaluate the ability of the TF's manager to identify and manage such risks. The IFM should provide the CSSF with the results of its assessment upon request. The IFM is responsible for determining whether a TF has virtual assets as its main exposure. 

Conclusion: The evolving virtual asset industry

The update to the CSSF FAQ reflects the rapidly evolving nature of the virtual asset industry and the need for regulatory clarity in this area. As virtual assets continue to gain in popularity, it is likely that regulators around the world will continue to develop new rules and guidelines to govern their use. In Luxembourg, the CSSF will continue to play an important role in ensuring that investors are protected and that the virtual asset industry operates in a safe and secure manner.

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