crypto assets

Crypto funds - CSSF clarifies that Luxembourg AIFs can invest in virtual assets

The Financial Sector Supervisory Authority (CSSF) has issued guidance on the rules governing investment in digital assets by Luxembourg funds, clarifying that alternative investment funds may invest in them, and while UCITS funds may not, the shares of companies active in the digital currency and related ecosystem could qualify as eligible assets.

The regulator notes that it embraces the challenges raised by financial innovation such as virtual assets and is committed to promote an open, technology-neutral and prudent risk-based regulatory approach, while the exponential growth of virtual assets in recent years has generated strong interest as a potential new asset class for both professionals and private investors.

However, the CSSF points out that the emergence of the sector has raised questions from the financial industry in areas such as investments in virtual assets by investment funds, direct investments as opposed to investment through derivatives, and the implications for depository responsibilities.

Wide variety of digital assets

It has now published guidance including a frequently-asked questions document for investment funds on practical issues for financial professionals, reflecting the appeal of virtual assets for portfolio diversification, pointing out that they range from digital representations of traditional assets with a straightforward risk-return basic to more complex representations of digital rights that may be harder to assess. A similar FAQs document for banks will be issued later in December.

The CSSF says that while digital tokens may use the same digital ledger – blockchain – technology and cryptography, they may different or multiple purposes, such as payment, investment or utility, reflect one or more baskets of assets, in some cases fall under the definition of financial instruments subject to existing regulation, be non-fungible and non-interchangeable, such as non-fungible tokens, or be used to finance specific projects such as the creation of a new crypto-currency or the tokenisation of real estate. The specific characteristics of a particular asset will determine the risks and opportunities they present.

The CSSF says any regulated entity considering an activity involving digital assets must conduct thorough due diligence regarding risks relating to volatility, liquidity, technology, counterparties, custody and reputation to assess the risks and benefits affecting its existing business model and risk appetite. This requires the management body to ensure a formal and well-defined risk appetite assessment in all business areas and rigorous decision-making processes are in place.

The regulator also says businesses should be prepared to adapt their business and operational activities to future regulatory developments, notably under the forthcoming European Markets in Crypto-asset Regulation, which will regulate certain types of virtual assets that are outside of the scope of existing legislation, and should proactively engage with the CSSF when planning any activity involving virtual assets.

Implications for UCITS, AIFs, managers and AML/CFT

The FAQs for the fund industry notably says that:

  • Investing in virtual assets as defined in the AML/CTF law of November 12, 2004 is not suitable for all types of investors or investment objectives, so UCITS or other funds targeting non-professional customers and pension funds may not invest directly or indirectly in virtual assets. However, assets that qualify as financial instruments, including shares of companies active in the virtual asset ecosystem, are not subject to this restriction and may be eligible investments for UCITS.
  • Investment in virtual assets as defined by the AML/CTF legislation may be compatible with funds aimed at professional investors, as long as such investment does not prevent application of and compliance with existing regulatory requirements. Thus an alternative investment fund with an authorised AIFM may invest directly or indirectly in virtual assets as long as the fund’s shares or units are marketed only to professional investors, and the AIFM obtains an extension of authorisation from the CSSF for the new investment strategy. The regulator draws attention to the importance of integration of virtual assets into the investment policy and of adequate internal control functions. Investment managers should make a case-by-case assessment of the impact of virtual asset investments on the risk profile of the fund, and ensure investors are informed in a transparent and timely manner and fund documentation is updated.
  • Authorised Investment Fund Managers of regulated or unregulated alternative funds seeking to invest in virtual assets must obtain prior authorisation from the CSSF and provide information or documents including a description of the project and of the services providers or delegates involved, whether the investment is direct or indirect, updated risk management and valuation policies, description of the experience of the portfolio manager and other entities involved in the investment management process, description of the depositary’s role, information about targeted investors and distribution channels, and AML/CTF analysis of the assets. Initiators of funds planning to invest in virtual assets should present its project to the CSSF, in advance, detailing how the investment manager or other participants control the virtual assets through access to or control over cryptographic keys, and an analysis of the services to be provided must be conducted for activities listed under Article 1 (20c) of the AML/CTF law. The investment manager or other entities providing these services must apply to the CSSF for registration as a virtual asset service provider before launching.

The CSSF’s guidance document can be found at:

Feel free to get in touch with our investment management team should you wish to receive more information or should you want to establish a crypto fund.