CSSF updates its FAQ for investments in virtual assets: Impact on AIFs

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.

Feel free to get in touch with our investment management team should you wish to receive more information or if you are interested in establishing a crypto fund.

crypto assets

Guidance for consumers on investing in virtual assets by CSSF

Many exchange platforms promote virtual assets investments to consumers through various digital communication channels. While such investments may provide high returns, they are also associated with high risks and are not suitable for all types of investors. The CSSF warns consumers interested in investing in virtual assets to read the warning on virtual assets and/or initial coin offerings (ICOs) and tokens, as well as the European Supervisory Authorities’ (EBA, ESMA and EIOPA) consumer warning.

Despite the risks associated with virtual asset investments, the demand for such investments is increasing. The legislator has recognised the need to regulate some of the risks associated with virtual asset investments, including the AML/CTF risk, by developing new legislation, such as the Markets in Crypto-assets Regulation (MiCA).

To assist consumers who are willing to invest in virtual assets, the present guidance outlines some minimum steps to perform before investing. However, the guidance does not constitute an investment recommendation or investor protection measure. Consumers should educate themselves about virtual assets, which lack a detailed legal framework and consumer protection regime, before making any investment decisions.


crypto assets

CSSF publishes white paper on risks and opportunities of blockchain and DLT

The CSSF has published a white paper setting out technological risks and recommendations for the financial sector regarding blockchain and distributed ledger technology (DLT).

The regulator says use cases can include, in KYC data management, to confirm identity claims through cryptographic proof. It can also be used for improving the speed and security of payments and fund transfers, and for distribution platforms involving tokenization of investment funds that enable investors to subscribe and redeem fund shares or units through a web or mobile application.

However, the CSSF points out that risks can include governance issues, regulatory requirements, the ability to comply with judicial decisions, and legal certainty over blockchain technology and smart contracts.

The CSSF white paper on blockchain and DLT is available here.

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: https://www.cssf.lu/en/2021/11/cssf-guidance-on-virtual-assets/

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.


Fintech in Luxembourg | Registration process for virtual asset service providers (VASP)

Luxembourg’s Financial Sector Supervisory Authority (CSSF) has stated on April 9 on virtual assets, virtual asset service providers and the related registration process.

Under the law of March 25, 2020, amending the legislation of November 12, 2004, on efforts to combat money laundering and financing of terrorism, the CSSF has been designated as the supervisory authority for virtual assets and virtual asset service providers as defined by Article 1(20c) of the legislation. The CSSF’s role for service providers domiciled in Luxembourg is limited to registration, supervision and enforcement for AML/CFT purposes only.

Under articles 1(20c) and 7-1(1) of the AML/CFT law, entities that are established or provide services in Luxembourg must register with the CSSF if they are providing one or more of the following services on behalf of their clients or for their own account:
• Exchange between virtual assets and fiat currencies.
• Exchange between one or more types of virtual assets.
• Transfer of virtual assets.
• Safekeeping and/or administration of virtual assets or instruments providing control over virtual assets, including custodian wallet services.
• Participation in and provision of financial services relating to an issuer’s offer or sale of virtual assets.

As a result, any entity already licensed or registered by a regulatory authority, primarily licensed financial institutions that already offer virtual asset services as of March 30, 2020, must fulfil three criteria. They must notify the CSSF promptly by e-mail, submit an application to the CSSF to be registered as a virtual asset service provider at the latest by May 30, and comply with the professional obligations and conditions set out in the AML/CFT law as of March 30.

Any entity already licensed or registered by a regulatory authority and primarily licensed financial institutions that intend to offer any virtual asset services starting from March 30 must register in advance as a virtual asset service provider as a VASP and comply with the professional obligations and conditions set out in the AML/CFT legislation.

The statement also notes that the registration requirement for applicants that are established or provide services in Luxembourg does not affect any other licensing, registration or other requirements in Luxembourg, other European or non-EU countries for other activities they may undertake.

The fact that the CSSF registers a virtual asset service provider may not, under any circumstances, be described as any kind of positive endorsement by the regulator of the quality of services it offers. Registration, submission of an application or the fact of CSSF AML/CFT oversight may not be mentioned or used in advertising or any business solicitation.

The AML/CFT legislation of November 12, 2004, and the revision of March 25, 2020, can be found here.

How to apply as a virtual asset service provider (VSAP)?

The link to apply for registration as a virtual asset service provider can be found here and the CSSF statement of April 9, 2020, by clicking here