The CSSF issues further guidance on virtual assets

On 29 November, the Commission de surveillance du secteur financier (the “CSSF”) published a long-awaited guidance regarding investments in virtual assets in the Grand-Duchy of Luxembourg (FAQ).

As a reminder, virtual assets are defined as digital representations of value that can be digitally traded or transferred, and can be used for payment or investment purposes.

What does the FAQ cover?

The CSSF reaffirmed its position for UCITs, UCIs marketed to non-professional customers and pension funds: these investors are not allowed to invest directly or indirectly in virtual assets.

The CSSF specified that an alternative investment fund (“AIF”) managed by an authorised alternative investment fund manager (“AIFM”) can invest directly (and indirectly) in virtual assets, under the following cumulative conditions:

• the AIF markets its units, shares, interests only to professional investors; and
• the authorised AIFM obtains an extension authorisation from the CSSF for this new strategy.

The CSSF draws attention to the integration phase of virtual assets in the investment policies of AIFs and reiterates the importance for AIFMs of having adequate internal control functions and their key role in the approval of new products/investment strategies, prior to applying for an extension authorisation from the CSSF for this new strategy.

Given the broad range of virtual assets available, investment managers need to make a case-by-case assessment of the impact of these investments on the risk profile of AIFs they manage.

What is the impact on asset managers?

CSSF’s license application

First of all, initiators of AIFs that intend to invest in virtual assets should present their respective project beforehand to the CSSF.

Authorised AIFMs wishing to manage AIFs investing in virtual assets must obtain a prior authorisation from the CSSF for the strategy “Other-Other Fund-Virtual assets”.

Consequently an application must be submitted to the CSSF and, among others, the following information/documents must be provided:

• Description of the project and of the different services providers/delegates involved;
• Information on whether investments in virtual assets will be made directly or indirectly (by the means of derivatives for example);
• An updated risk management policy including in particular how the risks in relation to the virtual assets are managed;
• An updated valuation policy including the rules as to how the value of the virtual assets will be determined;
• A description of the experience of the portfolio manager (and other involved entities in the investment management process) in investments in virtual assets;
• A description of how the custody of the assets will be organised by the depositary;
• Information regarding targeted investors, as well as any information on the distribution channels of the AIF;
• A description of the AML/CTF controls put in place by the authorised AIFM, on the assets side.

Furthermore, should the AIFM (or any other participant) be involved in the control of the virtual assets by means of access to/control over the cryptographic keys, a complete application file for registration as a virtual asset service provider (“VASP”) needs to be submitted to the CSSF before commencing any activity.

Due Diligence

AIFMs wishing to pursue an activity involving virtual assets bear the responsibility to carry out a thorough due diligence on asset screening, pertaining to their volatility, liquidity, technological risk, counterparty, custody or even reputation and to carefully weigh up the risks and benefits associated with the proposed virtual assets activity with respect to the AIFM’s existing business model and risk appetite.

AML compliance function arrangements

As investing in virtual assets, whether directly or indirectly, increases the risk of Money Laundering (“ML”), Terrorist Financing (“TF”) and Proliferation Financing to which the supervised entity is exposed, the CSSF expects that the Responsable du Contrôle (RC) and the Responsable du Respect (RR) of supervised entities which intend to manage AIFs investing in virtual assets possesses, and can demonstrate an adequate understanding of the new ML, TF and Proliferation Financing risks posed by virtual assets and the necessary measures to mitigate them.

What happens next?

AIFM entities are further reminded of the need to closely follow any regulatory developments, in particular those concerning the prudential treatment of virtual assets and related practical implications for their investments and customers.

They should also consider and adapt their business and operational arrangements activities to concrete foreseeable regulatory developments, as for example those under the upcoming European Markets in Cryptoasset Regulation (MICA) that will regulate certain virtual assets which until now have fallen outside of the scope of existing legislation.

Registered alternative investment fund managers within the scope of articles 3(2) and 3(3) of the Law of 12 July 2013 on alternative investment fund managers, which intend to manage an AIF investing in virtual assets, are not in the scope of the CSSF’s press release. Based on our recent experience, these registered AIFMs must fulfil additional queries related to virtual assets, with a particular focus on risk management and anti-money laundering controls monitoring put in place by the registered AIFM. Technical questions are raised by the CSSF upon filing of the registration request.

For further information, please don’t hesitate to reach out to our asset management & investment funds team in Luxembourg.

Sources:

• FAQ of the CSSF on virtual assets
• Communiqué of the CSSF: Guidance de la CSSF en matière d’avoirs virtuels (uniquement en anglais)