On 29 November 2021, in issuing guidance composed of a communiqué and an FAQ on virtual assets, the Commission de Surveillance du Secteur Financier (CSSF) confirmed its ambition to frame and promote innovation in the financial sector.
The purpose of the communiqué is to introduce the CSSF’s general guidance on virtual assets. Noting that virtual assets had raised numerous questions from its supervised entities, the CSSF undertakes to provide concise answers to allow those entities to benefit from the opportunities that investments in such assets may offer.
The FAQ is dedicated to undertakings for collective investment and provides the CSSF’s position on questions related to investments in and management of virtual assets by investment funds, including investor profile, required authorization and mitigation of the money-laundering and terrorist-financing risks.
A similar FAQ for credit institutions is expected to be released shortly.
Investment in virtual assets is reserved for professional investors and subject to prior authorization from the CSSF
- UCITS and UCIs addressing non-professional customers and pension funds are not allowed to invest directly or indirectly in virtual assets.
- Alternative investment funds (AIFs) may invest directly and indirectly in virtual assets provided that the following conditions are met:
- The AIF markets its units only to professional investors.
- If the AIF is managed by an authorized AIFM, it should have obtained from the CSSF the extended authorization for this new investment strategy .
- In response to the specificities of the virtual assets and associated risks (i.e., volatility, liquidity and technological risk, etc.) which may affect the risk profile of the AIF, the CSSF expects that proper assessment be made at the time of the integration of virtual assets in the investment policy, that it shall be ensured that adequate internal control functions are implemented and that investors are properly informed in a transparent and timely manner.
Management of virtual assets by an authorized AIFM is subject to prior authorization from the CSSF
- Authorized investment fund manager must obtain prior authorization to invest in virtual assets by providing the CSSF with detailed information on the investment project (including experience of the portfolio manager, targeted investors, services providers involved and distribution channels), on how the investments in virtual assets will be made, how the related risks will be managed, how the custody of the assets will be organized by the depositary and the AML/CFT analysis by the IFM on the virtual assets.
No provider of virtual asset services may be established in Luxembourg without being registered with the CSSF
- Any other service provider of services in respect of virtual assets (transfer of virtual assets) must file a complete application to the CSSF before commencing the activity.
Mitigation of the Money Laundering and Terrorism Financing Risks
- The mitigation measures implemented must be commensurate to the increase risks to which the AIF is exposed through investment in virtual assets.
- The Responsable du Contrôle and the Responsable du Respect of supervised entities must be able to demonstrate an adequate understanding of the new money-laundering, terrorist-financing and proliferation-financing risks posed by virtual assets and the necessary measures in place to mitigate them.
As a final remark, depositaries will have to determine and sort out which amongst the digital assets will qualify as financial instruments within the meaning of the Luxembourg implementation laws of AIFMD and UCITS V Directive.
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