CSSF's FAQ on virtual assets

Long awaited by market participants, this FAQ clarifies that:

1. At this point in time, no virtual asset holdings are authorised in UCITS funds as these assets are not deemed suitable investments for retail investors – a potential positioning from The European Securities and Markets Authority (ESMA) on this might certainly make things evolve but it is the reality as of today;
2. Virtual assets that qualify as financial instruments (a.k.a., tokenised financial instruments) might be eligible for investment in UCITS funds. It is indeed expected that a substance over form principle is retained;
3. Regulated and unregulated alternative investment funds (AIF)s with an authorised alternative investment managers (AIFM)s may invest directly or indirectly (derivatives) in virtual assets of any kind, to the extent the AIFM obtained prior authorisation from the Commission de Surveillance du Secteur Financier (CSSF) to rollout a newly created "other-other fund-virtual assets" investment strategy;
4. To obtain such authorisation, the candidate AIFM shall, among other things, provide information about the nature of the projects (stakeholders, type of investments, team, etc.), amended risk management and valuation policies taking the specifics of virtual assets into account and details of custody arrangements.
5. ML/TF mitigation measures taking into account the specific risks of virtual assets are expected from supervised entities having such exposures.

This formal clarification will undoubtedly be warmly welcomed by the market and will drive further developments for the Luxembourg asset management industry. However, knowing what is possible vs what is not is only the starting point, and numerous preliminary steps shall be undertaken when envisaging a virtual asset investment vehicle, among others:

• Acknowledge and understand the breadth of the virtual assets universe, their value proposition and investment rationale (more than 15,000 virtual assets exist at the time of writing);

• Elaborate and design sound investment strategies taking the full potential of virtual assets into account (i.e. yield enhancement features);

• Design fit for purpose internal policies (risk management, valuation, etc.) taking the specifics of virtual assets into account; 

• Obtain an unbiased view on key players in the space and perform due diligence on potential stakeholders with an emphasis on depositary and custody arrangements.

These are only some of the key areas to consider before entering this fascinating yet complex and fragmented new ecosystem.