Luxembourg – including the financial regulator – has adopted a “be prepared” approach to cryptoassets, says Camille Thommes, director general at ALFI, the Luxembourg funds industry association.
The mention of cryptoassets often seems to trigger extreme reactions. Not unlike Marmite, cryptoassets as investments are eyed with suspicion or frowned upon by some, and welcomed with enthusiasm verging on hype by others.
From an investment strategy standpoint, the perception among Luxembourg market participants seems fragmented today. Zoom in to the niche, and one will find that specialists such as fintech players see considerable investor demand which they are keen to satisfy, calling for better frameworks and international standardisation. The mainstream industry however shows limited interest for now. Noteworthy is the reputational aspect – at both ends of the spectrum: businesses want to be seen at the forefront of innovation, but also fear potential reputational damage if they end up going too far out on a limb.
But Luxembourg wouldn’t be Luxembourg if the overall spirit wasn’t so much a ‘wait and see’ but rather a ‘be prepared’ approach. There is a universal willingness to engage in cryptoasset activity, and agreement among asset managers and service providers that any future demand will be met quickly. The no-fuss attitude extends to public bodies and includes the supervisor. The CSSF has in fact recently published an informative document on DLT, the distributed ledger technology which provides the basis for cryptoassets. The CSSF recalls that its stance is technology-neutral and that its oversight – like most legal and regulatory rules – hinges on the nature of the activities, products or services provided, not on the technology used.
The CSSF white paper is one indicator that in Luxembourg, buzzwords like DLT, blockchain and cryptocurrencies are met with the same sobriety as any other technology, any other investment. There is a widespread understanding that a risk analysis will be required in each case, and behind the scenes, the local subject-matter experts have paved the way for those investments in cryptoassets that pass the test.
The DLT as such, characterised by its peer involvement and decentral nature, has been said to ‘democratise’ processes and thereby help legitimise the transactions it facilitates, such as cryptocurrency transactions. While trust and transparency are welcome tender in the financial sector, on the flipside of the (bit)coin, sky-high energy consumption, especially broken down per transaction, has been an issue. Inability to qualify as sustainable would rightly bring cryptoassets into disrepute. Time will tell if these are teething problems that maturity can solve.
Cryptoassets are just one example of a DLT use case. In the funds world, these investment categories are not expected to be open to retail investors as they are not eligible under Ucits and are likely to continue to fall into the ‘alternatives’ bucket. Custody of cryptoassets as a new type of alternatives could, subject to regulatory clarification, turn out to be just one new business opportunity in Luxembourg. In addition, DLT has the potential to replace current processes in a variety of other areas, such as AML/KYC, collateralisation, fund distribution, payments etc.
A jurisdiction that takes digital opportunities seriously without sensationalising them, a level-headed supervisor and widespread understanding of the prudent risk-based approach are the best prerequisites for the successful uptake of this technology. Luxembourg is ready.
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