Blockchain Investment Fund in Luxembourg   - Damalion - Independent consulting firm.

Fintech is slowly shaking the very foundations of traditional financing services in Luxembourg. In fact, blockchain alone is fast becoming recognized as a game changer, transforming transactions, accounting, currency exchange, and other crucial financial services. 

As the popularity of crypto-funding is steadily growing, the Commission for the Supervision of the Financial Sector (CSSF)  has issued guidance in response to Frequently Asked Questions on virtual assets in Luxembourg. As cryptocurrency is becoming a popular investment among Luxembourg and foreign investors, the Commission for the Supervision of the Financial Sector (CSSF) aims to frame and promote this cutting-edge innovation in the country’s financial sector. 

Here are the general guidelines when it comes to virtual assets funding in Luxembourg. Additionally, the guidelines were designed for undertakings for collective investments, providing the Commission for the Supervision of the Financial Sector (CSSF) answer questions related to cryptocurrency investments, as well as the proper and efficient management of virtual investment funds. These includes guidance on investor profile, required authorization, and regulations to prevent money laundering and terrorist financing risks in Luxembourg. 

Alternative Investment Funds for Virtual Assets Funding 

  • The Commission for the Supervision of the Financial Sector (CSSF) has fully embraces the challenges raised by financial innovations brought by virtual assets. 
  • Luxembourg is looking forward to open its financial industry by taking an open, and prudent risk-based approach when it comes to the regulation of a new asset class for professionals and regular investors.

Wide Range of Digital Assets

The Commission for the Supervision of the Financial Sector (CSSF) has addressed the potential issues that investors and financial professionals may face in the use of virtual assets as a part of a portfolio diversification strategy. Regulations concerning digital assets are more complex, as it covers a wide range of virtual assets and new-age currencies. 

Here are a few guidelines in crypto-funding in the Grand Duchy:

  • While digital tokens may use the same digital ledger, blockchain, technology, and cryptography, they may serve a host of purposes, including investment, payment, or even reflect one or more baskets of assets.
  • In some cases, digital tokens may also fall under the definition of a financial instrument. They may be non-fungible and non-interchangeable and can even be used to finance projects such as the establishment of a new cryptocurrency or the tokenisation of real estate in Luxembourg. 
  • The specific characteristics of an asset class will determine the opportunities and risk that they present to investors. 
  • Any legal entity that is considering investment activities that involves digital assets must conduct their own due diligence in relation to liquidity, technology, volatility, and counterparties. 
  • Additionally investors need to evaluate the reputation of a cryptocurrency to have a clear picture of the potential benefits and risks that can come with this new type of investment. 
  • Legal entities and private investors must conduct a thorough risk appetite assessment across all business areas to come with a sensible and well-informed investment decision. 
  • Existing companies are encouraged to adapt their business operations to future regulatory requirements that may include virtual assets such as digital tokens. 
  • Luxembourg investors need to consider the European Markets forthcoming crypto-asset regulations which involve regulation of certain types of digital assets that are not included in the existing regulation. 

Implications of Crypto-Funding for UCITS, AIFS, and Initiators in Luxembourg

  • Investments in virtual assets such as cryptocurrencies as defined by the Anti-Money Laundering and Counter Terrorism Financing Law of 12 November 2004 is not well suited for all types of investors or investment initiatives. 
  • Undertakings for Collective Investment in Transferable Securities (UCITS) and other funds targeting non-professional or amateur investors and pension funds cannot directly or indirectly invest in virtual assets. 
  • Assets that are categorized as financial instruments, such as company shares that are active in the virtual asset ecosystem are not subject to restrictions. Therefore, they may be used as eligible investments for Undertakings for Collective Investment in Transferable Securities (UCITS) . 
  • Investments in digital assets under the  Anti-Money Laundering and Counter Terrorism Financing Law may be compatible with funds aimed at well-informed investors, so long as investments do not impede or deter the application and compliance with existing regulatory requirements. 
  • An alternative investment fund with an authorized Alternative Investment Fund Manager (AIFM) can invest directly or indirectly in virtual assets in Luxembourg. This can be allowed if the fund’s shares or units are marketed only to well-informed investors. Additionally, an Alternative Investment Fund Manager must obtain an extension of authorization from the Commission for the Supervision of the Financial Sector (CSSF)for a brand-new investment strategy. 
  • The Commission for the Supervision of the Financial Sector (CSSF) also emphasizes the relevance of integration of virtual assets into the investment policy and of adequate internal control activities. 
  • Investment managers must conduct a thorough assessment regarding the impact of virtual asset investments on the risk profile of the fund. Due diligence on the part of managers will ensure transparency and  timeliness of fund documentation. 
  • Authorized Investment Fund Managers of both regulated and unregulated alternative funds that are looking to invest in virtual assets must obtain prior authorization from the Commission for the Supervision of the Financial Sector (CSSF). They must provide complete documentation, including project description,  service providers involved, classification whether an investment is direct or indirect in nature, and an updated risk management and valuation policies. 
  • Additionally Authorized Investment Fund Managers must submit a description of the experience of the portfolio and other entities that will be involved in the investment management process. 
  • A crypto-fund must submit a description of the depositary’s role, information about potential investors, distribution channels, and  Anti-Money Laundering and Counter Terrorism Financing Law analysis of assets. 
  • Crypto-fund initiators must present its project to the  Commission for the Supervision of the Financial Sector (CSSF) in advance, detailing how the investment manager and other participants control virtual assets through access to cryptographic keys. Initiators must present an analysis of the services to be provided must be conducted for activities under Article 1 (20c) of the  Anti-Money Laundering and Counter Terrorism Financing Law. 
  • Investment managers who engage in crypto-funding must apply to the Commission for the Supervision of the Financial Sector (CSSF) for formal registration to be categorized as a virtual service provider before launching. 
  • Given virtual asset investment is liable to increase a supervisory entity’s money laundering and terrorism financing risk, the Commission for the Supervision of the Financial Sector (CSSF) must implement the right sets of mitigation measures. 

The Popularity of Crypto-Funding in Luxembourg

In 2021, the cryptocurrency market has inspired many investment managers to consider Luxembourg as the perfect location to establish an alternative investment fund. 

A crypto-fund in Luxembourg begins with an initial coin offering. This process involves the preparation of documents, including the essential information regarding the project. The essential components in setting up a crypto-fund includes:

  • Information on project details and timelines
  • Amount of capital required
  • Tokens
  • Dividend to be paid per token to investors

Marketing the crypto fund is the next step in the crypto-fund creation process. A fund initiator will promote the project to collect the needed capital. 

Crypto-funds in Luxembourg may be set-up as a Special Limited Partnership (SCSp)

  • The advantage of setting up a crypto-fund as a special limited partnership is that it is not regulated under the capital threshold of EUR 100,000,000.
  • There are no custodian requirements. 
  • No regulated manager needed. 
  • Does not need the approval of the Commission for the Supervision of the Financial Sector (CSSF).
  • There is no need to open a bank account in Luxembourg. 
  • There is no need to appoint an auditor for the crypto-fund. 

A cypto-fund may also be established as a Reserved Alternative Investment Fund (RAIF)

Damalion provides expert consulting solutions that are necessary for the set-up and registration of crypto-funds in Luxembourg. We aim to promote the financial industry’s knowledge about blockchain and crypto-funding opportunities to foreign legal entities and private investors. We have a dedicated global service network that will facilitate the set-process to your preferred legal form. If you wish to learn more about the creation and registration of crypto-funds in Luxembourg, reach out to a Damalion expert today. 

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.