Tuesday January 4 2022

News Source: Fund Regulation

Focus: UCITS

Type: General

Country: Luxembourg

The CSSF have updated the FAQs regarding Virtual Assets. The following questions have been amended:

Question 2. May an AIF invest in virtual assets?

Answer 2.

Investments in virtual assets as defined in the AML/CTF Law could be compatible with funds aimed at the professional investor, as opposed to those aimed at the retail investor, on condition that the investment by the fund in virtual assets does not prevent the application of and compliance with existing regulatory requirements.

In consequence, an AIF may invest directly (and indirectly) in virtual assets under the condition that its units are marketed only to professional investors. Should such AIF be managed by a Luxembourg authorised AIFM, the latter must obtain an extension of authorisation from the CSSF for this new investment strategy. Virtual assets present specificities such as their volatility, liquidity and technological risk which could significantly affect the risk profile of the investment vehicle. The CSSF draws attention to the integration phase of virtual assets in the investment policy and reiterates the importance of having adequate internal control functions and their key role in the approval of new products/investment strategies.

Given the diverse 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 the investment fund. Investment managers will have to ensure that investors are properly informed in a transparent and timely manner and that the relevant fund documentation is updated

Question 5. May a Luxembourg depositary act as depositary for investment funds investing directly in virtual assets?

Answer 5.

Luxembourg fund depositaries may be mandated to act as depositary for investment funds investing directly in virtual assets. Certain conditions would need to be complied with as the regulatory requirements that depositaries are subject to would remain applicable. In this context, fund depositaries must put in place adequate organisational arrangements and an appropriate operational model, considering the specific risks related to the safekeeping of virtual assets. Moreover, depositaries shall notify the CSSF beforehand when they intend to act as depositary for an investment fund investing directly in virtual assets. For credit institutions acting as fund depositaries, please also refer to the FAQ on virtual assets for credit institutions.

In relation to depositary services, for virtual assets that qualify as “other assets”, the depositaries’ liability in its depositary function is limited to safekeeping duties regarding ownership verification and record keeping in line with article 19 (8) (b) of the AIFM law and article 90 of the COMMISSION DELEGATED REGULATION (EU) no 231/2013 of 19 December 2012 (“DR 231/2013”).

Where the depositary does not offer safekeeping or administration type of services for the virtual assets and the IFM/investment fund directly appoints a specialised virtual asset service provider offering a “custodian wallet type of service”, the virtual assets are not recognised in the off-balance sheet of the depositary as the depositary is not liable for the restitution of the assets. Indeed, this liability is directly incumbent on the specialised virtual asset service provider. To that effect, the IFM/investment fund is required to have a direct contractual relationship with the specialised service provider.

A depositary providing administrative and depositary services to an investment fund investing in virtual assets triggers an obligation to register as a virtual asset service provider within the meaning of the AML/CFT law, if the depositary directly provides services related to the safekeeping or the administration of virtual assets, including the custodian wallet service, to its client. Under this setup, virtual assets are recognised in the off-balance sheet and the depositary has an obligation of restitution for the loss or theft of said assets within the meaning of the civil law. Fund depositaries that envisage to directly safeguard virtual assets are required to inform the CSSF of such plans in a timely manner. This requirement is additional to the registration as a virtual asset service provider.

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